10-Q/A: Quarterly report pursuant to Section 13 or 15(d)
Published on January 22, 2020
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
☒ QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31, 2019
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
For
the transition period from _______ to ________
Commission File number
000-30262
KNOW LABS, INC.
(Exact
name of registrant as specified in charter)
Nevada
|
|
90-0273142
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
500 Union Street, Suite
810, Seattle, Washington USA
|
|
98101
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
206-903-1351
|
(Registrant's
telephone number, including area code)
|
|
(Former
name, address, and fiscal year, if changed since last
report)
|
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
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☒
|
(Do not check if a
smaller reporting company)
|
|
Emerging growth
company
|
☐
|
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 ☒
The number of shares of common
stock, $.001 par value, issued and outstanding as of May 15,
2019: 18,192,949 shares.
EXPLANATORY NOTE
This
Amendment No. 1 on Form 10-Q/A amends and restates the quarterly
report on Form 10-Q of Know Labs Inc. (the “Company”)
for the three and six months ended March 31, 2019, as originally
filed with SEC on May 15, 2019 (“Original Filing”).
This Form 10-Q/A is being filed to restate the Company’s
consolidated financial statements in Item 1 in their entirety and
related disclosures (including Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Item
2) for the three and six months ended March 31, 2019. Consequently,
the previously filed unaudited condensed interim consolidated
financial statements for the period ended March 31, 2019 should no
longer be relied upon.
In
connection with the review of the Form 10-Q for the Company for the
three and six months ended March 31, 2019, management determined
that previously issued unaudited consolidated financial statements
issued for the three and six months ended March 31, 2019 contained
an error which was non-cash in nature. The Company received
proceeds from convertible promissory notes which are mandatorily
convertible into equity after a one year term. The Company
originally classified the proceeds as equity. They should
have properly been classified as debt and footnoted to explain that
they would become equity at the end of their term. Certain
expenditures related to warrants attached to the debt offering were
not properly accounted for as well.
The
original and restated accounts are detailed
below:
|
As of March 31, 2019
|
|
|
As Originally Reported
|
As Restated
|
Convertible
notes payable
|
$ 2,255,066
|
$ 2,255,066
|
Common
stock
|
22,003
|
18,192
|
Additional
paid in capital
|
36,917,782
|
36,608,295
|
Accumulated
deficit
|
37,285,145
|
(37,002,765)
|
|
|
|
|
Three Months Ended March 31,
2019
|
|
Selling,
general and administrative expenses
|
1,678,335
|
1,003,504
|
Operating
loss
|
(1,723,486)
|
(1,048,655)
|
Interest
expense
|
(7,750)
|
(400,201)
|
Loss
before taxes and net loss
|
(1,724,618)
|
(1,442,238)
|
|
|
|
|
Six Months Ended March 31,
2019
|
|
Selling,
general and administrative expenses
|
2,367,781
|
1,692,950
|
Operating
loss
|
(2,489,999)
|
(1,815,168)
|
Interest
expense
|
(16,876)
|
(409,327)
|
Loss
before taxes and net loss
|
(2,493,821)
|
(2,211,441)
|
The
Company evaluated the impact of this error under the SEC’s
authoritative guidance on materiality and determined that the
impact of this error for the three and six months ended March 31,
2019 consolidated financial statements was material. On January 22,
2020, after review by our independent registered public accounting
firm and legal counsel, the Audit Committee of the Company’s
Board of Directors concluded that the Company should restate our
unaudited interim condensed financial statements for the three and
six months ended March 31, 2019 to reflect the correction of the
previously identified error in the unaudited condensed consolidated
financial statements for this period.
Although
this Form 10-Q/A supersedes the previously issued unaudited
condensed consolidated financial statements issued for the three
and six months ended March 31, 2019 in its entirety, this Form
10-Q/A only amends and restates Item 1 and certain provisions of
Item 2 and Item 4 of Part I as a result of and to reflect the
restatements, as well as immaterial conforming changes to other
Items. No other information in the Original Filing is amended
hereby. While the foregoing items have been updated, this amended
report does not reflect any other events occurring after the
Original Filing. In addition, currently dated certifications from
our Chief Executive Officer and Chief Financial Officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002,
are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and
32.2, respectively.
No
other changes have been made to the Original Filing. This Amendment
does not reflect events that have occurred after May 15, 2019, the
filing date of the Form 10-Q or modify or update the disclosures
presented therein, except to reflect the amendment described
above.
