10-K: Annual report pursuant to Section 13 and 15(d)
Published on December 21, 2018
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended September 30, 2018
☐ TRANSACTION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transaction period from ________ to ________
Commission File
number 000-30262
KNOW LABS, INC.
(Exact name of registrant as specified in charter)
Nevada
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90-0273142
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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500
Union Street, Suite 810, Seattle, Washington
USA
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98101
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(Address of principal executive offices)
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(Zip Code)
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206-903-1351
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(Registrant's telephone number, including area
code)
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N/A
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(Former name, address, and fiscal year, if changed since last
report)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer (Do not check if a smaller reporting company)
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
As of March 31, 2018 (the last business day of our most recently
completed second fiscal quarter), based upon the last reported
trade on that date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates (for this purpose,
all outstanding and issued common stock minus stock held by the
officers, directors and known holders of 10% or more of the
Company’s common stock) was $1,029,906.
The number of shares of common stock, $.001 par value, issued and
outstanding as of December 21, 2018: 17,531,522
shares
1
TABLE OF CONTENTS
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Page
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PART
1
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3
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ITEM 1.
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Description of Business
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3
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ITEM 1A.
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Risk Factors
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8
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ITEM 1B
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Unresolved Staff Comments
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17
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ITEM 2.
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Properties
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18
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ITEM 3.
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Legal Proceedings
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18
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ITEM 4.
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Mine Safety Disclosures
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18
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ITEM 5 | Other Information |
18
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PART
II
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19
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ITEM 5.
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Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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19
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ITEM 6.
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Selected Financial Data
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24
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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24
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ITEM 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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29
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ITEM 8.
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Financial Statements and Supplementary Data
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29
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ITEM 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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29
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ITEM 9A.
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Controls and Procedures
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29
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ITEM 9B.
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Other Information
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30
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PART
III
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31
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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31
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ITEM 11.
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Executive Compensation
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34
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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40
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ITEM 13.
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Certain Relationships and Related Transactions, and Director
Independence
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41
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ITEM 14.
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Principal Accounting Fees and Services
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44
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PART
IV
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46
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ITEM 15.
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Exhibits, Financial Statement Schedules
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46
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SIGNATURES
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48
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2
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion, in addition to the other information
contained in this report, should be considered carefully in
evaluating us and our prospects. This report (including without
limitation the following factors that may affect operating results)
contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended ("Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act") regarding us and our business, financial
condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are
intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this
report. Additionally, statements concerning future matters such as
revenue projections, projected profitability, growth strategies,
development of new products, enhancements or technologies, possible
changes in legislation and other statements regarding matters that
are not historical are forward-looking statements.
Forward-looking statements in this report reflect the good faith
judgment of our management and these statements are based on facts
and factors as we currently understand them. Forward-looking
statements are subject to risks and uncertainties and actual
results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors that
could cause or contribute to such differences in results and
outcomes include, but are not limited to, those discussed below in
“Risk Factors” and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well
as those discussed elsewhere in this report. Readers are urged not
to place undue reliance on these forward-looking statements,
which speak only as of the date of
this report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
ITEM 1. DESCRIPTION OF
BUSINESS
BACKGROUND AND CAPITAL STRUCTURE
Know Labs, Inc., formerly Visualant, Incorporated, was incorporated
under the laws of the State of Nevada in 1998. Since 2007,
we have been focused primarily on research and development of
proprietary technologies which can be used to authenticate and diagnose a wide variety of
organic and non-organic substances and materials. Our Common
Stock trades on the OTCQB Exchange under the symbol
“KNWN.”
BUSINESS
We are focused on the development, marketing and sales of a
proprietary technologies which are capable of uniquely
authenticating or diagnosing almost any substance or material using
electromagnetic energy to create, record and detect the unique
“signature” of the substance. We call these our
“ChromaID™” and “Bio-RFID™”
technologies.
Overview
Historically, the Company focused on the development of our
proprietary ChromaID technology. Using light from low-cost LEDs
(light emitting diodes) we map the color of substances, fluids and
materials and with our proprietary processes we can authenticate,
identify and diagnose based upon the color that is present. The
color is both visible to us as humans but also outside of the
humanly visible color spectrum in the near infra-red and near
ultra-violet and beyond. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see
it, and identify, authenticate and diagnose based upon the color
that is present. Our ChromaID scanner is capable of uniquely
identifying and authenticating almost any substance or liquid using
light to create, record and detect its unique color signature. We
will continue to develop and enhance our ChromaID technology and
extend its capacity. More recently, we have focused upon extensions
and new inventions that are derived from and extend beyond our
ChromaID technology. We call this technology Bio-RFID. The rapid
advances made with our Bio-RFID technology in our laboratory have
caused us to move quickly in to the commercialization phase of our
Company as we work to create revenue generating products for the
marketplace. We will also, as resources permit, pursue licensing
opportunities with third parties who have ready applications for
our technologies.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues it is not central to our current focus
as a Company. Moreover, we have written down any goodwill
associated with its historic acquisition. We continue to closely
monitor this subsidiary.
3
The Know Labs Technology
We have internally and under contract with third parties developed
proprietary platform technologies to uniquely authenticate or
diagnose almost any material and substance. Our technology utilizes
electromagnetic energy at various points along the electromagnetic
spectrum to perform analytics which allow the user to identify,
authenticate and diagnose depending upon the application and the
unique field of use. The Company’s proprietary platform
technologies are called ChromaID and Bio-RFID.
The ChromaID patented technology utilizes light at the photon
(elementary particle of light) level through a series of emitters
and detectors to generate a unique signature or
“fingerprint” from a scan of almost any solid, liquid
or gaseous material. This signature of reflected or transmitted
light is digitized, creating a unique ChromaID signature. Each
ChromaID signature is comprised of from hundreds to thousands of
specific data points.
The ChromaID technology looks beyond visible light frequencies to
areas of near infra-red and ultraviolet light and beyond that are
outside the humanly visible light spectrum. The data obtained
allows us to create a very specific and unique ChromaID signature
of the substance for a myriad of authentication, verification and
diagnostic applications.
Traditional light-based identification technology, called
spectrophotometry, has relied upon a complex system of prisms,
mirrors and visible light. Spectrophotometers typically have a
higher cost and utilize a form factor (shape and size) more suited
to a laboratory setting and require trained laboratory personnel to
interpret the information. The ChromaID technology uses lower cost
LEDs and photodiodes and specific electromagnetic frequencies
resulting in a more accurate, portable and easy-to-use solution for
a wide variety of applications. The ChromaID technology not only
has significant cost advantages as compared to spectrophotometry,
it is also completely flexible is size, shape and configuration.
The ChromaID scan head can range in size from endoscopic to a scale
that could be the size of a large ceiling-mounted florescent light
fixture.
In normal operation, a ChromaID master or reference scan is
generated and stored in a database. We call this the ChromaID
Reference Library. The scan head can then scan similar materials to
identify, authenticate or diagnose them by comparing the new
ChromaID digital signature scan to that of the original or
reference ChromaID signature or scan result. Over time, we believe
the ChromaID Reference Libraries can become a significant asset of
the Company, providing valuable information in numerous fields of
use. The Reference Libraries for Bio-RFID will have a similar
promise regarding their utility and value.
The Company’s latest technology platform is called Bio-RFID.
Working in our lab over the past year, we have developed extensions
and new inventions derived in part from our ChromaID technology
which we refer to as Bio-RFID technology. While we are in the early
stages of the development of this technology, we have recently
announced that we have successfully been able to non-invasively
ascertain blood glucose levels. We are building the internal and
external development team necessary to commercialize this newly
discovered technology as well as make additional patent filings
covering the intellectual property created with these new
inventions. The first applications of our Bio-RFID technology will
be in a product we call the UBAND™. The first UBAND product
will be marketed as a real time calorie counter. It is a wearable
product which will be worn on the wrist and communicate with a
smart phone device via Bluetooth connectivity. It will provide the
user with real time information on their caloric consumption from
carbohydrates.
We have recently announced the results of laboratory-based
comparison testing between our Bio-RFID technology and the leading
continuous glucose monitors from Abbott Labs (Freestyle
Libre®) and DexCom (G5®). These results provide evidence
of a high degree of correlation between our Bio-RFID based
technology and the current industry leaders. Our technology is
fundamentally differentiated from these industry leaders as it is
completely non-invasive.
We expect to begin the process of obtaining US Food and Drug
Administration approval of our non-invasive continuous blood
glucose monitoring device during calendar year 2019. We are unable
to estimate the time necessary for such approval nor the likelihood
of success in that endeavor.
ChromaID and Bio-RFID: Foundational Platform
Technologies
Our ChromaID and Bio-RFID technologies provide a platform upon
which a myriad of applications can be developed. As platform
technologies, they are analogous to a smartphone, upon which an
enormous number of previously unforeseen applications have been
developed. ChromaID and Bio-RFID technologies are
“enabling” technologies that bring the science of
electromagnetic energy to low-cost, real-world commercialization
opportunities across multiple industries. The technologies are
foundational and, as such, the basis upon which the Company
believes a significant business can be built.
As with other foundational technologies, a single application may
reach across multiple industries. The ChromaID technology can, for
example effectively differentiate and identify different brands of
clear vodkas that appear identical to the human eye. By extension,
this same technology can identify pure water from water with
contaminants present. It can provide real time detection of liquid
medicines such as morphine that have been adulterated or
compromised. It can detect if jet fuel has water contamination
present. It could determine when it is time to change oil in a deep
fat fryer. These are but a few of the potential applications of the
ChromaID technology based upon extensions of its ability to
identify different clear liquids.
4
Similarly, the Bio-RFID technology can non-invasively identity the
presence and quantity of glucose in the human body. By extension,
there may be other molecular structures which this same technology
can identity in the human body which, over time, the Company will
focus upon. They may include the monitoring of drug usage or the
presence of illicit drugs. They may also involve identifying
hormones and various markers of disease.
The cornerstone of a company with a foundational platform
technology is its intellectual property. We have pursued an active
intellectual property strategy and have been granted 12 patents. We
currently have 20 patents pending. We possess all right, title and
interest to the issued patents. Ten of the pending patents are
licensed exclusively to us in perpetuity by our strategic partner,
Allied Inventors.
Our Patents and Intellectual Property.
We believe that our 12 patents, 20 patent applications, three
registered trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets. Our issued
patents will expire at various times between 2027 and 2033. The
duration of our trademark registrations varies from country to
country. However, trademarks are generally valid and may be renewed
indefinitely as long as they are in use and/or their registrations
are properly maintained.
The issued patents cover the fundamental aspects of the Know Labs
ChromaID technology and a growing number of unique applications
ranging, to date, from invisible bar codes to tissue and liquid
analysis. We have filed patents on Bio-RFID technology and will
continue to expand the Company’s patent portfolio over time
through internal development efforts as well as through licensing
opportunities with third parties.
Additionally, significant aspects of our technology are trade
secrets which may not be disclosed through the patent filing
process. We intend to be diligent in maintaining our trade
secrets.
The patents that have been issued to Know Labs and their dates of
issuance are:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2
entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The patent expires February 7,
2033. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
On March 23, 2015, we were issued US Patent No. 8,988,666 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 31, 2027.
On May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On April 19, 2016, we were issued US Patent No. 9,316,581 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
March 12, 2033. This patent describes an enhancement to the
foundational ChromaID technology.
5
On April 18, 2017, we were issued US Patent No. 9,625,371 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy.” The
patent expires July 2027. This patent pertains to the use of
ChromaID technology for the identification and analysis of
biological tissue. It has many potential applications in medical,
industrial and consumer markets.
On April 4, 2018, we were issued US Patent No. 9,869,636 B2,
entitled “Device for Evaluation of Fluids Using
Electromagnetic Energy.” The patent expires approximately
April 2033. This patent pertains to the use of ChromaID technology
for evaluating and analyzing fluids such as those following through
an IV drip in a hospital or water, for example.
We continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
Joint Development Agreements and Product Strategy
We are currently undertaking internal development work on potential
products for the consumer marketplace. This development work was
being performed through our Consulting Agreement with Blaze
Clinical, and Phillip A. Bosua, who served as our Chief Product
Officer. In his current role as Chief Executive Officer, Mr. Bosua
continues to lead these efforts. As these products take form over
the coming months, we will make appropriate product
announcements.
We also will continue to engage with partners through licensing our
technology in various fields of use, entering in to joint venture
agreements to develop specific applications of our technology, and
in certain specific instances develop our own products for the
marketplace.
We have deployed our ChromaID development kit to a number of
potential joint venture partners and customers around the world.
There are strong indications of interest in deploying our
technology in a wide variety of applications involving
identification, authentication and diagnostics. Currently we are
focusing our current efforts on productizing our Bio-RFID
technology as we move it out of the research laboratory and in to
the marketplace.
Research and Development
Our current research and development efforts are primarily focused
improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for the technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications. Our current internal team along with outside
consultants have considerable experience working with the
application of our technologies and their application. We engage
third party experts as required to supplement our internal team. We
believe that continued development of new and enhanced technologies
is essential to our future success. We incurred expenses of
$570,514 and $79,405 for the year ended September 30, 2018 and
2017, respectively, on development activities. On July 6, 2017, we
entered into a Consulting Agreement with Phillip A. Bosua, our
Chief Product Officer to lead our development efforts. He has
continued in that role with expanded responsibilities upon his
appointment as Chief Executive Officer on April 19,
2018.
RECENT DEVELOPMENTS
We have the following recent developments:
Merger with RAAI Lighting, Inc.
On April 10, 2018, we entered into an Agreement and Plan of Merger
with 500 Union Corporation, a Delaware corporation and a wholly
owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, we have
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
Under the terms of the Merger Agreement, each share of RAAI common
stock issued and outstanding immediately before the Merger (1,000
shares) were cancelled and we issued 2,000,000 shares of our common
stock. As a result, we issued 2,000,000 shares of its common stock
to Phillip A. Bosua, formerly the sole stockholder of RAAI. The
consideration for the Merger was determined through arms-length
bargaining by the Company and RAAI. The Merger was structured to
qualify as a tax-free reorganization for U.S. federal income tax
purposes. As a result of the Merger, the Company received certain
intellectual property, related to RAAI.
Appointment of Director
On April 10, 2018, the Board increased the size of the Board from
three to four members and Phillip A. Bosua was appointed as a
member of the Board. Mr. Bosua’s term of office expire at the
next annual meeting of our stockholders. On May 24, 2018, the Board
of Directors increased the size of the Board from four to five
members and appointed (Ret.) Admiral William Owens as a member of
the Board. Admiral Owen’s term of office expires at the next
annual meeting of our stockholders.
6
Appointment of Officer.
On April 10, 2018, we appointed Mr. Bosua as Chief Executive
Officer of the Company, replacing Ronald P. Erickson, who remains
Chairman of the Company. Mr. Erickson has been a director and
officer of Know Labs since April 2003. He was appointed as our CEO
and President in November 2009 and as Chairman of the Board in
February 2015. Previously, Mr. Erickson was our President and Chief
Executive Officer from September 2003 through August 2003 and was
Chairman of the Board from August 2004 until May 2011.
Phillip A. Bosua was appointed the Company’s CEO on April 10,
2018. Previously, Mr. Bosua served as our Chief Product Officer
since August 2017. We entered into a Consulting Agreement with Mr.
Bosua’s company, Blaze Clinical on July 7, 2017. From
September 2012 to February 2015, Mr. Bosua was the founder and
Chief Executive Officer of LIFX Inc. (where he developed and
marketed an innovative “smart” light bulb) and from
August 2015 until February 2016 was Vice President Consumer
Products at Soraa (which markets specialty LED light bulbs). From
February 2016 to July 2017, Mr. Bosua was the founder and CEO of
RAAI, Inc. (where he continued the development of his smart
lighting technology). From May 2008 to February 2013 he was the
Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, we entered into an Employment Agreement with Mr.
Bosua reflecting his appointment as Chief Executive Officer. The
Employment Agreement is for an initial term of 12 months (subject
to earlier termination) and will be automatically extended for
additional 12-month terms unless either party notifies the other
party of its intention to terminate the Employment Agreement. Mr.
Bosua will be paid a base salary of $225,000 per year, received
500,000 shares of common stock valued at $0.33 per share and may be
entitled to bonuses and equity awards at the discretion of the
Board or a committee of the Board. The Employment Agreement
provides for severance pay equal to 12 months of base salary if Mr.
Bosua is terminated without “cause” or voluntarily
terminates his employment for “good
reason.”
On April 10, 2018, we entered into an Amended Employment Agreement
for Ronald P. Erickson which amends the Employment Agreement dated
July 1, 2017. The Agreement expires March 21, 2019.
Amendment of Equity Incentive Plan
On April 10, 2018, the Board approved an amendment to its 2011
Stock Incentive Plan increasing the number of shares of common
stock reserved under the Incentive Plan from 93,333 to 1,200,000.
On August 1, 2018, the Board approved an amendment to its 2011
Stock Incentive Plan increasing the number of shares of common
stock reserved under the Incentive Plan 1,200,000 to
2,000,000.
Merger with Know Labs, Inc.
On May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated
on April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
Corporate Name Change and Symbol Change
On May
24, 2018, the Financial Industry Regulatory Authority
(“FINRA”) announced the effectiveness of a change in
our name from Know Labs Incorporated to Know Labs, Inc. and a
change in our ticker symbol from VSUL to the new trading symbol
KNWN which became effective on the opening of trading as of May 25,
2018. In addition, in connection with the name change and symbol
change, we were assigned the CUSIP number of
499238103.
Closing of Financing on June 25, 2018
On
June 25, 2018, we closed a private placement and received gross
proceeds of $1,750,000 in exchange for issuing 7,000,000 shares of
common stock and warrants to purchase 3,500,000 shares of common
stock in a private placement to accredited investors pursuant to a
series of substantially identical subscription
agreements.
The initial exercise price of the warrants described above is $0.25
per share, subject to certain adjustments, and they expired five
years after their issuance.
The shares and the warrants described above were issued in
transactions that were not registered under the Securities Act of
1933, as amended (the “Act”) in reliance upon
applicable exemptions from registration under Section 4(a)(2) of
the Act and/or Rule 506 of SEC Regulation D under the Act.
7
Conversion of Certain Debt to Equity
On June 25, 2018, we closed debt conversions and issued 605,000
shares of common stock in exchange for the conversion of $199,935
in preexisting debt owed by the Company to certain service
providers, all of whom are accredited investors. These shares were
issued in transactions that were not registered under the Act in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the
Act.
On July 9, 2018, we repaid a $199,935 Business Loan Agreement with
Umpqua Bank from funds previously provided by an entity
affiliated with Ronald P. Erickson, our Chairman of the Board. The
Company paid $27,041 and issued
800,000 shares of common stock in exchange for the conversion of
this debt. Mr. Erickson is an accredited investor. These shares
were issued in transactions that were not registered under the Act
in reliance upon applicable exemptions from registration under
Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation D
under the Act.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol
“KNWN.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
name change from Know Labs, Incorporated to Know Labs, Inc. and
symbol change from VSUL to KNWN was announced by FINRA declared
effective on the opening of trading as of May 25,
2018.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part I, Item
1A.
CORPORATE INFORMATION
We were incorporated under the laws of the State of Nevada on
October 8, 1998. Our executive offices are located at 500 Union
Street, Suite 810, Seattle, WA 98101. Our telephone number is (206)
903-1351 and its principal website address is located at
www.knowlabs.co. The information on our website is not incorporated
as a part of this Form 10-K.
EMPLOYEES
As of September 30, 2018, we had fifteen full-time employees and
two consultants or consulting groups. Our senior management is
located in the Seattle, Washington office.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.knowlabs.co that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-K.
ITEM 1A. RISK FACTORS
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
Risks Relating to the Company Generally
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through March 31,
2019. We need additional
financing to implement our business plan and to service our ongoing
operations, pay our current debts (described below) and maintain
ownership of our intellectual property. There can be no assurance
that we will be able to secure any needed funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing when it is
needed, we will need to restructure our operations and/or divest
all or a portion of our business. We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected. There
can there can be no assurance that we will be able to sell that
number of shares, if any.
8
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash flows from
operations, the audit report of our independent registered public
accountants on our consolidated financial statements for the year
ended September 30, 2018 contains an explanatory paragraph stating
that there is substantial doubt about our ability to continue as a
going concern. Factors identified in the report include our
historical net losses, negative working capital, and the need for
additional financing to implement our business plan and service our
debt repayments. If we are not able to attain profitability in the
near future our financial condition could deteriorate further,
which would have a material adverse impact on our business and
prospects and result in a significant or complete loss of your
investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured
creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of September 30, 2018, we owe approximately $2,965,632 and if we
do not satisfy these obligations, the lenders may have the right to
demand payment in full or exercise other remedies.
On
March 16, 2018, we closed a Note and Account Payable Conversion
Agreement with J3E2A2Z, a Washington limited partnership, Ronald P.
Erickson, our Executive Chairman of the Board and a member of the
Board of Directors pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation and interest of approximately $565,380. The
Company owes Mr. Erickson, or entities with which he is affiliated,
$1,749,466 as of September 30, 2018.
On July 9, 2018, the Company repaid a $199,935 Business Loan
Agreement with Umpqua Bank from funds previously provided by
an entity affiliated with Ronald P. Erickson, our Chairman of the
Board. The Company paid $27,041 and issued 800,000 shares of common stock in exchange
for the conversion of this debt. Mr. Erickson is an accredited
investor. These shares were issued in transactions that were not
registered under the Act in reliance upon applicable exemptions
from registration under Section 4(a)(2) of the Act and/or Rule 506
of SEC Regulation D under the Act.
Including
Mr. Erickson, we owe $2,255,066 under various convertible
promissory notes as of September 30, 2018.
We owe
Capital Source $145,186 under a credit facility.
We require additional financing, to service and/or repay these debt
obligations. If we raise additional capital through borrowing or
other debt financing, we may incur substantial interest expense. If
and when we raise more equity capital in the future, it will result
in substantial dilution to our current stockholders.
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As of September 30,
2018, we had an accumulated deficit of $34,791,000 and net losses
in the amount of $3,258,000 and $3,901,000 for the years ended
September 30, 2018 and 2017, respectively. There can be no
assurance that we will achieve or maintain
profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID business has produced minimal revenues, and may not
produce significant revenues in the near term, or at all, which
would harm our ability to continue our operations or obtain
additional financing and require us to reduce or discontinue our
operations. You must consider our business and prospects in light
of the risks and difficulties we will encounter as business with an
early-stage technology in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could significantly harm our business,
operating results and financial condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
9
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID technology and
related products to achieve or sustain profitability.
We are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID technology, grant additional
licenses and obtain royalties or develop other revenue streams will
have a material adverse effect on our business, financial condition
and results of operations.
To date, we have generated minimal revenue from sales of our
products. We believe that our commercialization success is
dependent upon our ability to significantly increase the number of
customers that are using our products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our success depends on our ability to develop and market products
that are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, potential customers are required
to devote significant time and effort to testing and validating our
products. In addition, during the implementation phase, customers
may be required to devote significant time and effort to training
their personnel on appropriate practices to ensure accurate results
from our technology and products. Any failure of our technology or
related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt systems other than ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30, 2018, our
management identified material weaknesses in our internal control
over financial reporting. If these weaknesses continue, investors
could lose confidence in the accuracy and completeness of our
financial reports and other disclosures.
In addition, our management has concluded that our disclosure
controls and procedures were not effective due to the lack of an
audit committee “financial expert.” These material
weaknesses, if not remediated, create an increased risk of
misstatement of the Company’s financial results, which, if
material, may require future restatement thereof. A failure to
implement improved internal controls, or difficulties encountered
in their implementation or execution, could cause future delays in
our reporting obligations and could have a negative effect on us
and the trading price of our common stock.
10
Our services and license agreement with Allied Inventors is
important to our business strategy and operations.
In November 2013, we entered into a five-year strategic
relationship with Allied Inventors, formerly Xinova and Invention
Development Management Company, a former subsidiary of Intellectual
Ventures, a private intellectual property fund with over $5 billion
under management. Allied Inventors owns over 40,000 IP assets and has broad global
relationships for the invention of technology, the filing of
patents and the licensing of intellectual property. Allied
Inventors has worked to expand the reach and the potential
application of the ChromaID technology and has filed ten patents
based on the ChromaID technology, which it has licensed to
us.
The amended agreement with Allied Inventors covers a number of
areas that are important to our operations, including the
following:
● The agreement requires Allied Inventors to identify and
engage inventors to develop new applications of our ChromaID
technology, present the developments to us for approval, and file
at least ten patent applications to protect the
developments;
● We received a worldwide, nontransferable, exclusive license
to the licensed intellectual property developed under this
agreement within the identification, authentication and diagnostics
field of use;
● We received a nonexclusive and nontransferable option to
acquire a worldwide, nontransferable, nonexclusive license to
intellectual property held by Allied Inventors within that same
field of use; and
● We granted to Allied Inventors certain licenses to our
intellectual property outside the identification, authentication
and diagnostics field of use.
Failure to operate in accordance with the Allied Inventors
agreement, or an early termination or cancellation of this
agreement for any reason, would have a material adverse effect on ability to
execute our business strategy and on our results of operations and
business.
If components used in our finished products become unavailable, or
third-party manufacturers otherwise experience delays, we may incur
delays in shipment to our customers, which would damage our
business.
We depend on third-party suppliers for substantially all of our
components and products. We purchase these products and components
from third-party suppliers that serve the advanced lighting systems
market and we believe that alternative sources of supply are
readily available for most products and components. However,
consolidation could result in one or more current suppliers being
acquired by a competitor, rendering us unable to continue
purchasing necessary amounts of key components at competitive
prices. In addition, for certain of our customized components,
arrangements for additional or replacement suppliers will take time
and result in delays. We purchase products and components pursuant
to purchase orders placed from time to time in the ordinary course
of business. This means we are vulnerable to unanticipated price
increases and product shortages. Any interruption or delay in the
supply of components and products, or our inability to obtain
components and products from alternate sources at acceptable prices
in a timely manner, could harm our business, financial condition
and results of operations.
While we believe alternative manufacturers for these products are
available, we have selected these particular manufacturers based on
their ability to consistently produce these products per our
specifications ensuring the best quality product at the most
cost-effective price. We depend on our third-party manufacturers to
satisfy performance and quality specifications and to dedicate
sufficient production capacity within scheduled delivery times.
Accordingly, the loss of all or one of these manufacturers or
delays in obtaining shipments could have a material adverse effect
on our operations until such time as an alternative manufacturer
could be found.
We are dependent on key personnel.
Our success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace, including Ronald P. Erickson, our
Chairman and Phil Bosua, our Chief Executive Officer. We do not
maintain key person life insurance covering any of our officers.
Our success will depend on the performance of our officers, our
ability to retain and motivate our officers, our ability to
integrate new officers into our operations, and the ability of all
personnel to work together effectively as a team. Our
officers do not currently have employment
agreements. Our failure to retain and recruit officers
and other key personnel could have a material adverse effect on our
business, financial condition and results of
operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
11
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions, or demonstrate that we did not derive our invention
from another, we may have to participate in interference or
derivation proceedings in the USPTO or in court that could result
in substantial costs in legal fees and could substantially affect
the scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There can be no assurance that:
●
|
any of our existing patents will continue to be held valid, if
challenged;
|
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patents will be issued for any of our pending
applications;
|
●
|
any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
|
●
|
our patents will be issued in the primary countries where our
products are sold in order to protect our rights
and potential commercial advantage;
or
|
●
|
any of our products or technologies will not infringe on the
patents of other companies.
|
If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining and maintaining a patent portfolio entails significant
expense and resources. Part of the expense includes periodic
maintenance fees, renewal fees, annuity fees, various other
governmental fees on patents and/or applications due in several
stages over the lifetime of patents and/or applications, as well as
the cost associated with complying with numerous procedural
provisions during the patent application process. We may or may not
choose to pursue or maintain protection for particular inventions.
In addition, there are situations in which failure to make certain
payments or noncompliance with certain requirements in the patent
process can result in abandonment or lapse of a patent or patent
application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. If we choose to forgo patent
protection or allow a patent application or patent to lapse
purposefully or inadvertently, our competitive position could
suffer.
Legal actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We may receive notices that claim we have infringed upon
the intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
We currently have a very small sales and marketing organization at
our TransTech Systems subsidiary. If we are unable to secure a
sales and marketing partner or establish satisfactory sales and
marketing capabilities at the Know Labs parent Company level we may
not be able to successfully commercialize our ChromaID and Bio-RFID
technology.
Our subsidiary, TransTech Systems, has six sales and marketing
employees on staff to support the ongoing sales efforts of that
business. In order to commercialize products that are approved for
commercial sales, we sell directly to our customers, collaborate
with third parties that have such commercial infrastructure and
work with our strategic business partners to generate sales. If we
are not successful entering into appropriate collaboration
arrangements, or recruiting sales and marketing personnel or in
building a sales and marketing infrastructure, we will have
difficulty successfully commercializing our ChromaID and Bio-RFID
technology, which would adversely affect our business, operating
results and financial condition.
12
We may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize ChromaID and Bio-RFID
without strategic partners or licensees include:
●
|
our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
|
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
|
●
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
|
Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Our
ChromaID and Bio-RFID technology may have a number of potential
applications in fields of use which will require prior governmental
regulatory approval before the technology can be introduced to the
marketplace. For example, we are exploring the use of our ChromaID
and Bio-RFID technology for certain medical diagnostic
applications, with an initial focus on the continuous monitoring of
blood glucose.
There
is no assurance that we will be successful in developing a
continuous glucose monitoring medical applications for our
technology.
If we
were to be successful in developing a continuous glucose monitoring
medical applications of our technology, prior approval by the FDA
and other governmental regulatory bodies will be required before
the technology could be introduced into the
marketplace.
There
is no assurance that such regulatory approval would be obtained for
a continuous glucose monitoring medical diagnostic or other
applications requiring such approval.
The FDA
can refuse to grant, delay, limit or deny approval of an
application for approval of our UBA ND CGM for many
reasons,
We may
not obtain the necessary regulatory approvals or clearances to
market these continuous glucose monitoring systems in the United
States or outside of the United States.
Any
delay in, or failure to receive or maintain, approval or clearance
for our products could prevent us from generating revenue from
these products or achieving profitability.
Cybersecurity risks and cyber incidents could result in the
compromise of confidential data or critical data systems and give
rise to potential harm to customers, remediation and other
expenses, expose us to liability under HIPAA, consumer protection
laws, or other common law theories, subject us to litigation and
federal and state governmental inquiries, damage our reputation,
and otherwise be disruptive to our business and
operations.
Cyber
incidents can result from deliberate attacks or unintentional
events. We collect and store on our networks sensitive information,
including intellectual property, proprietary business information
and personally identifiable information of our customers. The
secure maintenance of this information and technology is critical
to our business operations. We have implemented multiple layers of
security measures to protect the confidentiality, integrity and
availability of this data and the systems and devices that store
and transmit such data. We utilize current security technologies,
and our defenses are monitored and routinely tested internally and
by external parties. Despite these efforts, threats from malicious
persons and groups, new vulnerabilities and advanced new attacks
against information systems create risk of cybersecurity incidents.
These incidents can include, but are not limited to, gaining
unauthorized access to digital systems for purposes of
misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may not immediately produce signs of
intrusion, we may be unable to anticipate these incidents or
techniques, timely discover them, or implement adequate
preventative measures.
These
threats can come from a variety of sources, ranging in
sophistication from an individual hacker to malfeasance by
employees, consultants or other service providers to
state-sponsored attacks. Cyber threats may be generic, or they may
be custom-crafted against our information systems. Over the past
several years, cyber-attacks have become more prevalent and much
harder to detect and defend against. Our network and storage
applications may be vulnerable to cyber-attack, malicious
intrusion, malfeasance, loss of data privacy or other significant
disruption and may be subject to unauthorized access by hackers,
employees, consultants or other service providers. In addition,
hardware, software or applications we develop or procure from third
parties may contain defects in design or manufacture or other
problems that could unexpectedly compromise information security.