TABLE
OF CONTENTS
|
|
Page Number
|
|
|
|
PART
I FINANCIAL INFORMATION
|
|
|
|
|
|
ITEM
1 Financial Statements (unaudited except as
noted)
|
|
3
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2019 and September 30, 2018
(audited)
|
|
3
|
|
|
|
Consolidated
Statements of Operations for the three and six months ended
March 31, 2019 and 2018
|
|
4
|
|
|
|
Consolidated Statements of Changes in
Stockholders’ Deficit
|
|
5
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended March 31,
2019 and 2018
|
|
6
|
|
|
|
Notes
to the Financial Statements
|
|
7
|
|
|
|
ITEM
2 Management's Discussion and Analysis of
Financial Condition and Results of Operation
|
|
22
|
|
|
|
ITEM
3 Quantitative and Qualitative Disclosures About
Market Risk
|
|
30
|
|
|
|
ITEM
4 Controls and Procedures
|
|
30
|
|
|
|
PART
II OTHER INFORMATION
|
|
|
|
|
|
ITEM
1A. Risk Factors
|
|
32
|
|
|
|
ITEM
2 Unregistered Sales of Equity Securities and Use
of Proceeds
|
|
40
|
|
|
|
ITEM
3 Defaults upon
Senior Securities
|
|
41
|
|
|
|
ITEM
4 Mine Safety
Disclosures
|
|
41
|
|
|
|
ITEM
5 Other Information
|
|
41
|
|
|
|
ITEM
6 Exhibits
|
|
42
|
|
|
|
SIGNATURES
|
|
46
|
2
ITEM 1. FINANCIAL STATEMENTS
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
March 31,
2019
|
September 30,
2018
|
ASSETS
|
(Restated)
|
(Audited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
and cash equivalents
|
$3,061,901
|
$934,407
|
Accounts
receivable, net of allowance of $60,000 and $60,000,
respectively
|
193,372
|
320,538
|
Prepaid
expenses
|
12,844
|
20,140
|
Inventories,
net
|
100,989
|
203,582
|
Total
current assets
|
3,369,106
|
1,478,667
|
|
|
|
EQUIPMENT,
NET
|
197,536
|
169,333
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets
|
361,112
|
447,778
|
Other
assets
|
15,867
|
7,170
|
|
|
|
TOTAL
ASSETS
|
$3,943,621
|
$2,102,948
|
|
|
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts
payable - trade
|
$1,298,278
|
$1,512,617
|
Accounts
payable - related parties
|
7,395
|
12,019
|
Accrued
expenses
|
112,256
|
72,140
|
Accrued
expenses - related parties
|
644,099
|
657,551
|
Deferred
revenue
|
-
|
55,959
|
Convertible
notes payable
|
2,255,066
|
2,255,066
|
Notes
payable - current portion of long term debt
|
-
|
145,186
|
Total
current liabilities
|
4,317,094
|
4,710,538
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 15)
|
-
|
-
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Preferred
stock - $0.001 par value, 5,000,000 shares authorized, 0 shares
issued and
|
|
|
outstanding
at 3/31/2019 and 9/30/2018, respectively
|
-
|
-
|
Series
A Convertible Preferred stock - $0.001 par value, 23,334 shares
authorized, 0 shares and
|
|
|
20,000
shares issued and outstanding at 3/31/2019 and 9/30/2018,
respectively
|
-
|
11
|
Series
C Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
|
|
|
1,785,715
shares issued and outstanding at 3/31/2019 and 9/30/2018,
respectively
|
1,790
|
1,790
|
Series
D Convertible Preferred stock - $0.001 par value, 1,016,014 shares
authorized,
|
|
|
1,016,004
shares issued and outstanding at 3/31/2019 and 9/30/2018,
respectively
|
1,015
|
1,015
|
Common
stock - $0.001 par value, 100,000,000 shares authorized, 18,192,949
and 17,531,502 shares
|
|
|
issued
and outstanding at 3/31/2019 and 9/30/2018,
respectively
|
18,192
|
17,532
|
Additional
paid in capital
|
36,608,295
|
32,163,386
|
Accumulated
deficit
|
(37,002,765)
|
(34,791,324)
|
Total
stockholders' deficit
|
(373,473)
|
(2,607,590)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$3,943,621
|
$2,102,948
|
The
accompanying notes are an integral part of these consolidated
financial statements.