Unauthorized parties may also attempt to gain access to our systems
or facilities through fraud, trickery or other forms of deceiving
our employees, contractors and temporary staff.
13
There
can be no assurance that we will not be subject to cybersecurity
incidents that bypass our security measures, impact the integrity,
availability or privacy of personal health information or other
data subject to privacy laws or disrupt our information systems,
devices or business, including our ability to deliver services to
our customers. As a result, cybersecurity, physical security and
the continued development and enhancement of our controls,
processes and practices designed to protect our enterprise,
information systems and data from attack, damage or unauthorized
access remain a priority for us. As cyber threats continue to
evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures
or to investigate and remediate any cybersecurity
vulnerabilities.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our growth strategy depends in part on our ability to execute
successful strategic acquisitions. We have made strategic
acquisitions in the past and may do so in the future, and if the
acquired companies do not perform as expected, this could adversely
affect our operating results, financial condition and existing
business.
We may continue to expand our business through strategic
acquisitions. The success of any acquisition will depend on, among
other things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
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Our management has concluded that our disclosure controls and
procedures were not effective due to the lack of an audit committee
“financial expert.” We expect to appoint an additional
independent director to serve as Audit Committee Chairman. This
director will be an “audit committee financial expert”
as defined by the SEC. However, we cannot assure you that we will
be able to fully comply with these laws, rules, and regulations
that address corporate governance, internal control reporting, and
similar matters in the future. Failure to comply with these laws,
rules and regulations could materially adversely affect our
reputation, financial condition, and the value of our
securities.
The Capital Source credit facility with TransTech contains
covenants that may limit our flexibility in operating our business
and failure to comply with any of these covenants could have a
material adverse effect on our business.
In December 8, 2009, we entered into the Capital Source credit
facility. On December 6, 2018, Capital Source notified
TransTech that the Loan and Security Agreement and Capital Source
Credit Facility would be cancelled as of March 12, 2019. Effective
December 12, 2018, TransTech entered into the Sixth Modification to
the Loan and Security Agreement which reduced the secured credit
facility to $200,000.
This Capital Source credit facility contains covenants that limit
our ability to engage in specified types of transactions. These
covenants limit our ability to, among other things:
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sell,
transfer, lease or dispose of certain assets;
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engage
in certain mergers and consolidations;
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incur
debt or encumber or permit liens on certain assets, except in the
limited circumstances permitted under the loan and security
agreements;
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make
certain restricted payments, including paying dividends on, or
repurchasing or making distributions with respect to, our common
stock; and
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enter
into certain transactions with affiliates.
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A breach of any of the covenants under the Capital Source credit
facility could result in a default under the Capital Source credit
facility. Upon the occurrence of an event of default under the
Capital Source credit facility, the lenders could elect to declare
all amounts outstanding to be immediately due and payable and
terminate all commitments to extend further credit. If we are
unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure such indebtedness. We
expect to replace the credit facility by March 12,
2019.
Our wholly-owned TransTech subsidiary revenues are
declining
The
financial results from our TransTech subsidiary have been
diminishing as vendors of their products increasingly move to the
Internet and direct sales to their customers. While it does provide
our current revenues, it is not central to our current focus as a
Company. Moreover, we have written down any goodwill associated
with its historic acquisition. We continue to closely monitor this
subsidiary. We may not be able to
successfully address this revenue decline, which could
significantly harm our business, operating results and financial
condition and result in winding down this
subsidiary.
The exercise prices of certain warrants, convertible notes payable
and the Series A, C, and D Preferred Shares may require further
adjustment.
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price of 20,000
outstanding shares of Series A Preferred Stock, 1,785,715
outstanding shares of Series C Preferred Stock, 1,016,004
outstanding shares Series D Preferred Stock that adjust below $0.25
per share pursuant to the documents governing such instruments. In
addition, the conversion price of a Convertible Note Payable of
$2,255,066 and the exercise price of additional outstanding
warrants to purchase 13,865,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures, strategic relationships, addition or loss of
significant customers and contracts, capital expenditure
commitments and
litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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Investor and public relation activities;
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Announcements of technological innovations;
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New product introductions by us or our competitors;
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Competitive activities; and
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Additions or departures of key personnel.
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These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our common stock may be restricted under the
securities or securities regulations laws promulgated by various
states and foreign jurisdictions, commonly referred to as "blue
sky" laws. Absent compliance with such individual state laws, our
common stock may not be traded in such jurisdictions. Because the
securities held by many of our stockholders have not been
registered for resale under the blue sky laws of any state, the
holders of such shares and persons who desire to purchase them
should be aware that there may be significant state blue sky law
restrictions upon the ability of investors to sell the securities
and of purchasers to purchase the securities. These restrictions
may prohibit the secondary trading of our common stock. Investors
should consider the secondary market for our securities to be a
limited one.
Three individual
investors could have significant influence over matters submitted
to stockholders for approval.
As of December 21, 2018, four individuals in the aggregate,
assuming the exercise of all warrants to purchase common stock,
hold shares representing approximately 61% of our common stock on a
fully-converted basis and could be considered a control group for
purposes of SEC rules. However, the agreement with one of these
individuals limits his ownership to 4.99% individually. Beneficial
ownership includes shares over which an individual or entity has
investment or voting power and includes shares that could be issued
upon the exercise of options and warrants within 60 days after the
date of determination. If these persons were to choose to act
together, they would be able to significantly influence all matters
submitted to our stockholders for approval, as well as our
officers, directors, management and affairs. For example, these
persons, if they choose to act together, could significantly
influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may
desire.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales or issuances of a large number of shares of common stock in
the public market or the perception that sales may occur could
cause the market price of our common stock to decline. As of
December 21, 2018, we had 17,531,502 shares of common stock issued and
outstanding, held by 122 stockholders of record. The number of
stockholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock
entitles its holder to one vote on each matter submitted to the
stockholders for a vote, and no cumulative voting for directors is
permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by
us. As of December
21, 2018, there were options outstanding for the purchase of
2,182,668 common shares, warrants for the purchase of 15,473,398
common shares, and 4,914,071 shares of our common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock. In addition, we have an unknown number
of shares (9,020,264 common shares at the current price of $0.25
per share) are issuable upon conversion of convertible debentures
of $2,255,066. All of which could potentially dilute future
earnings per share.
Significant shares of common stock are held by our principal
stockholders, other company insiders and other large stockholders.
As “affiliates” of Know Labs, as defined under
Securities and Exchange Commission Rule 144 under the Securities
Act of 1933, our principal stockholders, other of our insiders and
other large stockholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common stock
holders and may affect the market price of the common
stock.
Future issuance of additional shares of
common stock and/or preferred stock could dilute existing
stockholders. We have and may
issue preferred stock that could have rights that are preferential
to the rights of common stock that could discourage potentially
beneficially transactions to our common
stockholders.
Pursuant to our certificate of incorporation, we currently have
authorized 100,000,000 shares of common stock and 5,000,000 shares
of preferred stock. To the extent that common shares are available
for issuance, subject to compliance with applicable stock exchange
listing rules, our board of directors has the ability to issue
additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient.
The issuance of any additional securities could, among other
things, result in substantial dilution of the percentage ownership
of our stockholders at the time of issuance, result in substantial
dilution of our earnings per share and adversely affect the
prevailing market price for our common stock.
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An issuance of additional shares of preferred stock could result in
a class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we
raise additional capital by issuing equity securities, our existing
stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. We may also issue
equity securities that provide for rights, preferences and
privileges senior to those of our common stock. If we raise
additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms
of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise
additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or
candidate products, or to grant licenses on terms that are not
favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid cash dividends on our capital stock.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business, and we do
not anticipate paying any cash dividends on our capital stock in
the foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our certificate of incorporation, as amended, our bylaws and Nevada
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock; our Series A Preferred Stock contains
provisions that restrict our ability to take certain actions
without the consent of at least 66% of the Series A Preferred Stock
then outstanding.
Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
In addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
● authorizing, creating, designating, establishing or issuing
an increased number of shares of Series A Preferred Stock or any
other class or series of capital stock ranking senior to or on a
parity with the Series A Preferred Stock;
● adopting a plan for the liquidation, dissolution or winding
up the affairs of our company or any recapitalization plan (whether
by merger, consolidation or otherwise);
● amending, altering or repealing, whether by merger,
consolidation or otherwise, our articles of incorporation or bylaws
in a manner that would adversely affect any right, preference,
privilege or voting power of the Series A Preferred Stock;
and
● declaring or paying any dividend (with certain exceptions)
or directly or indirectly purchase, redeem, repurchase or otherwise
acquire any shares of our capital stock, stock options or
convertible securities (with certain exceptions).
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are reviewing an SEC comment related to a late Form 8-K filing.
The matter was previously reported in another SEC
filing.
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ITEM 2. PROPERTIES
Corporate Offices
On April 13, 2017, we leased our executive office located at 500
Union Street, Suite 810, Seattle, Washington, USA, 98101. The
Company leases 943 square feet and the net monthly payment is
$2,672. The monthly payment increases approximately 3% each year
and the lease expires on May 31, 2022.
Lab Facilities and Executive Offices
On May 1, 2018, we leased our lab facilities and executive offices
located at 304 Alaskan Way South, Suite 102, Seattle, Washington,
USA, 98101. We lease 2,800 square feet and the net monthly payment
is $4,000. The lease expires on April 30, 2019.
TransTech Facilities
TransTech is located at 12142 NE Sky Lane, Suite 130, Aurora, OR
97002. TransTech leases a total of approximately 6,340 square feet
of office and warehouse space for its administrative offices,
product inventory and shipping operations. Effective December 1,
2017, TransTech leases this office from December 1, 2017 at $4,465
per month. The monthly payment increases approximately 3% each year
and the lease expires on January 31, 2020. Until December 1, 2017,
TransTech leased this office on a month to month basis at $6,942
per month.
ITEM 3. LEGAL PROCEEDINGS
We may
from time to time become a party to various legal proceedings
arising in the ordinary course of our business. We are currently
not a party to any pending legal proceeding that is not ordinary
routine litigation incidental to our business.
ITEM 4. MINE SAFETY
DISCLOSURES
This item is not applicable.
ITEM 5. OTHER INFORMATION
This item is not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Authorized Capital Stock
We have
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares of preferred stock, par value
$0.001 per share.
Voting Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred
stock with a par value of $0.001.
Series A Preferred Stock
In July
2015, we sold Series A Preferred Stock to two investors for a total
of $350,000. As of December 21, 2018,
we had 20,000 Series A Preferred Stock issued and
outstanding.
Each
holder of outstanding shares of Series A Preferred is entitled to
the number of votes equal to the number of whole shares of common
stock into which the shares of Series A Preferred held by such
holder are then convertible as of the applicable record date. The
Series A Preferred may not be redeemed without the consent of the
holder. The Company cannot amend, alter or repeal any preferences,
rights, or other terms of the Series A Preferred so as to adversely
affect the Series A Preferred, without the written consent or
affirmative vote of the holders of at least 66% of the then
outstanding shares of Series A Preferred, voting as a separate
voting group, given by written consent or by vote at a meeting
called for such purpose for which notice shall have been duly given
to the holders of the Series A Preferred.
In
connection with the issuance of the Series A Preferred, we also
issued (i) a Series C five-year Warrant for 2 shares of common
stock and (ii) a Series D five-year Warrant for 23,334 shares of
common stock. The Series A Preferred Stock and Series C and D
Warrants currently have no registration rights.
On August 14, 2017, the price of the Series A Preferred Stock and
Series C and D Warrants were adjusted to $0.25 per share pursuant
to the documents governing such
instruments.
On
September 23, 2018, a holder of Series A Preferred Stock converted
3,334 shares into 3,334 shares of common stock. In addition, the
holder exercised Series C and D Warrants for 6,668 shares of common
stock at $0.25 per share.
Series C and D Preferred Stock and Warrants
On
August 5, 2016, we closed a Series C Preferred Stock and Warrant
Purchase Agreement with Clayton A. Struve, an accredited investor
for the purchase of $1,250,000 of preferred stock with a conversion
price of $0.70 per share. The preferred stock has a yield of 8% and
an ownership blocker of 4.99%. In addition, Mr. Struve received a
five-year warrant to acquire 1,785,714 shares of common stock at
$0.70 per share.
To
determine the effective conversion price, a portion of the proceeds
received by us upon issuance of the Series C Preferred Stock was
first allocated to the freestanding warrants issued as part of this
transaction. Given that the warrants will not subsequently be
measured at fair value, we determined that the warrants should
receive an allocation of the proceeds based on their relative fair
value. This is based on the understanding that the FASB staff and
the SEC staff believe that a freestanding instrument issued in a
basket transaction should be initially measured at fair value if it
is required to be subsequently measured at fair value pursuant to
US generally accepted accounting principles (“GAAP”),
with the residual proceeds from the transaction allocated to any
remaining instruments based on their relative fair values. As such,
the warrants were allocated a fair value of approximately $514,706
upon issuance, with the remaining $735,294 of proceeds allocated to
the Series C Preferred Stock.
Proportionately,
this allocation resulted in approximately 59% of the face amount of
the Series C Preferred Stock issuance remaining, which applied to
the stated conversion price of $0.70 resulted in an effective
conversion price of approximately $0.41.
Having
determined the effective conversion price, we then compared this to
the fair value of the underlying Common Stock as of the commitment
date, which was approximately $1.06 per share, and concluded that
the conversion feature did have an intrinsic value of $0.65 per
share. As such, the Company concluded that the Series C Preferred
Stock did contain a beneficial conversion feature and an accounting
entry and additional financial statement disclosure was
required.
Because
our preferred stock is perpetual, with no stated maturity date, and
the conversions may occur any time from inception, the dividend is
recognized immediately when a beneficial conversion exists at
issuance. During the year ending September 30, 2016, the Company.
recognized preferred stock dividends of $1.16 million on Series C
preferred stock related to the beneficial conversion feature
arising from a common stock effective conversion rate of $0.41
versus a current market price of $1.06 per common
share.
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On
November 14, 2016, we issued 187,500 shares of Series D Convertible
Preferred Stock and a warrant to purchase 187,500 shares of common
stock in a private placement to certain accredited investors for
gross proceeds of $150,000 pursuant to a Series D Preferred Stock
and Warrant Purchase Agreement dated November 10,
2016.
The
warrants associated with the November 14, 2016 issuance were
allocated a fair value of approximately $56,539 upon issuance, with
the remaining $63,539 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 53% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.34. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$1.14 per share, and concluded that the conversion feature did have
an intrinsic value of $0.80 per share. As such, we concluded that
the Series D Preferred Stock did contain a beneficial conversion
feature of $150,211 which was recorded as a beneficial conversion
in stockholders’ equity.
On
December 19, 2016, we issued 187,500 shares of Series D Convertible
Preferred Stock and a warrant to purchase 187,500 shares of common
stock in a private placement to an accredited investor for gross
proceeds of $150,000 pursuant to a Series D Preferred Stock and
Warrant Purchase Agreement dated December 14, 2016.
The
warrants associated with the December 19, 2016 issuance were
allocated a fair value of approximately $60,357 upon issuance, with
the remaining $69,643 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 54% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.37. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$0.81 per share, and concluded that the conversion feature did have
an intrinsic value of $0.44 per share. As such, we concluded that
the Series C Preferred Stock did contain a beneficial conversion
feature of $82,232 which was recorded as a beneficial conversion in
stockholders’ equity.
Because
our preferred stock is perpetual, with no stated maturity date, and
the conversions may occur any time from inception, the dividend is
recognized immediately when a beneficial conversion exists at
issuance. During the year ending September 30, 2017, we recognized
preferred stock dividends of $2.3 million on Series D preferred
stock related to the beneficial conversion feature arising from a
common stock effective conversion rate of $0.34 and $0.37 versus
the original market price of $1.14 and $1.06 per common share,
respectively.