3
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Three
Months Ended,
|
Six
Months Ended,
|
||
|
March
31, 2019
|
March
31, 2018
|
March
31, 2019
|
March
31, 2018
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
REVENUE
|
$ 593,712
|
$ 1,092,228
|
1,195,921
|
$ 2,325,085
|
COST
OF SALES
|
454,839
|
865,571
|
927,125
|
1,850,594
|
GROSS
PROFIT
|
138,873
|
226,657
|
268,796
|
474,491
|
RESEARCH
AND DEVELOPMENT EXPENSES
|
184,024
|
153,300
|
391,014
|
241,020
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
1,003,504
|
578,097
|
1,692,950
|
992,462
|
OPERATING
LOSS
|
(1,048,655)
|
(504,740)
|
(1,815,168)
|
(758,991)
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Interest
expense
|
(400,201)
|
(793,837)
|
(409,327)
|
(1,087,039)
|
Other
income
|
6,618
|
(577)
|
13,054
|
18,611
|
Total other income (expense)
|
(393,583)
|
(794,414)
|
(396,273)
|
(1,068,428)
|
|
|
|
|
|
(LOSS)
BEFORE INCOME TAXES
|
(1,442,238)
|
(1,299,154)
|
(2,211,441)
|
(1,827,419)
|
|
|
|
|
|
Income
taxes - current provision
|
-
|
-
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$ (1,442,238)
|
$ (1,299,154)
|
(2,211,441)
|
$ (1,827,419)
|
|
|
|
|
|
Basic
and diluted loss per share
|
$ (0.08)
|
$ (0.25)
|
(0.12)
|
$ (0.37)
|
|
|
|
|
|
Weighted
average shares of common stock outstanding- basic and
diluted
|
18,094,492
|
5,128,144
|
17,829,909
|
4,889,218
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
4
KNOW
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
|
Series A Convertible
|
Series C Convertible
|
Series D Convertible
|
|
|
Additional
|
|
Total
|
|||
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Common Stock
|
Paid in
|
Accumulated
|
Stockholders'
|
||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Amount
|
Amount
|
Capital
|
Deficit
|
Deficit
|
Balance as of
September 30, 2017
|
23,334
|
$23
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
4,655,486
|
$4,655
|
$27,565,453
|
$(31,533,727)
|
$(3,960,791)
|
Stock
compensation expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,187
|
-
|
5,187
|
Issuance of
Series D Convertible Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
216,774
|
-
|
216,774
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(528,265)
|
(528,265)
|
Balance as of
December 31, 2017
|
23,334
|
23
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
4,655,486
|
4,655
|
27,787,414
|
(32,061,992)
|
(4,267,095)
|
Stock
compensation expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,147
|
-
|
2,147
|
Issuance of
Series D Convertible Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
601,028
|
-
|
601,028
|
Issuance of
common stock for services
|
-
|
-
|
-
|
-
|
-
|
-
|
329,240
|
330
|
70,311
|
-
|
70,641
|
Issuance of
common stock for conversion of
liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
230,000
|
230
|
48,070
|
-
|
48,300
|
Issuance of
warrant for debt conversion
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
110,545
|
-
|
110,545
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,299,154)
|
(1,299,154)
|
Balance as of
March 31, 2018
|
23,334
|
23
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
5,214,726
|
5,215
|
28,619,515
|
(33,361,146)
|
(4,733,588)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
October 1, 2018
|
20,000
|
11
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
17,531,502
|
17,532
|
32,163,385
|
(34,791,324)
|
(2,607,591)
|
Stock
compensation expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
171,499
|
-
|
171,499
|
Issuance of
common stock for warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
279,929
|
280
|
(280)
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
-
|
(769,203)
|
(769,204)
|
Balance as of
December 31, 2018
|
20,000
|
11
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
17,811,431
|
17,811
|
32,334,604
|
(35,560,527)
|
(3,205,296)
|
Stock
compensation expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
91,648
|
-
|
91,648
|
Issuance of
common stock for services
|
-
|
-
|
-
|
-
|
-
|
-
|
245,000
|
245
|
348,655
|
-
|
348,900
|
Conversion of
Series A Preferred Stock
|
(20,000)
|
(11)
|
-
|
-
|
-
|
-
|
80,000
|
80
|
(69)
|
-
|
-
|
Beneficial
conversion feature (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,570,049
|
-
|
1,570,049
|
Issuance of
warrants to debt holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,244,263
|
-
|
1,244,263
|
Issuance of
warrants for services related to debt offering (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
988,876
|
-
|
988,876
|
Stock based
compensation- warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
30,325
|
-
|
30,325
|
Issuance of
common stock for warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
56,518
|
56
|
(56)
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,442,238)
|
(1,442,238)
|
Balance as of
March 31, 2019
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
$18,192,949
|
$18,192
|
$36,608,295
|
$(37,002,765)
|
$(373,473)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Six
Months Ended,
|
|
|
March
31, 2019
|
March
31, 2018
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$ (2,211,441)
|
$ (1,827,419)
|
Adjustments
to reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation
and amortization
|
133,019
|
30,462
|
Issuance
of capital stock for services and expenses
|
348,900
|
70,641
|
Stock
based compensation- warrants
|
30,325
|
-
|
Conversion
of interest
|
-
|
64,233
|
Stock
based compensation- stock option grants
|
263,147
|
7,334
|
Amortization
of debt discount
|
361,534
|
475,174
|
Conversion
of accrued liabilities- related parties to notes
payable
|
-
|
491,802
|
Provision
on loss on accounts receivable
|
8,728
|
21,406
|
Impairment
of goodwill
|
-
|
110,545
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
118,438
|
114,918
|
Prepaid
expenses
|
7,296
|
4,292
|
Inventory
|
102,593
|
21,616
|
Other
assets
|
(8,697)
|
(2,100)
|
Accounts
payable - trade and accrued expenses
|
(245,393)
|
33,193
|
Deferred
revenue
|
(55,959)
|
(58,615)
|
NET
CASH (USED IN) OPERATING ACTIVITIES
|
(1,147,510)
|
(442,518)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Payment
for research and development equipment
|
(74,556)
|
-
|
NET
CASH (USED IN) BY INVESTING ACTIVITIES:
|
(74,556)
|
-
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Proceeds
from convertible notes payable
|
3,809,976
|
-
|
Repayments
of line of credit
|
(92,094)
|
(190,663)
|
Payments
for issuance costs from notes payable
|
(368,322)
|
-
|
Proceeds
from convertible notes payable
|
-
|
530,000
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
3,349,560
|
339,337
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
2,127,494
|
(103,181)
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
934,407
|
103,181
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ 3,061,901
|
$ -
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$ 7,750
|
$ 20,243
|
Taxes
paid
|
$ -
|
$ -
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
Beneficial
conversion feature
|
$ 1,570,049
|
$ 348,096
|
Conversion
of accrued liabilities- related parties to notes
payable
|
$ -
|
$ 482,014
|
Issuance
of warrants to debt holders
|
$ 1,244,263
|
$ -
|
Issuance
of warrants for services related to debt
offering
|
$ 988,876
|
$ -
|
Cashless
warrant exercise
|
$ 84,107
|
$ -
|
The
accompanying notes are an integral part of these consolidated
financial statements.
6
KNOW LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying
unaudited consolidated condensed financial statements have been
prepared by Know Labs, Inc, formerly Visualant, Incorporated
(“the Company”, “us,” “we,” or
“our”) in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial
reporting and rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. In the opinion
of our management, all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
fiscal periods presented have been included.
These financial
statements should be read in conjunction with the audited financial
statements and related notes included in our Annual Report filed on
Form 10-K for the year ended September 30, 2018, filed with the
Securities and Exchange Commission (“SEC”) on December
21, 2018. The results of operations for the six months ended March
31, 2019 are not necessarily indicative of the results expected for
the full fiscal year, or for any other fiscal
period.
1.
ORGANIZATION
Know Labs, Inc. (the “Company”) was
incorporated under the laws of the State of Nevada in 1998.
The Company has 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 preferred stock, par
value $0.001 per share.
The Company is
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. The
Company’s 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)
the Company’s 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. The Company’s ChromaID scanner sees
what we like to call “Nature’s Color
Fingerprint.” Everything in nature has a unique color
identifier and with ChromaID the Company can see it, and identify,
authenticate anddiagnose based upon the color that is present. The
Company’s 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. The Company
will continue to develop and enhance its ChromaID technology and
extend its capacity. More recently, the Company has focused upon
extensions and new inventions that are derived from and extend
beyond our ChromaID technology. The Company’s call this
technology Bio-RFID. The rapid advances made with our Bio-RFID
technology in our laboratory have caused us to move quickly
into the commercialization phase of our Company as we
work to create revenue generating products for the marketplace. The
Company will also, as resources permit, pursue licensing
opportunities with third parties who have ready applications for
our technologies.