On May 1, 2017, we issued 357,143 shares of Series D Convertible
Preferred Stock and a warrant to purchase 357,143 shares of common
stock in a private placement to an accredited investor for gross
proceeds of $250,000 pursuant to a Series D Preferred Stock and
Warrant Purchase Agreement dated May 1, 2016.
The initial conversion price of the Series D Shares is $0.70 per
share, subject to certain adjustments. The initial exercise price
of the warrant is $0.70 per share, also subject to certain
adjustments. The Company also amended and restated the Certificate
of Designations, resulting in an adjustment to the conversion price
of all currently outstanding Series D Shares to $0.70 per
share.
On August 14, 2017, the price of the Series C and D Preferred Stock were
adjusted to $0.25 per share pursuant
to the documents governing such instruments. After adjustment there
were 3,108,356 shares of Series D preferred stock
authorized.
On July
17, 2018, we filed with the State of Nevada a second Amended and
Restated Certificate of Designation of Preferences, Powers, and
Rights of the Series D Convertible Preferred Stock. The Amended
Certificate restates the prior Certificate of Designation filed on
May 8, 2017 to decrease the number of authorized Series D shares
from 3,906,250 shares to 1,016,014 shares. No other amendments were
made to the preferences and rights of the Series D Convertible
Preferred Stock. The filing of the Amended Certificate was
unanimously approved by the Board of Directors and the shareholders
of Series D Convertible Preferred Stock.
Series F Preferred Stock
On August 1, 2018, we filed with the State of Nevada a Certificate
of Designation establishing the Designations, Preferences,
Limitations and Relative Rights of Series F Preferred Stock (the
“Designation”). The Designation authorized 500 shares
of Series F Preferred Stock. The Series F Preferred Stock shall
only be issued to the current Board of Directors on the date of the
Designation’s filing and is not convertible into common
stock. As set forth in the Designation, the Series F Preferred
Stock has no rights to dividends or liquidation preference and
carries rights to vote 100,000 shares of common stock per share of
Series F upon a Trigger Event, as defined in the Designation. A
Trigger Event includes certain unsolicited bids, tender offers,
proxy contests, and significant share purchases, all as described
in the Designation. Unless and until a Trigger Event, the Series F
shall have no right to vote. The Series F Preferred Stock shall
remain issued and outstanding until the date which is 731 days
after the issuance of Series F Preferred Stock (“Explosion
Date”), unless a Trigger Event occurs, in which case the
Explosion Date shall be extended by 183 days.
20
Securities Subject to Price Adjustments
On
August 14, 2017, a private placement triggered a provision in the
documents governing 23,334 outstanding shares of Series A Preferred
Stock, 1,785,715 outstanding shares of Series C Preferred Stock and
1,016,004 outstanding shares Series D preferred Stock, which
adjusted the conversion price of such Preferred Stock to $0.25 per
share. In addition, the conversion price of a Convertible Note
Payables of $2,390,066 and the exercise price of outstanding
warrants to purchase 9,548,741 shares of common stock were adjusted
to $0.25 per share pursuant to the documents governing such
instruments.
As of December 21, 2018, there were outstanding warrants for the
purchase of 15,473,398 shares of common stock. In the future, if we sell our common stock at a
price below $0.25 per share, the exercise price of 20,000 outstanding shares of
Series A Preferred Stock, 1,785,715 outstanding shares of Series C
Preferred Stock, 3,108,356 outstanding shares Series D Preferred
Stock that adjust below $0.25 per share pursuant to the documents
governing such instruments. In addition, the conversion price of a
Convertible Note Payable of $2,255,066 (9,020,264 common shares at
the current price of $0.25 per share) and the exercise price of
additional outstanding warrants to purchase 13,865,286 shares of
common stock would adjust below $0.25 per share pursuant to the
documents governing such instruments.
Common Stock
We are authorized to issue up to 100,000,000 shares of common stock
with a par value of $0.001. As of September 30, 2018, we had
17,531,502 shares of common stock issued and outstanding, held by
122 shareholders of record. The number of shareholders, including
beneficial owners holding shares through nominee names, is
approximately 2,300. Each share of common stock entitles its holder
to one vote on each matter submitted to the shareholders for a
vote, and no cumulative voting for directors is
permitted. Shareholders do not have any preemptive
rights to acquire additional securities issued by us. As
of September 30, 2018, there were options outstanding for the
purchase of 2,182,668 common shares, warrants for the purchase of
15,473,398 common shares and 4,914,071 shares of our common
stock issuable upon the conversion of Series A, Series C and Series
D Convertible Preferred Stock. We have Convertible Note Payable of
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share). All of which could potentially dilute future earnings
per share.
American Stock Transfer and Trust Company is the transfer agent and
registrar for our Common Stock.
Stock Incentive Plan
On
March 21, 2013, an amendment to the Stock Option Plan was approved
by the stockholders of the Company, increasing the number of shares
reserved for issuance under the Plan to 93,333 shares. On April 10, 2018, the Board
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 93,333 to 1,200,000. On August 7, 2018, the Board
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 1,200,000 to 2,000,000 to common shares. On December
21, 2018, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 2,000,000 to 2,500,000 to
common shares.
Anti-Takeover Provisions
Nevada Revised Statutes
Acquisition of Controlling Interest
Statutes. Nevada's "acquisition of
controlling interest" statutes contain provisions governing the
acquisition of a controlling interest in certain Nevada
corporations. These "control share" laws provide generally that any
person who acquires a "controlling interest" in certain Nevada
corporations may be denied certain voting rights, unless a majority
of the disinterested stockholders of the corporation elects to
restore such voting rights. These statutes provide that a person
acquires a "controlling interest" whenever a person acquires shares
of a subject corporation that, but for the application of these
provisions of the Nevada Revised Statutes, would enable that person
to exercise (1) one-fifth or more, but less than one-third,
(2) one-third or more, but less than a majority or (3) a
majority or more, of all of the voting power of the corporation in
the election of directors. Once an acquirer crosses one of these
thresholds, shares which it acquired in the transaction taking it
over the threshold and within the 90 days immediately
preceding the date when the acquiring person acquired or offered to
acquire a controlling interest become "control shares" to which the
voting restrictions described above apply. Our articles of
incorporation and bylaws currently contain no provisions relating
to these statutes, and unless our articles of incorporation or
bylaws in effect on the tenth day after the acquisition of a
controlling interest were to provide otherwise, these laws would
apply to us if we were to (i) have 200 or more stockholders of
record (at least 100 of which have addresses in the State of Nevada
appearing on our stock ledger) and (ii) do business in the
State of Nevada directly or through an affiliated corporation. As
of September 30, 2018 we have less than 200 record stockholders. If
these laws were to apply to us, they might discourage companies or
persons interested in acquiring a significant interest in or
control of the company, regardless of whether such acquisition may
be in the interest of our stockholders.
21
Combinations with Interested Stockholders
Statutes. Nevada's "combinations with
interested stockholders" statutes prohibit certain business
"combinations" between certain Nevada corporations and any person
deemed to be an "interested stockholder" for two years after the
such person first becomes an "interested stockholder" unless
(i) the corporation's board of directors approves the
combination (or the transaction by which such person becomes an
"interested stockholder") in advance, or (ii) the combination
is approved by the board of directors and sixty percent of the
corporation's voting power not beneficially owned by the interested
stockholder, its affiliates and associates. Furthermore, in the
absence of prior approval certain restrictions may apply even after
such two-year period. For purposes of these statutes, an
"interested stockholder" is any person who is (x) the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the outstanding voting shares of the
corporation, or (y) an affiliate or associate of the
corporation and at any time within the two previous years was the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the then outstanding shares of the corporation.
The definition of the term "combination" is sufficiently broad to
cover most significant transactions between the corporation and an
"interested stockholder". Subject to certain timing requirements
set forth in the statutes, a corporation may elect not to be
governed by these statutes. We have not included any such provision
in our articles of incorporation.
The
effect of these statutes may be to potentially discourage parties
interested in taking control of us from doing so if it cannot
obtain the approval of our Board of Directors.
Articles of Incorporation and Bylaws Provisions
Our
articles of incorporation, as amended and restated, and our bylaws,
as amended and restated, contain provisions that could have the
effect of discouraging potential acquisition proposals or tender
offers or delaying or preventing a change in control, including
changes a stockholder might consider favorable. In particular, our
articles of incorporation and bylaws, among other
things:
●
permit our Board of Directors to alter our bylaws without
stockholder approval;
●
provide that vacancies on our Board of Directors may be filled by a
majority of directors in office, although less than a
quorum;
●
authorize the issuance of preferred stock, which can be created and
issued by our Board of Directors without prior stockholder
approval, with rights senior to our common stock, which may render
more difficult or discourage an attempt to obtain control of us by
means of a merger, tender offer, proxy contest or otherwise;
and
●
establish advance notice procedures with respect to stockholder
proposals relating to the nomination of candidates for election as
directors and other business to be brought before stockholder
meetings, which notice must contain information specified in our
bylaws.
In
addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
●
authorizing, creating, designating, establishing or issuing an
increased number of shares of Series A Preferred Stock or any other
class or series of capital stock ranking senior to or on a parity
with the Series A Preferred Stock;
●
adopting a plan for the liquidation, dissolution or winding up the
affairs of our company or any recapitalization plan (whether by
merger, consolidation or otherwise);
●
amending, altering or repealing, whether by merger, consolidation
or otherwise, our articles of incorporation or bylaws in a manner
that would adversely affect any right, preference, privilege or
voting power of the Series A Preferred Stock;
and
●
declaring or paying any dividend (with certain exceptions) or
directly or indirectly purchase, redeem, repurchase or otherwise
acquire any shares of our capital stock, stock options or
convertible securities (with certain exceptions).
Such
provisions may have the effect of discouraging a third-party from
acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
Board of Directors and in the policies formulated by them, and to
discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition
proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in
an improvement of their terms.
However,
these provisions could have the effect of discouraging others from
making tender offers for our shares that could result from actual
or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Market Price of and Dividends on Common Equity and Related
Stockholder Matters
Our common stock trades on the OTCQB Exchange under the symbol
“KNWN.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
name change from Know Labs, Incorporated to Know Labs, Inc. and
symbol change from VSUL to KNWN was announced by FINRA declared
effective on the opening of trading as of May 25,
2018.
Trades
in our common stock may be subject to Rule 15g-9 of the Exchange
Act, which imposes requirements on broker/dealers who sell
securities subject to the rule to persons other than established
customers and accredited investors. For transactions covered by the
rule, broker/dealers must make a special suitability determination
for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.
22
Period
Ended
|
High
|
Low
|
Year Ending September 30, 2018
|
|
|
September
30, 2018
|
$5.71
|
$0.62
|
June
30, 2018
|
$0.65
|
$0.24
|
March
31, 2018
|
$0.36
|
$0.21
|
December
31, 2017
|
$0.44
|
$0.20
|
|
|
|
Year Ending September 30, 2017
|
|
|
September
30, 2017
|
$0.25
|
$0.11
|
June
30, 2017
|
$0.70
|
$0.23
|
March
31, 2017
|
$0.99
|
$0.54
|
December
31, 2016
|
$1.44
|
$0.66
|
As of
December 18, 2018, the high and low sales price of our common stock
was $4.44 per share and $2.78 per share, respectively. As of
December 21, 2018, there were 17,531,502 shares of common stock
outstanding held by approximately 122 stockholders of record. This
number does not include approximately 2,300 beneficial owners whose
shares are held in the names of various security brokers, dealers
and registered clearing agencies.
Transfer Agent
Our transfer agent is American Stock Transfer & Trust Company
located at 6201 15th Avenue, Brooklyn, New York 11219, and their
telephone number is (800) 937-5449.
Dividend Policy
We have
not previously declared or paid any cash dividends on our common
stock and do not anticipate or contemplate paying dividends on our
common stock in the foreseeable future. We currently intend to use
all of our available funds to finance the growth and development of
our business. We can give no assurances that we will ever have
excess funds available to pay dividends. In addition, our articles
of incorporation restrict our ability to pay any dividends on our
common stock without the approval of 66% of our then outstanding
Series A Preferred Stock.
Recent Sales of Unregistered Securities
During the three months ended September 30, 2018, we had the
following sales of unregistered sales of equity
securities:
We issued 71,436 shares of common stock to employees and
consultants and for services during 2018. We expensed
$91,438.
On June 25, 2018, we closed a private placement and received gross
proceeds of $1,750,000 ($1,710,000 as of September 30, 2018) in
exchange for issuing 7,000,000 (6,840,000 as of September 30, 2018)
shares of common stock and warrants to purchase 3,500,000
(3,420,000 as of September 30, 2018) shares of common stock in a
private placement to accredited investors pursuant to a series of
substantially identical subscription agreements. The initial
exercise price of the warrants described above is $0.25 per share,
subject to certain adjustments, and they expired five years after
their issuance. The shares and the warrants described above were
issued in transactions that were not registered under the
Securities Act of 1933, as amended (the “Act”) in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the
Act.
We closed debt conversions and issued 1,600,000 shares of common
stock in exchange for the conversion of $464,000 in preexisting
debt owed by the Company to by Ronald P. Erickson or entities and
Clayton A. Struve, both of whom are accredited investors. These
shares were issued in transactions that were not registered under
the Act in reliance upon applicable exemptions from registration
under Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation
D under the Act.
During the three months ended September 30, 2018, we issued 158,000
shares of our common stock related to warrant exercises that were
valued at $80,128.
On September 23, 2018, we issued 3,334 shares of our common stock
related to the conversion of Series A Preferred Stock for
$834.
23
Equity Compensation Information
The following table provides information as of December 21, 2018
related to the equity compensation plan in effect at that
time.
|
(a)
|
(b)
|
(c)
|
|
|
|
Number of securities
|
|
|
|
remaining available
|
|
Number of securities
|
Weighted-average
|
for future issuance
|
|
to be issued upon
|
exercise price of
|
under equity compensation
|
|
exercise of outstanding
|
outstanding options,
|
plan (excluding securities
|
Plan Category
|
options, warrants and rights
|
warrants and rights
|
reflected in column (a))
|
Equity compensation plan
|
|
|
|
approved by shareholders
|
-
|
-
|
-
|
Equity compensation plans
|
|
|
|
not approved by shareholders
|
2,182,668
|
1.698
|
317,332
|
Total
|
2,182,668
|
1.698
|
317,332
|
ITEM 6. SELECTED FINANCIAL
DATA
Summary Financial Information
In the following table, we provide you with our selected
consolidated historical financial and other data. We have prepared
the consolidated selected financial information using our
consolidated financial statements for the years ended September 30,
2018 and 2017. When you read this selected consolidated historical
financial and other data, it is important that you read along with
it the historical financial statements and related notes in our
consolidated financial statements included in this report, as well
as Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(dollars in thousands)
|
Years
Ended September 30,
|
||||
|
2018
|
2017
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS DATA:
|
|
|
|
|
|
Net
revenue
|
$4,303
|
$4,874
|
$6,024
|
$6,291
|
$7,983
|
Cost
of goods sold
|
3,482
|
3,966
|
5,036
|
5,274
|
6,694
|
Gross
profit
|
821
|
908
|
988
|
1,017
|
1,289
|
Research
and development expenses
|
570
|
79
|
326
|
363
|
670
|
General
and administrative expenses
|
2,509
|
3,088
|
3,355
|
2,984
|
3,180
|
Impairment
of goodwill
|
-
|
984
|
-
|
-
|
-
|
Operating
(loss)
|
(2,258)
|
(3,243)
|
(2,693)
|
(2,330)
|
(2,561)
|
Other
expense
|
(1,000)
|
(658)
|
947
|
(271)
|
1,538
|
Net
(loss)
|
(3,258)
|
(3,901)
|
(1,746)
|
(2,601)
|
(1,023)
|
Income
taxes current benefit
|
-
|
-
|
-
|
30
|
(6)
|
Net
(loss)
|
(3,258)
|
(3,901)
|
(1,746)
|
(2,631)
|
(1,017)
|
Noncontrolling
interest
|
-
|
-
|
-
|
-
|
-
|
Net
(loss) attributable to Visualant, Inc. and Subsidiaries common
shareholders
|
$(3,258)
|
$(3,901)
|
$(1,746)
|
$(2,631)
|
$(1,017)
|
Net
(loss) per share
|
$(0.38)
|
$(1.01)
|
$(1.22)
|
$(2.33)
|
$(2.33)
|
Weighted
average number of shares
|
8,630,891
|
3,844,840
|
1,428,763
|
1,131,622
|
437,049
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing at the end of this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus, including
information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that
involve risks and uncertainties. You should read the "Risk Factors"
section of this prospectus for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements
contained in the following discussion and analysis.
We are focused on the development, marketing and sales of a
proprietary technology which is capable of uniquely identifying and
authenticating almost any substance using electromagnetic energy to
create, record and detect the unique digital
“signature” of the substance. We call our technology
“ChromaID™” and
“Bio-RFID™.”
24
Overview
Historically we have focused on the development of our proprietary
ChromaID™ technology. Using light from low-cost LEDs (light
emitting diodes) we map the color of substances, fluids and
materials and with our proprietary processes we can authenticate,
identify and diagnose based upon the color that is present. The
color is both visible to us as humans but also outside of the
humanly visible color spectrum in the near infra-red and near
ultra-violet and beyond. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see
it, and identify, authenticate and diagnose based upon the color
that is present. Our ChromaID scanner is capable of uniquely
identifying and authenticating almost any substance or liquid using
light to create, record and detect its unique color signature. We
will continue to develop and enhance our ChromaID technology and
extend its capacity. More recently, we have focused upon extensions
and new inventions that are derived from and extend our ChromaID
technology which we call Bio-RFID. The rapid advances made with
Bio-RFID technology in our laboratory have caused us to move
quickly in to the commercialization phase of our Company as we work
to create revenue generating products for the marketplace. We will
also, as time permits, pursue licensing opportunities with third
parties who have ready applications for our
technology.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues it is not central to our current focus
as a Company. Moreover, we have written down any good will
associated with its historic acquisition and we continue to monitor
this subsidiary.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from year-to-year.
(dollars in thousands)
|
Years
Ended September 30,
|
|||
|
2018
|
2017
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$4,303
|
$4,874
|
$(571)
|
-11.7%
|
Cost
of sales
|
3,482
|
3,966
|
(484)
|
12.2%
|
Gross
profit
|
821
|
908
|
(87)
|
-9.6%
|
Research
and development expenses
|
570
|
79
|
491
|
-621.5%
|
Selling,
general and administrative expenses
|
2,509
|
3,088
|
(579)
|
18.8%
|
Impairment
of goodwill
|
-
|
984
|
(984)
|
100.0%
|
Operating
loss
|
(2,258)
|
(3,243)
|
985
|
30.4%
|
Other
(expense) income:
|
|
|
|
|
Interest
expense
|
(1,195)
|
(377)
|
(818)
|
-217.0%
|
Other
income (expense)
|
25
|
(63)
|
88
|
139.7%
|
(Loss)
on change- derivative liability warrants
|
-
|
(218)
|
218
|
100.0%
|
Gain
on debt settlements
|
170
|
-
|
170
|
100.0%
|
Total
other income (expense)
|
(1,000)
|
(658)
|
(342)
|
-52.0%
|
(Loss)
before income taxes
|
(3,258)
|
(3,901)
|
643
|
16.5%
|
Income
taxes - current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(3,258)
|
$(3,901)
|
$643
|
16.5%
|
YEAR ENDED SEPTEMBER 30, 2018 COMPARED TO THE YEAR ENDED SEPTEMBER
30, 2017
Sales
Net revenue for the year ended September 30, 2018 decreased
$571,000 to $4,303,000 as compared to $4,874,000 for the year ended
September 30, 2017. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Cost of Sales
Cost of sales for the year ended September 30, 2018 decreased
$484,000 to $3,482,000 as compared to $3,966,000 for the year ended
September 30, 2017. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
25
Gross profit was $821,000 for the year ended September 30, 2018 as
compared to $908,000 for the year ended September 30, 2017. Gross
profit was 19.1% for the year ended September 30, 2018 as compared
to 18.6% for the year ended September 30, 2017. We have focused
TransTech on maximizing profits at the lower sales
level.
Research and Development Expenses
Research and development expenses for the year ended September 30,
2018 increased $491,000 to $570,000 as compared to $79,000 for the
year ended September 30, 2017. The increase was due to expenditures
related to the Consulting and Services Agreement with Phillip A.
Bosua, our Chief Product Officer for product development, including
the development of our Bio-RFID™
technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for year ended
September 30, 2018 decreased $579,000 to $2,509,000 as compared to
$3,088,000 for the year ended September 30,
2017.
The decrease primarily was due to (i) reduced payroll, bad debt and
other expenses of $465,000 at TransTech; (ii) decreased corporate
development expense of $425,000; (iii) decreased other corporate
expenses of $217,000; and (iv) offset by increased stock based
compensation expenses of $581,000 . As part of the selling, general
and administrative expenses for the three months ended September
30, 2018, we recorded $198,000 of investor relation expenses and
corporate development expenses.
Impairment of Goodwill
Our TransTech business is very capital intensive. We reviewed
TransTech’s operations based on its overall financial
constraints and determined the value has been impaired. We recorded
an impairment of goodwill associated with TransTech of $984,000
during the year ended September 30, 2017.
Other Income (Expense)
Other expense for the year ended September 30, 2018 was $1,000,000
as compared to other expense of $657,000 for the year ended
September 30, 2017. The other expense for the year ended September
30, 2018 included (i) interest expense of $1,195,000; offset by
(ii) other income of $25,000 and (iii) gain on debt settlements of
$170,000. The interest expense related a senior convertible
exchangeable debenture issued on December 12, 2017 and February 28,
2018 in conjunction with a Securities Purchase Agreement dated
August 14, 2017. The gain on debt settlements and forgiveness of
accounts payable.
The other expense for the year ended September 30, 2017 included
(i) change in the value of derivatives of $218,000; (ii) interest
expense of $377,000; (iii) other expense of $63,000. The decrease
is a result of the decline of the derivative liability as our
underlying stock price has declined and conversion of interest and
amortization of debt discount of $227,000.
Net (Loss)
Net loss for the year ended September 30, 2018 was $3,258,000 as
compared to $3,901,000 for the year ended September 30, 2017. The
net loss for the year ended September 30, 2018, included
non-cash expenses of $1,935,000. The
non-cash items include (i) depreciation and amortization of
$133,000; (ii) issuance of capital stock for services and expenses
of $440,000; (iii) stock based compensation of $291,000; (iv)
conversion of interest and amortization of debt discount of
$539,000; (v) conversion of accrued liabilities of $492,000; (vi)
issuance of common stock for conversion of liabilities of $200,000;
and (vii) other of $10,000; (viii) offset by non cash gain on
accounts payable of $170,000. TransTech’s net income from
operations was $49,000 for the year ended September 30, 2018 as
compared to a net loss from operations of ($256,000) for the year
ended September 30, 2017.
The net loss for the year ended September 30, 2017, included
non-cash expenses of non-cash items of
$2,397,000. The non-cash items include (i) depreciation and
amortization of $81,000; (ii) issuance of capital stock for
services and expenses of $548,000; (iii) stock based compensation
of $38,000; (iv) bad debt losses and provision on loss on accounts
receivable of $141,000; (v) impairment of goodwill of $984,000;
(vi) loss on sale of assets $113,000; (vii) conversion of interest
and amortization of debt discount of $227,000; and (viii)
reclassification of derivative liability of $410,000; offset by
(ix) loss on change- derivative liability warrants of
$145,000.
We expect losses to continue as we commercialize our
ChromaID™ and Bio-RFID™technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. Significant factors in the
management of liquidity are funds generated by operations, levels
of accounts receivable and accounts payable and capital
expenditures.
26
On June 25, 2018, we closed a private placement and received gross
proceeds of $1,750,000 ($1,710,000 as of September 30, 2018) in
exchange for issuing 7,000,000 (6,840,000 as of September 30, 2018)
shares of common stock and warrants to purchase 3,500,000
(3,420,000 as of September 30, 2018) shares of common stock in a
private placement to accredited investors pursuant to a series of
substantially identical subscription agreements. The initial
exercise price of the warrants described above is $0.25 per share,
subject to certain adjustments, and they expired five years after
their issuance. The shares and the warrants described above were
issued in transactions that were not registered under the
Securities Act of 1933, as amended (the “Act”) in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the
Act.
We had cash of approximately $934,000
and a net working capital deficit of approximately $832,000 (net of
convertible notes payable and notes payable) as of September 30,
2018. We have experienced net losses since inception and
we expect losses to continue as we commercialize our
ChromaID™ technology. As of September 30, 2018, we had an
accumulated deficit of $34,791,000 and net losses in the amount of
$3,258,000 and $3,901,000 for the years ended September 30, 2018
and 2017, respectively. We believe that our
cash on hand will be sufficient to fund our operations through
March 31, 2019.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2018 contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon raising capital
from financing transactions.
We need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
We have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale common stock, issuance of
common stock in conjunction with an equity line of credit, loans by
our Chairman and the exercise of warrants.
We
finance our TransTech operations from operations and a Secured
Credit Facility with Capital Source Business Finance Group. On June
15, 2018, TransTech entered into a Fifth Modification to the Loan
and Security Agreement related to the $500,000 secured credit
facility with Capital Source to fund its operations. The
Modification extended the maturity to December 12, 2018. The
secured credit facility provides for a prime rate interest floor
for prime interest of 4.5% plus 2.5%. The eligible borrowing is
based on 80% of eligible trade accounts receivable, not to exceed
$500,000. The secured credit facility is collateralized by the
assets of TransTech, with a guarantee by Know Labs, including a
security interest in all assets of Know Labs. The remaining balance
on the accounts receivable must be repaid by the time the secured
credit facility expires on December 12, 2018, unless we renew by
automatic extension for the next successive term. TransTech has
$24,000 available as of September 30, 2018.
On
December 6, 2018, Capital Source notified TransTech that the Loan
and Security Agreement and Capital Source Credit Facility would be
cancelled as of March 12, 2019.
Effective
December 12, 2018, TransTech entered into the Sixth Modification to
the Loan and Security Agreement which reduced the secured credit
facility to $200,000.
Operating Activities
Net cash used in operating activities for the year ended September
30, 2018 was $1,117,000. This amount was primarily related to (i) a
net loss of $3,258,000; (ii) a decrease in deferred revenue of
$8,000; and (iii) a decrease in accounts payable and accrued
expenses of $176,000; offset by (iv) a decrease in accounts
receivable of $362,000; (v) other of $29,000; and (vi) non-cash
expenses of $1,935,000. The non-cash items include (i) depreciation
and amortization of $133,000; (ii) issuance of capital stock for
services and expenses of $719,000; (iii) stock based compensation
of $291,000; (iv) conversion of interest and amortization of debt
discount of $539,000; (v) conversion of accrued liabilities of
$492,000; (vi) issuance of common stock for conversion of
liabilities of $200,000; and (vii) other of $10,000; (viii) offset
by non cash gain on accounts payable of $170,000.
Investing Activities
Net cash used in investing activities for the year ended September
30, 2018 was $97,000. This amount was primarily related to the
investment in equipment for the lab.
Financing Activities
Net cash provided by financing activities for the year ended
September 30, 2018 was $2,046,000. This amount was primarily
related to (i) proceeds from the issuance of common stock of
$1,750,000 (ii) proceeds from convertible notes of $636,000; (iii)
issuance of common stock for warrant exercises of $80,000, offset
by (iv) repayment of line of credit of $220,000 and (v) repayment
of note payable of $200,000.
27
On June 25, 2018, we closed a private placement and received gross
proceeds of $1,750,000 ($1,710,000 as of September 30, 2018) in
exchange for issuing 7,000,000 (6,840,000 as of September 30, 2018)
shares of common stock and warrants to purchase 3,500,000
(3,420,000 as of September 30, 2018) shares of common stock in a
private placement to accredited investors pursuant to a series of
substantially identical subscription agreements. The initial
exercise price of the warrants described above is $0.25 per share,
subject to certain adjustments, and they expired five years after
their issuance. The shares and the warrants described above were
issued in transactions that were not registered under the
Securities Act of 1933, as amended (the “Act”) in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the
Act.
Our contractual cash obligations as of September 30, 2018 are
summarized in the table below:
|
|
Less
Than
|
|
|
Greater
Than
|
Contractual
Cash Obligations
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
Operating
leases
|
$227,602
|
$118,190
|
$85,914
|
$23,498
|
$-
|
Convertible
notes payable
|
2,255,066
|
2,255,066
|
-
|
-
|
-
|
Notes
payable
|
145,186
|
145,186
|
-
|
-
|
-
|
Capital
expenditures
|
280,000
|
60,000
|
110,000
|
110,000
|
-
|
|
$2,907,854
|
$2,578,442
|
$195,914
|
$133,498
|
$-
|
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of
judgment. On an ongoing basis, we evaluate our estimates and
judgments based on historical experience and various other factors
that are believed to be reasonable under the
circumstances.
Actual results may differ from these estimates under different
assumptions or conditions. We believe that of our significant
accounting policies (see summary of significant accounting policies
more fully described in Note 2 to the financial statements set
forth in this report), the following policies involve a higher
degree of judgment and/or complexity:
Inventories – Inventories
consist primarily of printers and consumable supplies, including
ribbons and cards, badge accessories, capture devices, and access
control components held for resale and are stated at the lower of
cost or market on the first-in, first-out (“FIFO”)
method. Inventories are considered available for resale
when drop shipped and invoiced directly to a customer from a
vendor, or when physically received by TransTech at a warehouse
location. We record a provision for excess and obsolete
inventory whenever an impairment has been identified. There is a
$60,000 reserve for impaired inventory as of September 30, 2018 and
2017.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs).
Revenue Recognition –
Know Labs and TransTech revenue are derived from products and
services. Revenue is considered realized when the products or
services have been provided to the customer, the work has been
accepted by the customer and collectability is reasonably
assured. Furthermore, if an actual measurement of revenue cannot be
determined, we defer all revenue recognition until such time that
an actual measurement can be determined. If during the course of a
contract management determines that losses are expected to be
incurred, such costs are charged to operations in the period such
losses are determined. Revenues are deferred when cash has been
received from the customer but the revenue has not been
earned.
Stock Based Compensation – We have share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options to purchase shares of
our common stock at the fair market value at the time of grant.
Stock-based compensation cost is measured by us at the grant date,
based on the fair value of the award, over the requisite service
period. For options issued to employees, we recognize stock
compensation costs utilizing the fair value methodology over the
related period of benefit. Grants of stock options and
stock to non-employees and other parties are accounted for in
accordance with the ASC 505.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We have no investments in any market risk sensitive instruments
either held for trading purposes or entered into for other than
trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to our consolidated financial statements
beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of
September 30, 2018 that our
disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses in our
internal controls over financial reporting discussed immediately
below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do not employ a full time Chief Financial
Officer. Our Chairman serves as interim Chief Financial Officer. We
utilize a consultant to assist with our financial
reporting.
Audit Committee: While we have
an audit committee, we lack a financial expert. During 2019, the
Board expects to appoint an additional independent Director to
serve as Audit Committee Chairman who is an “audit
committee financial expert” as defined by the Securities and
Exchange Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002.
(b) Management's Report on Internal Control Over Financial
Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of September 30,
2018. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in the 2013 Internal Control-Integrated
Framework. Based on
its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as of
September 30, 2018.