In
2010, the Company acquired TransTech Systems, Inc. as an adjunct to
its business. TransTech is a distributor of products for employee
and personnel identification. TransTech has provided all of the
Company’s revenues.
The Company is in the process of commercializing
its technology. To date, the Company has entered into License
Agreements with Sumitomo Precision Products Co., Ltd. In addition,
it has a technology license agreement with Allied Inventors,
formerly Xinova and Invention
Development Management Company, a subsidiary of Intellectual
Ventures.
The
Company believes that its commercialization success is dependent
upon its ability to significantly increase the number of customers
that are purchasing and using its products. To date the Company has
generated minimal revenue from sales of its ChromaID and Bio-RFID
products. The Company is currently not profitable. Even if the
Company succeeds in introducing the ChromaID and Bio-RFID
technology and related products to its target markets, the Company
may not be able to generate sufficient revenue to achieve or
sustain profitability.
ChromaID was invented by scientists under contract
with the Company. Bio-RFID was invented by individuals working for
the Company. The Company actively pursues a robust intellectual
property strategy and has been granted twelve patents. The Company
also has 20 patents pending. The Company possesses all right, title
and interest to the issued patents. Ten of the pending patents are
licensed exclusively to the Company in perpetuity by the
Company’s strategic partner, Allied
Inventors.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, the Company 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.
7
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.
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 Visualant
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.
Restatement
of Form 10-Q for the Three and Six Months Ended March 31,
2019
This
Amendment No. 1 on Form 10-Q/A amends and restates the quarterly
report on Form 10-Q the Company for the three and six months ended
March 31, 2019, as originally filed with SEC on May 15, 2019. This
Form 10-Q/A is being filed to restate the Company’s
consolidated financial statements in Item 1 in their entirety and
related disclosures (including Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Item
2) for the three and six months ended March 31, 2019. Consequently,
the previously filed unaudited condensed interim consolidated
financial statements for the period ended March 31, 2019 should no
longer be relied upon.
In
connection with the review of the Form 10-Q for the Company for the
three and six months ended March 31, 2019, management determined
that previously issued unaudited consolidated financial statements
issued for the three and six months ended March 31, 2019 contained
an error which was non-cash in nature. The Company received
proceeds from convertible promissory notes which are mandatorily
convertible into equity after a one year term. The Company
originally classified the proceeds as equity. They should
have properly been classified as debt and footnoted to explain that
they would become equity at the end of their term. Certain
expenditures related to warrants attached to the debt offering were
not properly accounted for as well.
See
explanatory note for additional details.
2.
GOING CONCERN
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $2,211,411, $3,257,597
and $3,901,232 for the six months ended March 31, 2019 and the
years ended September 30, 2018 and 2017, respectively. Net cash
used in operating activities was $1,147,510,
$1,117,131 and $1,264,324 for the six months ended
March 31, 2019 and for the years ended September 30, 2018 and 2017,
respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of March 31, 2019, the Company’s
accumulated deficit was $37,002,765. The
Company has limited capital resources, and operations to date have
been funded with the proceeds from private equity and debt
financings and loans from Ronald P. Erickson, the Company’s
Chief Executive Officer, or entities with which he is affiliated.
These conditions raise substantial doubt about our ability to
continue as a going concern. The audit report prepared by the
Company’s independent registered public accounting firm
relating to our financial statements for the year ended September
30, 2018 includes an explanatory paragraph expressing the
substantial doubt about the Company’s ability to continue as
a going concern.
The
Company believes that its cash on hand will be
sufficient to fund our operations until December 31, 2019.
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 the
Company’s 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, the Company 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.
3.
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
Basis of Presentation – The accompanying unaudited
consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been
eliminated. The preparation of these unaudited condensed
consolidated financial statements were prepared in conformity with
U.S. generally accepted accounting principles
(“GAAP”).
Principles of
Consolidation – The
consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries,
TransTech Systems, Inc and RAAI Lighting, Inc. Inter-Company items
and transactions have been eliminated in
consolidation.
Cash and Cash
Equivalents – The
Company classifies highly liquid temporary investments with an
original maturity of three months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit.