29
Pursuant to Regulation S-K Item 308(b), this Annual Report on Form
10-K does not include an attestation report of our company’s
registered public accounting firm regarding internal control over
financial reporting.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate. A control system, no matter how well designed and
operated can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be
met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
c) Changes in Internal Control over Financial
Reporting
During
the three months ended September 30,
2018, there were no changes in our internal controls over
financial reporting during this fiscal quarter that materially
affected, or is reasonably likely to have a materially affect, on
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
There were no disclosures of any information required to be filed
on Form 8-K during the three months ended September 30, 2018 that
were not filed.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth certain information about our current
directors and executive officers:
|
Name
|
Age
|
Director/ Executive Officer
|
Directors-
|
|
|
Ronald P. Erickson
|
74
|
Chairman and Interim Chief Financial Officer (1)
|
Phillip A. Bosua
|
44
|
Chief Executive Officer and Director
|
Jon Pepper
|
67
|
Director (2)
|
Ichiro Takesako
|
59
|
Director
|
William A. Owens
|
78
|
Director (3)
|
(1)
Chairman of the Nominating and Corporate Governance
Committee.
|
(2)
Chairman of the Audit Committee.
|
(3)
Chairman of the Compensation Committee.
All
directors hold office until their successors are duly appointed or
until their earlier resignation or removal.
Background and Business Experience
Ronald P. Erickson has been a
director and officer of Know Labs since April 2003. He was
appointed as our CEO and President in November 2009 and as Chairman
of the Board in February 2015. Previously, Mr. Erickson was our
President and Chief Executive Officer from September 2003 through
August 2004, and was Chairman of the Board from August 2004 until
May 2011. Mr. Erickson stepped down as Chief Executive Officer
on April 10, 2018.
A senior executive with more than 30 years of experience in the
high technology, telecommunications, micro-computer, and digital
media industries, Mr. Erickson was the founder of Know Labs. He is
formerly Chairman, CEO and Co-Founder of Blue Frog Media, a mobile
media and entertainment company; Chairman and CEO of eCharge
Corporation, an Internet-based transaction procession
company, Chairman, CEO and Co-founder of GlobalTel
Resources, a provider of telecommunications services; Chairman,
Interim President and CEO of Egghead Software, Inc. a software
reseller where he was an original investor; Chairman and CEO of
NBI, Inc.; and Co-founder of MicroRim, Inc. the database software
developer. Earlier, Mr. Erickson practiced law in Seattle and
worked in public policy in Washington, DC and New York, NY.
Additionally, Mr. Erickson has been an angel investor and board
member of a number of public and private technology
companies. In addition to his business activities, Mr.
Erickson is Chairman of the Board of Trustees of Central Washington
University where he received his BA degree. He also holds a MA from
the University of Wyoming and a JD from the University of
California, Davis. He is licensed to practice law in the State of
Washington.
Mr. Erickson is our founder and was appointed as a director because
of his extensive experience in developing technology
companies.
Phillip A. Bosua was appointed a director and Chief
Executive Officer of the Company on April 10, 2018. Previously, Mr.
Bosua served as our Chief Product Officer since August 2017 and we
entered into a Consulting Agreement on July 7, 2017. From September
2012 to February 2015, he was the founder and Chief Executive
Officer of LIFX Inc. (where he developed and marketed an innovative
“smart” light bulb) and from August 2015 until February
2016 was Vice President Consumer Products at Soraa (which markets
specialty LED light bulbs). From February 2016 to July 2017, Mr.
Bosua was the founder and CEO of RAAI, Inc. (where he continued the
development of his smart lighting technology). From May 2008
to February 2013 he was the Founder and CEO of LimeMouse Apps, a
leading developer of applications for the Apple App
Store.
Mr. Bosua was appointed as a director because of his extensive
experience in developing technology companies.
Ichiro Takesako has served as a
director since December 28, 2012. Mr. Takesako has held executive
positions with Sumitomo Precision Products Co., Ltd or Sumitomo
since 1983. Mr. Takesako graduated from Waseda University, Tokyo,
Japan where he majored in Social Science and graduated with a
Degree of Bachelor of Social Science.
In the past few years, Mr. Takesako has held the following
executive position in Sumitomo and its affiliates:
June 2008:
appointed
as General Manager of Sales and Marketing Department of Micro
Technology Division
April 2009:
appointed
as General Manager of Overseas Business Department of Micro
Technology Division, in charge
of M&A activity of certain business segment and assets of Aviza
Technology, Inc.
July 2010:
appointed
as Executive Director of SPP Process Technology Systems, 100% owned
subsidiary of Sumitomo
Precision Products then, stationed in Newport, Wales
August 2011:
appointed
as General Manager, Corporate Strategic Planning Group
31
January
2013:
appointed
as Chief Executive Officer of M2M Technologies, Inc., a company
invested by Sumitomo
Precision products
April 2013:
appointed
as General Manager of Business Development Department, in parallel
of CEO of M2M Technologies,
Inc.
April
2014:
relieved
from General Manager of Business Development Department and is
responsible for M2M Technologies
Inc. as its CEO
Mr. Takesako was appointed as a Director based on his position with
Sumitomo and Sumitomo's significant partnership with the
Company.
Jon Pepper has served as an
independent director since April 2006. Mr. Pepper founded Pepcom in
1980, and continues as the founding partner of Pepcom, an industry
leader at producing press-only technology showcase events around
the country. Prior to that, Mr. Pepper started the DigitalFocus
newsletter, a ground-breaking newsletter on digital imaging that
was distributed to leading influencers worldwide. Mr. Pepper has
been closely involved with the high technology revolution since the
beginning of the personal computer era. He was formerly a
well-regarded journalist and columnist; his work on technology
subjects appeared in The New York
Times, Fortune, PC Magazine, Men's
Journal, Working
Woman, PC Week, Popular Science
and many other well-known
publications. Pepper was educated at Union College in Schenectady,
New York and the Royal Academy of Fine Arts in
Copenhagen.
Mr. Pepper was appointed as a director because of his marketing
skills with technology companies.
William A. Owens has served as an independent director since
May 24, 2018. Mr. Owens is currently the co-founder and executive
chairman of Red Bison Advisory Group, a company which identifies
opportunities with proven enterprises in China, the Middle East,
and the United States and creates dynamic partnerships focusing on:
natural resources (oil, gas and fertilizer plants), real estate,
and information and communication technology. Most recently, he was
the chairman of the board of CenturyLink Telecom, the third largest
telecommunications company in the United States and was on the
advisory board of SAP USA. Mr. Owens serves on the board of
directors at Wipro Technologies and is a director of the following
private companies: Humm Kombucha, a beverage company and Versium.
Mr. Owens is on the advisory board of the following private
companies: Healthmine, Platform Science, Sarcos, Sierra Nevada
Corporation, and Vodi. Mr. Owens is on the board of trustees at
EastWest Institute, Seattle University, and an advisor to the
Fiscal Responsibility Amendment (CFFRA) Association which aims to
establish a balanced budget amendment to the US Constitution. He is
also a member of the Council of Foreign Relations.
From
2007 to 2015, Mr. Owens was the Chairman and Senior Partner of AEA
Investors Asia, a private equity firm located in Hong Kong, and
Vice Chairman of the NYSE for Asia. Mr. Owens also served as the
Chairman of Eastern Airlines. He has served on over 20 public
boards including Daimler, British American Tobacco, Telstra, Nortel
Networks, and Polycom. Mr. Owens was the CEO/Chairman of Teledesic
LLC, a Bill Gates/Craig McCaw company bringing worldwide broadband
through an extensive satellite network and prior, was the
President, COO/Vice Chairman of Science Applications International
Corporation (SAIC). Mr. Owens has also served on the boards of the
non-for-profit organizations; Fred Hutchinson Cancer Research
Center, Carnegie Corporation of New York, Brookings Institution,
and RAND Corporation.
Mr.
Owens is a four-star US Navy veteran. He was Vice Chairman of the
Joint Chiefs of Staff, the second-ranking United States military
officer with responsibility for reorganizing and restructuring the
armed forces in the post- Cold War era. He is widely recognized for
bringing commercial high-grade technology into the Department of
Defense for military applications
Mr.
Owens is a 1962 honor graduate of the United States Naval Academy
with a bachelor’s degree in mathematics, bachelor’s and
master’s degrees in politics, philosophy and economics from
Oxford University, and a master’s degree in management from
George Washington University.
Mr.
Owen was appointed as a director because of his business skills
with technology companies.
Family Relationships
There are no family relationships among our directors and executive
officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past
ten years:
|
●
|
Had any petition under the federal bankruptcy laws or any state
insolvency law filed by or against, or had a receiver, fiscal
agent, or similar officer appointed by a court for the business or
property of such person, or any partnership in which he was a
general partner at or within two years before the time of such
filing, or any corporation or business association of which he was
an executive officer at or within two years before the time of such
filing;
|
|
●
|
Been convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
32
|
●
|
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
|
|
◦
|
Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
|
|
|
|
|
◦
|
Engaging in any type of business practice; or
|
|
|
|
|
◦
|
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
|
|
●
|
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limiting for more
than 60 days the right of such person to engage in any activity
described in (i) above, or to be associated with persons engaged in
any such activity;
|
|
|
|
|
●
|
Been found by a court of competent jurisdiction in a civil action
or by the SEC to have violated any federal or state securities law,
where the judgment in such civil action or finding by the SEC has
not been subsequently reversed, suspended, or vacated;
or
|
|
|
|
|
●
|
Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, where the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
|
Board Committees
The Board has three standing committees to facilitate and assist
the Board in the execution of its responsibilities. The committees
are currently the Audit Committee, the Nominating and Corporate
Governance Committee, and the Compensation Committee. The
Committees were formed in July 2010. The Audit and Compensation
Committees are comprised solely of non-employee, independent
directors. The Nominating and Corporate Governance Committee has aa
management director, Ronald P. Erickson, as Chairman. Charters for
each committee are available on our website at www.knowlabs.co. The
discussion below describes current membership for each of the
standing Board committees.
|
|
|
|
Nominating and
|
Audit
|
|
Compensation
|
|
Corporate Governance
|
Jon Pepper (Chairman)
|
|
Jon Pepper (Chairman)
|
|
Ron P. Erickson (Chairman)
|
|
|
|
|
Jon Pepper
|
Compensation Committee Interlocks and Insider
Participation
No member of the Compensation Committee during the fiscal year
ended September 30, 2018 served as an officer, former officer, or
employee of the Company or participated in a related party
transaction that would be required to be disclosed in this
prospectus. Further, during this period, no executive officer of
the Company served as:
|
●
|
a member of the Compensation Committee or equivalent of any other
entity, one of whose executive officers served as one of our
directors or was an immediate family member of a director, or
served on our Compensation Committee; or
|
|
|
|
|
●
|
a director of any other entity, one of whose executive officers or
their immediate family member served on our Compensation
Committee.
|
Code of Ethics
We have
adopted conduct and ethics standards titled the code of ethics,
which is available at www.knowlabs.co. These standards were adopted
by our Board of Directors to promote transparency and integrity.
The standards apply to our Board of Directors, executives and
employees. Waivers of the requirements of our code of ethics or
associated polices with respect to members of our Board of
Directors or executive officers are subject to approval of the full
board.
33
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material
elements of compensation awarded to, earned by or paid to each of
our executive officers named in the Compensation Table on page
37 under “Remuneration of Executive Officers” (the
“Named Executive Officers”) who served during the year
ended September 30, 2018. This compensation discussion primarily
focuses on the information contained in the following tables and
related footnotes and narrative for the last completed fiscal year.
We also describe compensation actions taken after the last
completed fiscal year to the extent that it enhances the
understanding of our executive compensation disclosure. The
principles and guidelines discussed herein would also apply to any
additional executive officers that the Company may hire in the
future.
The Compensation Committee of the Board has responsibility for
overseeing, reviewing and approving executive compensation and
benefit programs in accordance with the Compensation
Committee’s charter. The members of the Compensation
Committee are Jon Pepper. We expect to appoint an additional
independent Director to serve on the Compensation Committee by
early 2019.
Compensation Philosophy and Objectives
The major compensation objectives for the Company’s executive
officers are as follows:
|
|
|
|
●
|
to attract and retain highly qualified individuals capable of
making significant contributions to our long-term
success;
|
|
|
|
|
●
|
to motivate and reward named executive officers whose knowledge,
skills, and performance are critical to our success;
|
|
|
|
|
●
|
to closely align the interests of our named executive officers and
other key employees with those of its shareholders;
and
|
|
|
|
|
●
|
to utilize incentive based compensation to reinforce performance
objectives and reward superior performance.
|
Role of Chief Executive Officer in Compensation
Decisions
The Board approves all compensation for the chief executive
officer. The Compensation Committee makes recommendations on the
compensation for the chief executive officer and approves all
compensation decisions, including equity awards, for our executive
officers. Our chief executive officer makes recommendations
regarding the base salary and non-equity compensation of other
executive officers that are approved by the Compensation Committee
in its discretion.
Setting Executive Compensation
The Compensation Committee believes that compensation for the
Company’s executive officers must be managed to what we can
afford and in a way that allows for us to meet our goals for
overall performance. During 2018 and 2017, the Compensation
Committee and the Board compensated its Chairman of the Board and
Interim Financial Officer with an annual salary of $180,000. Since
April 10, 2018, the Compensation Committee and the Board
compensated its Chief Executive Officer with an annual salary of
$225,000. This compensation reflected the financial condition of
the Company. Other Named Executive Officers were paid by us during
2018 and 2017. The Compensation Committee does not use a peer group
of publicly-traded and privately-held companies in structuring the
compensation packages.
Executive Compensation Components for the Year Ended September 30,
2018
The Compensation Committee did not use a formula for allocating
compensation among the elements of total compensation during the
year that ended on September 30, 2018. The Compensation Committee
believes that in order to attract and retain highly effective
people it must maintain a flexible compensation structure. For the
year that ended on September 30, 2018, the principal components of
compensation for named executive officers were base
salary.
Base Salary
Base salary is intended to ensure that our employees are fairly and
equitably compensated. Generally, base salary is used to
appropriately recognize and reward the experience and skills that
employees bring to the Company and provides motivation for career
development and enhancement. Base salary ensures that all employees
continue to receive a basic level of compensation that reflects any
acquired skills which are competently demonstrated and are
consistently used at work.
Base salaries for the Company’s named executive officers are
initially established based on their prior experience, the scope of
their responsibilities and the applicable competitive market
compensation paid by other companies for similar positions. Mr.
Erickson and Mr. Wilson were compensated as described above based
on the financial condition of the Company.
34
Performance-Based Incentive Compensation
The Compensation Committee believes incentive compensation
reinforces performance objectives, rewards superior performance and
is consistent with the enhancement of stockholder value. All of the
Company’s Named Executive Officers are eligible to receive
performance-based incentive compensation. The Compensation
Committee did not recommend or approve payment of any
performance-based incentive compensation to the Named Executive
Officers during the year ended September 30, 2018 based on our
financial condition.
Ownership Guidelines
The Compensation Committee does not require our executive officers
to hold a minimum number of our shares. However, to directly align
the interests of executive officers with the interests of the
stockholders, the Compensation Committee encourages each executive
officer to maintain an ownership interest in the
Company.
Stock Option Program
Stock options are an integral part of our executive compensation
program. They are intended to encourage ownership and retention of
the Company’s common stock by named executive officers and
employees, as well as non-employee members of the Board. Through
stock options, the objective of aligning employees’ long-term
interest with those of stockholders may be met by providing
employees with the opportunity to build a meaningful stake in the
Company.
The Stock Option Program assists us by:
-
enhancing the link between the creation of stockholder value and
long-term executive incentive compensation;
-
providing an opportunity for increased equity ownership by
executive officers; and
-
maintaining competitive levels of total compensation.
Stock option award levels are determined by the Compensation
Committee and vary among participants’ positions within the
Company. Newly hired executive officers or promoted executive
officers are generally awarded stock options, at the discretion of
the Compensation Committee, at the next regularly scheduled
Compensation Committee meeting on or following their hire or
promotion date. In addition, such executives are eligible to
receive additional stock options on a discretionary basis after
performance criteria are achieved.
Options are awarded at the closing price of our common stock on the
date of the grant or last trading day prior to the date of the
grant. The Compensation Committee’s policy is not to grant
options with an exercise price that is less than the closing price
of our common stock on the grant date.
Generally, the majority of the options granted by the Compensation
Committee vest quarterly over two to three years or annually over
five years of the 5-10-year option term. Vesting and exercise
rights cease upon termination of employment and/or service, except
in the case of death (subject to a one year limitation), disability
or retirement. Stock options vest immediately upon termination of
employment without cause or an involuntary termination following a
change of control. Prior to the exercise of an option, the holder
has no rights as a stockholder with respect to the shares subject
to such option, including voting rights and the right to receive
dividends or dividend equivalents.
The Named Executive Officers received stock grants and option
awards during the year ended September 30, 2018.
Retirement and Other Benefits
We have no other retirement, savings, long-term stock award or
other type of plans for the Named Executive Officers.
Perquisites and Other Personal Benefits
During the year ended September 30, 2018, we provided the Named
Executive Officers with medical insurance. No other personal
benefits were provided to these individuals. The committee expects
to review the levels of perquisites and other personal benefits
provided to Named Executive Officers annually.
Employment Agreement with Phillip A. Bosua, Chief Executive
Officer
On April 10, 2018, we appointed Mr. Bosua as Chief Executive
Officer of the Company, replacing Ronald P. Erickson, who remains
Chairman of the Company. Mr. Erickson has been a director and
officer of Know Labs since April 2003. He was appointed as our CEO
and President in November 2009 and as Chairman of the Board in
February 2015. Previously, Mr. Erickson was our President and Chief
Executive Officer from September 2003 through August 2003 and was
Chairman of the Board from August 2004 until May 2011.
35
Phillip A. Bosua was appointed the Company’s CEO on April 10,
2018. Previously, Mr. Bosua served as our Chief Product Officer
since August 2017. We entered into a Consulting Agreement with Mr.
Bosua’s company, Blaze Clinical on July 7, 2017. From
September 2012 to February 2015, Mr. Bosua was the founder and
Chief Executive Officer of LIFX Inc. (where he developed and
marketed an innovative “smart” light bulb) and from
August 2015 until February 2016 was Vice President Consumer
Products at Soraa (which markets specialty LED light bulbs). From
February 2016 to July 2017, Mr. Bosua was the founder and CEO of
RAAI, Inc. (where he continued the development of his smart
lighting technology). From May 2008 to February 2013 he was the
Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, we entered into an Employment Agreement with Mr.
Bosua reflecting his appointment as Chief Executive Officer. The
Employment Agreement is for an initial term of 12 months (subject
to earlier termination) and will be automatically extended for
additional 12-month terms unless either party notifies the other
party of its intention to terminate the Employment Agreement. Mr.
Bosua will be paid a base salary of $225,000 per year, received
500,000 shares of common stock valued at $0.33 per share and may be
entitled to bonuses and equity awards at the discretion of the
Board or a committee of the Board. The Employment Agreement
provides for severance pay equal to 12 months of base salary if Mr.
Bosua is terminated without “cause” or voluntarily
terminates his employment for “good
reason.”
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
On
August 4, 2017, the Board of Directors approved an Employment
Agreement with Ronald P. Erickson pursuant to which we engaged Mr.
Erickson as our Chief Executive Officer through September 30,
2018.
Mr.
Erickson’s annual compensation is $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements.
If we terminate Mr. Erickson’s employment at any time prior
to the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Erickson terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
On April 10, 2018, we entered into an Amended Employment Agreement
for Ronald P. Erickson which amends the Employment Agreement dated
July 1, 2017. The Amended Employment Agreement expires March 21,
2019.
Tax and Accounting Implications
Deductibility of Executive Compensation
Subject to certain exceptions, Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") generally denies a
deduction to any publicly held corporation for compensation paid to
its chief executive officer and its three other highest paid
executive officers (other than the principal financial officer) to
the extent that any such individual's compensation exceeds $1
million. “Performance-based compensation” (as defined
for purposes of Section 162(m)) is not taken into account for
purposes of calculating the $1 million compensation limit, provided
certain disclosure, shareholder approval and other requirements are
met. We periodically review the potential consequences of Section
162(m) and may structure the performance-based portion of our
executive compensation to comply with certain exceptions to Section
162(m). However, we may authorize compensation payments that do not
comply with the exceptions to Section 162(m) when we believe that
such payments are appropriate and in the best interests of the
stockholders, after taking into consideration changing business
conditions or the officer's performance.
Accounting for Stock-Based Compensation
Beginning on January 1, 2006, we began accounting for stock-based
payments including its Stock Option Program in accordance with the
requirements of ASC 718, “Compensation-Stock
Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, composed entirely of independent
directors in accordance with the applicable laws and regulations,
sets and administers policies that govern the Company's executive
compensation programs, and incentive and stock programs. The
Compensation Committee of the Company has reviewed and discussed
the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management and, based on such review and
discussions, the Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in this
Proxy Statement.
THE COMPENSATION COMMITTEE
Jon Pepper, Chairman
36
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the fiscal years ended
September 30, 2018 and 2017:
Summary Compensation Table
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Stock
|
Option
|
Other
|
|
|
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
Name
|
Principal Position
|
|
($)
|
($)
|
($) (4)
|
($)
|
($)
|
($)
|
Salary-
|
|
|
|
|
|
|
|
|
Ronald P. Erickson (1)
|
Chairman of the Board and Interim Chief Financial
Officer
|
9/30/2018
|
$ 180,000
|
$ -
|
$ 21,000
|
$ -
|
$ -
|
$ 201,000
|
|
|
9/30/2017
|
$ 180,000
|
$ -
|
$ 34,000
|
$ -
|
$ -
|
$ 214,000
|
|
|
|
|
|
|
|
|
|
Phillip A. Bosua (2)
|
Chief Executive Officer
|
9/30/2018
|
$ 106,095
|
$ -
|
$ 177,000
|
$ 640,000
|
$ 167,500
|
$ 1,090,595
|
|
|
9/30/2017
|
$ -
|
$ -
|
$ 8,500
|
$ -
|
$ 17,500
|
$ 26,000
|
|
|
|
|
|
|
|
|
|
Todd Martin Sames (4)
|
Former Executive Vice President of Business
Development
|
9/30/2018
|
$ 58,846
|
$ -
|
$ 21,000
|
$ -
|
$ -
|
$ 79,846
|
|
|
9/30/2017
|
$ 120,000
|
$ -
|
$ 25,500
|
$ -
|
$ -
|
$ 145,500
|
(1) During the years ended September 30, 2018 and 2017, Mr.
Erickson was compensated at a monthly salary of $15,000. As of
September 30, 2017 and 2016, Mr. Erickson had accrued but unpaid
salary of $120,000 and $7,500, respectively. This accrual was based
on the tight cash flow of the Company and agreed to by Mr.
Erickson, but there was no formal deferral agreement. There was no
accrued interest paid on the unpaid salary. The 100,000 of restricted common stock was issued
on January 16, 2018 to Mr. Erickson at the grant date market value
of $0.21 per share. The 200,000 of restricted common
stock was issued on September 7, 2017 to Mr. Erickson at the grant
date market value of $0.17 per
share.
(2) On April 10, 2018, we
appointed Mr. Bosua as our Chief Executive Officer. During the
period April 10. 2018 to September 30, 2018, Mr. Bosua was
compensated at a monthly salary of $18,750. We entered into a
Consulting Agreement with Mr. Bosua’s company, Blaze Clinical
on July 7, 2017. We paid $167,500 during the period October 1,
2017- April 9, 2018. We paid $17,500 during the period July 7, 2017
to September 30, 2017. The 50,000 of restricted common stock was
issued on February 7, 2018 to Mr. Bosua at the grant date market
value of $0.24 per share. The 500,000 of restricted
common stock was issued on June 25, 2018 to Mr. Bosua at the grant
date market value of $0.33 per share. The 50,000 of restricted
common stock was issued on July 14, 2017 to Mr. Bosua at the grant
date market value of $0.17 per share. On July 30, 2018, Mr.
Bosua was awarded a stock option grant for 1,000,000 shares of our
common stock that was awarded at $1.28 per share and was valued at
the black scholes value of $0.64 per
share.
(3) February 23, 2018 was Mr. Todd Sames’s last
date of employment as our Executive Vice President of Business
Development. We paid $58,846 during the period October 1, 2017-
February 23, 2018. During the year ended September 30, 2017, Mr.
Sames was compensated at a monthly salary of $10,000. As of
September 30, 2017, Mr. Sames had accrued but unpaid salary of
$10,000. This accrual was based on the tight cash flow of the
Company and agreed to by Mr. Sames, but there was no formal
deferral agreement. There was no accrued interest paid on the
unpaid salary. The 100,000 of
restricted common stock was issued on January 11, 2018 to Mr. Sames
at the grant date market value of $0.21 per share. The
150,000 of restricted common stock was issued on September 7, 2017
to Mr. Sames at the grant date market value of $0.17 per
share.
(4) These amounts reflect the grant date market value as required
by Regulation S-K Item 402(n)(2), computed in accordance with FASB
ASC Topic 718.
Grants
of Stock Based Awards in Fiscal Year Then Ended September 30,
2018
The Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers during the
year ended September 30, 2018.
37
|
|
|
|
|
|
|
|
|
All
Other
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
Option
Awards;
|
|
|
|
|
Estimated
Future Payouts Under
|
Estimated
Future Payouts Under
|
Stock
Awards;
|
Number
of
|
|
|
||||
|
|
Non-Equity
Incentive Plan
|
Equity
Incentive Plan
|
Number
of
|
Securities
|
Exercise
or
|
Grant
Date
|
||||
|
|
Awards
|
Awards
|
Shares of
|
Underlying
|
Base Price of
|
Fair Value of
|
||||
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Stock
or Units
|
Options
|
Option
Awards
|
Stock
and
|
Name
|
Date
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($/Sh)
(4)
|
Option
Awards
|
|
|
|
|
|
|
|
|
||||
Ronald
P. Erickson (1)
|
|
$-
|
$-
|
$-
|
200,000
|
200,000
|
200,000
|
100,000
|
-
|
$0.170
|
$55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
A. Bosua (2)
|
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
550,000
|
1,000,000
|
$0.640
|
$817,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd
Martin Sames (3)
|
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
100,000
|
-
|
$0.210
|
$21,000
|
(1) The restricted common stock was issued on September 7, 2017 to
Mr. Erickson at the grant date market value of $0.17 per
share. The estimated future payments include 100,000
shares to be issued on January 1, 2019 and 2020. The 100,000 of
restricted common stock was issued on January 16, 2018 to Mr.
Erickson at the grant date market value of $0.21 per
share.
(2) On April 10, 2018, we appointed Mr. Bosua as our Chief
Executive Officer. The 50,000 of restricted common stock was issued
on February 7, 2018 to Mr. Bosua at the grant date market value of
$0.24 per share. The 500,000 of restricted common stock
was issued on June 25, 2018 to Mr. Bosua at the grant date market
value of $0.33 per share. On July 30, 2018, Mr. Bosua was
awarded a stock option grant for 1,000,000 shares of our common
stock that was awarded at $1.28 per share and was valued at the
black scholes value of $0.64 per share.
(3) February 23, 2018 was Mr. Todd Sames last date of
employment as our Executive Vice President of Business Development.
The 100,000 of restricted common stock
was issued on January 11, 2018 to Mr. Sames at the grant date
market value of $0.21 per share. The 150,000 of
restricted common stock was issued on September 7, 2017 to Mr.
Sames at the grant date market value of $0.17 per
share.
(4) These amounts reflect the grant date market value as required
by Regulation S-K Item 402(n)(2), computed in accordance with FASB
ASC Topic 718.
Outstanding Equity Awards as of Fiscal Year Then Ended September
30, 2018
Our Named Executive Officers have the following outstanding equity
awards as of September 30, 2018.
|
Option
Awards
|
|||
|
Number
of
|
Number
of
|
|
|
|
Securities
|
Securities
|
|
|
|
Underlying
|
Underlying
|
|
|
|
Unexercised
|
Unexercised
|
Option
|
|
|
Options
|
Options
|
Exercise
|
Option
|
|
Exercisable
|
Unexerciseable
|
Price
|
Expiration
|
Name
|
(#)
|
(#)
|
($)
(4)
|
Date
|
|
|
|
|
|
Ronald
P. Erickson (1)
|
-
|
-
|
$-
|
|
|
|
|
|
|
Phillip
A. Bosua (2)
|
-
|
1,000,000
|
$1.28
|
7/23/2023
|
|
|
|
|
|
Todd
Martin Sames (3)
|
-
|
-
|
$-
|
|
Option Exercises and Stock Vested
Our Named Executive Officers did not have any option exercises
during the year ended September 30, 2018.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
38
Employment Agreements
We have an employment agreement with Ronald P. Erickson and Phillip
A. Bosua.
Potential Payments upon Termination or Change in
Control
We have the following potential
payments upon termination or change in control with Ronald P.
Erickson:
|
|
Early
|
Not For
Good
|
Change
in
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
Separation
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
Compensation:
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$180,000
|
$180,000
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$34,000
|
$34,000
|
$-
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
Health
and welfare benefits (3)
|
$-
|
$-
|
$27,388
|
$27,388
|
$-
|
Accrued
vacation pay
|
$-
|
$-
|
$42,231
|
$42,231
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$283,619
|
$283,619
|
$-
|
(1)
Reflects a salary
for twelve months.
(2)
Reflects
the vesting of estimated future payments includes 100,000 shares to
be issued on January 1, 2019 and 2020 valued at $0.17 per
share.
(3)
Reflects
the cost of medical benefits for eighteen months.
We have the following potential payments upon termination or change
in control with Phillip A. Bosua:
|
|
Early
|
Not For
Good
|
Change
in
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
Separation
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
on
9/30/18
|
Compensation:
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$225,000
|
$225,000
|
$-
|
Performance-based
incentive
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$-
|
$-
|
$-
|
Stock
options
|
$-
|
$-
|
$640,000
|
$640,000
|
$-
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
Health
and welfare benefits (3)
|
$-
|
$-
|
$13,218
|
$13,218
|
$-
|
Accrued
vacation pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$878,218
|
$878,218
|
$-
|
(1)
Reflects a salary
for one year.
(2)
Reflects
the vesting of 1,000,000 shares to be issued upon a change in
control valued at $0.64 per share.
(3)
Reflects
the cost of medical benefits for eighteen months
We do
not have any potential payments upon
termination or change in control with our other Named Executive
Officers.
DIRECTOR COMPENSATION
We primarily use stock options grants to incentive compensation to
attract and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. During year then ended September 30, 2018, Ronald P.
Erickson and Phillip A. Bosua did not receive any compensation for
his service as a director. The compensation disclosed in the
Summary Compensation Table on page 37 represents the total
compensation for Mr. Erickson and Mr. Bosua.
39
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in
cash. The only compensation generally has been in the
form of stock awards. There is no formal stock compensation plan
for independent non-employee directors. Our non-employee directors
received the following compensation during the year ended September
30, 2018.
|
Stock
|
Option
|
Other
|
|
Name
|
Awards
(4)
|
Awards
|
Compensation
|
Total
|
Jon
Pepper (1)
|
$18,750
|
$-
|
$-
|
$18,750
|
Ichiro
Takesako (2)
|
12,500
|
-
|
-
|
12,500
|
William
A. Owens (3)
|
15,500
|
-
|
-
|
15,500
|
|
|
|
|
|
Total
|
$46,750
|
$-
|
$-
|
$46,750
|
(1) The 75,000 shares of restricted common stock was issued on
April 10, 2018 to Mr. Pepper at the grant date market value of
$0.25 per share.
(2) The 50,000 shares of restricted common stock was issued on
April 10, 2018 to Mr. Takesako at the grant date market value of
$0.25 per share.
(3) The 50,000 of restricted common stock was issued on May 20,
2018 to Mr. Owens at the grant date market value of $0.31 per
share.