8
Accounts Receivable and
Allowance for Doubtful Accounts – Accounts receivable consist primarily of
amounts due to the Company from normal business activities. The
Company maintains an allowance for doubtful accounts to reflect the
expected non-collection of accounts receivable based on past
collection history and specific risks identified within the
portfolio. If the financial condition of the customers were to
deteriorate resulting in an impairment of their ability to make
payments, or if payments from customers are significantly delayed,
additional allowances might be required.
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. The Company records a provision for excess and
obsolete inventory whenever an impairment has been identified.
There is a $35,000 reserve for impaired inventory as of March 31,
2019 and September 30, 2018, respectively.
Equipment – Equipment consists of machinery, leasehold
improvements, furniture and fixtures and software, which are stated
at cost less accumulated depreciation and amortization.
Depreciation is computed by the straight-line method over the
estimated useful lives or lease period of the relevant asset,
generally 2-10 years, except for leasehold improvements which are
depreciated over 2-3 years.
Long-Lived Assets
– The Company reviews its
long-lived assets for impairment annually or when changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets under certain circumstances are
reported at the lower of carrying amount or fair value. Assets to
be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of
carrying amount or fair value (less the projected cost associated
with selling the asset). To the extent carrying values exceed fair
values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible
assets are capitalized and amortized on a straight-line basis over
their estimated useful life, if the life is determinable. If the
life is not determinable, amortization is not recorded. We
regularly perform reviews to determine if facts and circumstances
exist which indicate that the useful lives of our intangible assets
are shorter than originally estimated or the carrying amount of
these assets may not be recoverable. When an indication exists that
the carrying amount of intangible assets may not be recoverable, we
assess the recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Research, Development and Engineering
Expenses – Research, development and engineering
expenses consist of the cost of employees, consultants and
contractors who design, engineer and develop new products and
processes as well as materials, supplies and facilities used in
producing prototypes.
The Company’s
research and development efforts are primarily focused improving
the core foundational ChromaID technology and developing new and
unique applications for the technology. As part of this effort, the
Company typically conduct testing to ensure that ChromaID
application methods are compatible with the customer’s
requirements, and that they can be implemented in a cost effective
manner. The Company is also actively involved in identifying new
application methods. Know Lab’s team has considerable
experience working with the application of light-based technologies
and their application to various industries. The Company believes
that its continued development of new and enhanced technologies
relating to our core business is essential to its future success.
The Company spent $391,014, $570,514 and $79,405 during the six
months ended March 31, 2019 and the years ended September 30, 2018
and 2017, respectively, on research and development
activities.
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). The hierarchy
consists of three levels:
Level 1 –
Quoted prices in active markets for identical assets and
liabilities;
Level 2 –
Inputs other than level one inputs that are either directly or
indirectly observable; and.
Level 3 -
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The recorded value
of other financial assets and liabilities, which consist primarily
of cash and cash equivalents, accounts receivable, other current
assets, and accounts payable and accrued expenses approximate the
fair value of the respective assets and liabilities as of March 31,
2019 and September 30, 2018 are based upon the short-term nature of
the assets and liabilities.
9
Derivative financial instruments -We
evaluate all of its financial instruments to
determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value
reported in the consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses a
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
Accounts Receivable and Revenue –
We recognize revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. For
TransTech, we extend thirty day terms to some customers. Accounts
receivable are reviewed periodically for
collectability.
Allowance for Doubtful Accounts - We
maintain an allowance for uncollectible accounts receivable. It is
our practice to regularly review and revise, when deemed necessary,
our estimates of uncollectible accounts receivable, which are based
primarily on actual historical return rates. We record estimated
uncollectible accounts receivable as selling, general and
administrative expense. As of March 31, 2019 and September 30,
2018, there was a reserve for sales returns of $60,000, which is
minimal based upon our historical experience.
Stock Based Compensation
– The Company has share-based
compensation plans under which employees, consultants, suppliers
and directors may be granted restricted stock, as well as options
to purchase shares of Company common stock at the fair market value
at the time of grant. Stock-based compensation cost is measured by
the Company at the grant date, based on the fair value of the
award, over the requisite service period. For options issued to
employees, the Company recognizes 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 718.