(4) These amounts reflect the grant date market value as
required by Regulation S-K Item 402(n)(2), computed in accordance
with FASB ASC Topic 718.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
ownership of our common stock as of September 30, 2018
by:
|
●
|
each director and nominee for director;
|
|
|
|
|
●
|
each person known by us to own beneficially 5% or more of our
common stock;
|
|
|
|
|
●
|
each executive officer named in the summary compensation table
elsewhere in this report;
and
|
|
|
|
|
●
|
all of our current directors and executive officers as a
group.
|
The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares voting
power,” which includes the power to vote or to direct the
voting of such security, or has or shares “investment
power,” which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the
right to acquire beneficial ownership within 60 days. Under these
rules more than one person may be deemed a beneficial owner of the
same securities and a person may be deemed to be a beneficial owner
of securities as to which such person has no economic
interest.
Unless otherwise indicated below, each beneficial owner named in
the table has sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable. The address for each person shown in the table is
c/o Know Labs, Inc. 500 Union Street, Suite 810, Seattle
Washington, unless otherwise indicated.
|
Shares
Beneficially Owned
|
|
|
Amount
|
Percentage
|
Directors
and Officers-
|
|
|
Ronald
P. Erickson (1)
|
7,889,015
|
32.6%
|
Phillip
A. Bosua (2)
|
2,917,500
|
16.6%
|
Jon
Pepper (3)
|
238,000
|
1.4%
|
Ichiro
Takesako (4)
|
150,000
|
0.9%
|
William
A. Owens (5)
|
650,000
|
3.7%
|
Total
Directors and Officers (5 in total)
|
11,844,515
|
67.6%
|
* Less than 1%.
(1) Reflects 1,258,085 shares of shares of common stock
beneficially owned by Ronald P. Erickson or entities controlled by
Mr. Erickson and warrants to
purchase 1,894,666 shares of our common stock that are exercisable
within 60 days, and also includes 4,736,264 shares of our common
stock related to convertible debt that are exercisable within 60
days.
(2) Reflects 2,855,000 shares of shares of common stock
beneficially owned by Phillip A. Bosua and vested stock option
grants to purchase 62,500 shares of our common stock that are
exercisable within 60 days.
(3) Reflects 238,000 shares of shares of common stock beneficially
owned by Jon Pepper.
(4) Reflects 150,000 shares of shares of common stock beneficially
owned Ichiro Takesako.
(5) Reflects 450,000 shares of shares of common stock beneficially
owned by William A. Owens and warrants to purchase 1,894,666 shares
of our common stock that are exercisable within 60
days.
40
|
Shares Beneficially Owned
|
|
|
Amount
|
Percentage
|
Greater Than 5% Ownership
|
|
|
|
|
|
Clayton A. Struve (1)
|
16,763,790
|
50.0%
|
|
Blocker at 4.99%
|
|
|
|
|
Ronald P. Erickson (2)
|
7,889,015
|
32.6%
|
|
|
|
Phillip A. Bosua (3)
|
2,917,500
|
16.6%
|
|
|
|
Dale Broadrick (4)
|
2,226,036
|
11.9%
|
(1) Reflects 800,000 shares
beneficially owned by Clayton A. Struve. This total also includes
6,785,719 warrants to purchase shares of our common stock,
4,894,071 shares related to the conversion of preferred stock into
our common stock and 4,284,000 shares related to the conversion of
debt into our common stock. The warrants, preferred stock and
convertible debt are currently priced at $0.25 per share, subject
to adjustment. The address of Mr. Struve is 175 West Jackson
Blvd., Suite 440, Chicago, IL 60604.
(2) Reflects 1,258,085 shares of shares of common stock
beneficially owned by Ronald P. Erickson or entities controlled by
Mr. Erickson and warrants to purchase 1,894,666 shares of our
common stock that are exercisable within 60 days, and also includes
4,736,264 shares of our common stock related to convertible debt
that are exercisable within 60 days. The address of Mr. Erickson is
500 Union Street, Suite 810, Seattle, WA 98101.
(3) Reflects 2,855,000 shares of shares of common stock
beneficially owned by Phillip A. Bosua and vested stock option
grants to purchase 62,500 shares of our common stock that are
exercisable within 60 days. The address of Mr. Bosua is 500 Union
Street, Suite 810, Seattle, WA 98101.
(4) Reflects the shares beneficially owned by Dale
Broadrick. This total includes 1,113,018 shares and a total of
1,113,018 warrants to purchase shares of our common stock that are
exercisable within 60 days. The address of Dale Broadrick is 3003
Brick Church Pike, Nashville, Tennessee.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Related Party Transactions
Related party transactions for the year ended September 30, 2018
are detailed below and in the Footnotes to this Annual Report on
Form 10-K.
Review and Approval of Related Person Transactions
We have operated under a Code of Conduct for many years. Our Code
of Conduct requires all employees, officers and directors, without
exception, to avoid the engagement in activities or relationships
that conflict, or would be perceived to conflict, with the
Company’s interests or adversely affect its reputation. It is
understood, however, that certain relationships or transactions may
arise that would be deemed acceptable and appropriate upon full
disclosure of the transaction, following review and approval to
ensure there is a legitimate business reason for the transaction
and that the terms of the transaction are no less favorable to the
Company than could be obtained from an unrelated
person.
The Audit Committee is responsible for reviewing and approving all
transactions with related persons. The Company has not adopted a
written policy for reviewing related person transactions. The
Company reviews all relationships and transactions in which the
Company and our directors and executive officers or their immediate
family members are participants to determine whether such persons
have a direct or indirect material interest. As required under SEC
rules, transactions that are determined to be directly or
indirectly material to the Company or a related person are
disclosed.
Director Independence
The Board has affirmatively determined that Mr. Pepper, Mr.
Takesako and Mr. Owens are each an independent
director. For purposes of
making that determination, the Board used NASDAQ’s Listing
Rules even though the Company is not currently listed on
NASDAQ.
41
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since
October 1, 2016, we have engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities and affiliates, or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Policies and Procedures for Related Person
Transactions
We have
operated under a Code of Conduct and Ethics since December 28,
2012. Our Code of Conduct and Ethics requires all employees,
officers and directors, without exception, to avoid the engagement
in activities or relationships that conflict, or would be perceived
to conflict, with our interests.
Prior
to the adoption of our related person transaction policy, there was
a legitimate business reason for all the related person
transactions described above and we believe that, where applicable,
the terms of the transactions are no less favorable to us than
could be obtained from an unrelated person.
Our
Audit Committee reviews all relationships and transactions in which
we and our directors and executive officers or their immediate
family members are participants to determine whether such persons
have a direct or indirect material interest.
As
required under SEC rules, transactions that are determined to be
directly or indirectly material to us or a related person are
disclosed.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since
October 1, 2016, we have engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities and affiliates, or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Transactions with Clayton Struve
We have
the following transactions with Clayton Struve:
Convertible Promissory Note dated September 30, 2016
On September 30, 2016, we entered into a $210,000 Convertible
Promissory Note with Clayton A. Struve, an accredited investor of
the Company, to fund short-term working capital. The Convertible
Promissory Note accrued interest at a rate of 10% per annum and was
due on March 30, 2017. The Note holder can convert the Note into
common stock at $0.70 per share. This note was extended in the
Securities Purchase Agreement, General Security Agreement and
Subordination Agreement dated August 14, 2017 with a maturity date
of August 13, 2018. Also, the conversion price of the Debenture was
adjusted to $0.25 per share, subject to certain adjustments. The
balance was increased $75,000 during the year ended September 30,
2018. On November 16, 2018, we signed Amendment 1 to Senior
Secured Convertible Redeemable Notes dated September 30,
2016extending the due dates of the Note to February 27, 2019. On
September 24, 2018, Mr. Struve converted $200,000 of the Note into
800,000 shares of our common stock.
Securities Purchase Agreement dated August 14, 2017
On August 14, 2017, we issued a senior convertible exchangeable
debenture with a principal amount of $360,000 and a common stock
purchase warrant to purchase 1,440,000 shares of common stock in a
private placement to Clayton Struve for gross proceeds of $300,000
pursuant to a Securities Purchase Agreement dated August 14, 2017.
The debenture accrues interest at 20% per annum and matures August
13, 2018.
On the same date, we entered into a General Security Agreement with
the Mr. Struve, pursuant to which the Company has agreed to grant a
security interest to the investor in substantially all of our
assets, effective upon the filing of a UCC-3 termination statement
to terminate the security interest held by Capital Source Business
Finance Group in the assets of the Company. In addition, an entity
affiliated with Ronald P. Erickson, out then Chief Executive
Officer, entered into a Subordination Agreement with the investor
pursuant to which all debt owed by us to such entity is
subordinated to amounts owed by us to Mr. Struve under the
Debenture (including amounts that become owing under any Debentures
issued to the investor in the future).
The initial conversion price of the Debenture is $0.25 per share,
subject to certain adjustments. The initial exercise price of the
Warrant is $0.25 per share, also subject to certain
adjustments.
As part of the Purchase Agreement, we granted the investor
“piggyback” registration rights to register the shares
of common stock issuable upon the conversion of the Debenture and
the exercise of the Warrant with the Securities and Exchange
Commission for resale or other disposition.
42
The Debenture and the Warrant were issued in a transaction that was
not registered under the Securities Act of 1933, as amended in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and Rule 506 of SEC Regulation D under the
Act.
Under the terms of the Purchase Agreement, Mr. Struve may purchase
up to an aggregate of $1,000,000 principal amount of Debentures
(before a 20% original issue discount) (and Warrants to purchase up
to an aggregate of 250,000 shares of common stock). These
securities are being offered on a “best efforts” basis
by the placement agent.
On December 12, 2017, we closed an additional $250,000 and issued a
senior convertible exchangeable debenture with a principal amount
of $300,000 and a common stock purchase warrant to purchase
1,200,000 shares of common stock in a private placement dated
December 12, 2017 with Mr. Struve pursuant to a Securities Purchase
Agreement dated August 14, 2017.
On March 2, 2018, we received gross proceeds of $280,000 in
exchange for issuing a senior convertible redeemable debenture with
a principal amount of $336,000 and a warrant to purchase 1,344,000
shares of common stock in a private placement dated February 28,
2018 with Mr. Struve pursuant to a Securities Purchase Agreement
dated August 14, 2017.
On
November 16, 2018, we signed Amendment 1 to Senior Secured
Convertible Redeemable Notes dated August 14, 2017 and December 12,
2017, extending the due dates of the Notes to February 27,
2019.
Series C and D Preferred Stock and Warrants
See
Part II, for a description of Series C and D Preferred Stock and
Warrants with Mr. Struve.
Related Party Transactions with Ronald P. Erickson
On September 7, 2017 Mr. Erickson was issued 200,000 of restricted
common stock to at the grant date market value of $0.17 per
share.
On January 16, 2018 Mr. Erickson was issued 100,000 of restricted
common stock on to at the grant date market value of $0.21 per
share.
On
January 25, 2018, we entered into amendments to two demand
promissory notes, totaling $600,000 with Mr. Erickson, our Chief
Executive Officer and/or entities in which Mr. Erickson has a
beneficial interest. The amendments extend the due date from
December 31, 2017 to September 30, 2018 and continue to provide for
interest of 3% per annum and a third lien on company assets if not
repaid by September 30, 2018 or converted into convertible
debentures or equity on terms acceptable to the Holder. On March
16, 2018, the demand promissory notes and accrued interest were
converted into convertible notes payable.
On
March 16, 2018, we entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of our common stock for a period of five years. The initial exercise price of the warrants
described above is $0.50 per share, also subject to certain
adjustments.
On July 9, 2018, we repaid a $199,935 Business Loan Agreement with
Umpqua Bank from funds previously provided by an entity
affiliated with Ronald P. Erickson, our Chairman of the Board. The
Company paid $27,041 and issued
800,000 shares of common stock in exchange for the conversion of
this debt. Mr. Erickson is an accredited investor. These shares
were issued in transactions that were not registered under the Act
in reliance upon applicable exemptions from registration under
Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation D
under the Act.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $657,551
as of September 30, 2018.
Related Party Transaction with Phillip A. Bosua
On July
14, 2017, we issued 50,000 shares of our common stock to Phillip A.
Bosua under the terms of a consulting agreement dated July 6,
2017.
On
February 7, 2018, we issued 50,000 shares of our common stock to
Phillip A. Bosua under the terms of a consulting agreement dated
July 6, 2017. The fair value of the shares issued was
$12,000.
On
April 10, 2018, we issued 2,000,000 shares of our common stock to
Phillip A. Bosua under the terms of the Merger Agreement with RAAI
common stock. The fair value of the shares issued was
$520,000.
43
On June
25, 2018, we issued 500,000 shares of our common stock to Phillip
A. Bosua under the terms of an Employment agreement dated April 10,
2018. The fair value of the shares issued was
$165,000.
On June
25, 2018, we closed a debt conversion
with an entity controlled by Phillip A. Bosua and issued 255,000
shares of common stock in exchange for the conversion of $63,750 in
preexisting debt owed by the Company to this
entity.
On July 30, 2018, Mr. Bosua was awarded a stock option grant for
1,000,000 shares of our common stock that was awarded at $1.28 per
share and was valued at the black scholes value of $1.22 per
share.
Stock Issuances to Named Executive Officers and
Directors
On September 7, 2017, we issued 400,000 shares of restricted common
stock to one Named Executive Officer and two directors for services
during 2015-2017. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $0.17 per share, the
market price of our common stock.
During January to May 2018, we issued 275,000 shares of restricted
common stock to one Named Executive Officer and two directors for
services during 2018. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $0.246 per share, the
market price of our common stock.
Stock Option Grant Cancellations
During the year ended September 30, 2017, two Named Executive
Officers forfeited stock option grants for 35,366 shares of common
stock at $19.53 per share.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and
procedures for audit, audit-related and tax services that can be
performed by the independent auditors without specific
authorization from the Audit Committee subject to certain
restrictions. The policy sets out the specific services
pre-approved by the Audit Committee and the applicable limitations,
while ensuring the independence of the independent auditors to
audit the Company's financial statements is not impaired. The
pre-approval policy does not include a delegation to management of
the Audit Committee’s responsibilities under the Exchange
Act. During the year ended September 30, 2018, the Audit Committee
pre-approved all audit and permissible non-audit services provided
by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting
Firm
The Audit Committee engaged SD Mayer and Associates, LLP to perform
an annual audit of the Company’s financial statements for the
fiscal years ended September 30, 2018 and 2017. The following is
the breakdown of aggregate fees paid to auditors for the Company
for the last two fiscal years:
|
Year
Ended
|
Year
Ended
|
|
September
30, 2018
|
September
30, 2017
|
Audit
fees
|
$42,000
|
$41,399
|
Audit
related fees
|
24,500
|
26,900
|
Tax
fees
|
3,289
|
11,825
|
All
other fees
|
-
|
17,000
|
|
|
|
|
$69,789
|
$97,124
|
-
“Audit Fees” are fees paid for professional services
for the audit of our financial statements.
-
“Audit-Related fees” are fees paid for professional
services not included in the first two categories, specifically,
SAS 100 reviews, SEC filings and consents, and accounting
consultations on matters addressed during the audit or interim
reviews, and review work related to quarterly filings.
-
“Tax Fees” are fees primarily for tax compliance in
connection with filing US income tax returns.
-
“All other fees” for 2017 related to three year SEC
review.
44
SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as
of September 30, 2018 our executive officers, directors and 10%
holders complied with all filing requirements except as
follows:
Todd
Martin Sames filed a Form 4 on January 11, 2018 that was required
to be filed on January 15, 2018.
Jon
Pepper filed a Form 4 on April 19, 2018 that was required to be
filed on April 12, 2018.
Ichiro
Takesako filed a Form 4 on April 19, 2018 that was required to be
filed on April 12, 2018.
Phillip
Bosua filed a Form 4 on July 10, 2018 that was required to be filed
on June 27, 2018.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS:
The company’s financial statements, as indicated by the Index
to Consolidated Financial Statements set forth below, begin on page
F-1 of this Form 10-K, and are hereby incorporated by reference.
Financial statement schedules have been omitted because they are
not applicable or the required information is included in the
financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Title of Document
|
|