Convertible Securities
– Based upon ASC 815-15,
we have adopted a sequencing approach regarding the application of
ASC 815-40 to convertible securities. We will evaluate our
contracts based upon the earliest issuance date. In the event
partial reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
Net Loss per Share –
Under the provisions of ASC 260, “Earnings Per Share,”
basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that would then share in the income of the
Company, subject to anti-dilution limitations. As of March 31, 2019, there were options
outstanding for the purchase of 2,282,668 common shares, warrants
for the purchase of 17,572,583 common shares, and
4,894,071 shares of the Company’s common stock issuable
upon the conversion of Series A, Series C and Series D Convertible
Preferred Stock. In addition, the Company currently
has 12,829,329 common shares (9,020,264 common shares at the
current price of $0.25 per share and 3,808,975 common shares
at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of
$6,060,041. All of which
could potentially dilute future earnings per
share.
As
of March 31, 2018, there were options outstanding for the purchase
of 4,736 common shares, warrants for the purchase of 11,837,422
common shares, 2,825,053 shares of the Company’s common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock. In addition, the Company has an
unknown number of shares issuable upon conversion of convertible
debentures of $2,390,066. All of which could potentially dilute
future earnings per share.
10
Dividend Policy
– The Company has never paid any
cash dividends and intends, for the foreseeable future, to retain
any future earnings for the development of our business. Our future
dividend policy will be determined by the board of directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
Use of Estimates
– The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
On October 1, 2018, we adopted Accounting
Standards Codification (“ASC”) Topic
606, Revenue from Contracts with
Customers (“ASC
606”), and its related amendments, using the modified
retrospective method applied to those contracts which were not
completed as of October 1, 2018. The adoption of ASC 606, using the
modified retrospective approach, had no significant impact to our
accumulated deficit as of October 1, 2018 and no significant impact
to the total net cash from or used in operating, investing, or
financing activities within the consolidated statements of cash
flows.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)
(“ASU 2016-02”), which will replace the existing
guidance in ASC 840, “Leases.” The FASB has also issued
amendments to ASU 2016-02, including ASU No. 2018-11, Leases (Topic
842): Targeted Improvements (ASU 2018-11), which the Company
collectively refers to as the new leasing standard. The
Company’s outstanding leases primarily relate to its two
facility leases Seattle, Washington. In conjunction with these
leases, the Company adopted this new retrospectively on July 1,
2019 and recognized a lease liability and related right-of-use
asset on the Company’s consolidated balance sheet. The
retrospect adjustment did not require any adjustment to previously
reported equity.
A
variety of proposed or otherwise potential accounting standards are
currently under study by standard setting organizations and various
regulatory agencies. Due to the tentative and preliminary nature of
those proposed standards, management has not determined whether
implementation of such proposed standards would be material to the
Company’s consolidated financial statements.
11
4. ACCOUNTS
RECEIVABLE/CUSTOMER CONCENTRATION
Accounts receivable were $193,372 and $320,538,
net of allowance, as of March 31, 2019 and September 30, 2018,
respectively. The Company had two customers in excess of 10% (14.8%
and 10.1%) of the Company’s consolidated revenues for the
three months ended March 31, 2019. The Company had two customers in
excess of 10% (21.7%,and 20.7%) with accounts receivable in excess
of 10% as of March 31, 2019. The Company has a total allowance for
bad debt in the amount of $60,000 as of March 31,
2019. The decrease in accounts receivable related to
lower sales and purchases at TransTech.
5. INVENTORIES
Inventories were and $100,989 and $203,582 as of
March 31, 2019 and September 30, 2018, respectively. Inventories
consist primarily of printers and consumable supplies, including
ribbons and cards, badge accessories, capture devices, and access
control components held for resale. There was a $35,000 reserve for
impaired inventory as of September 30, 2018 and 2017,
respectively. The decrease in inventory related to lower
sales at TransTech.
6. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was
$197,536 and $169,333 as of March 31, 2019 and September 30, 2018,
respectively. Accumulated depreciation was $717,019 and $670,666 as
of March 31, 2019 and September 30, 2018, respectively. Total
depreciation expense was $46,354 and $30,462 for the six months
ended March 31, 2019 and 2018, respectively. All
equipment is used for selling, general and administrative purposes
and accordingly all depreciation is classified in selling, general
and administrative expenses.
Property
and equipment as of March 31, 2019 and September 30,
2018 was comprised of the following:
|
Estimated
|
|
|
|
Useful
Lives
|
March 31,
2019
|
September 30,
2018
|
Machinery
and equipment
|
2-10
years
|
$449,542
|
$332,306
|
Leasehold
improvements
|
2-3
years
|
276,112
|
276,112
|
Furniture
and fixtures
|
2-3
years
|
153,071
|
58,051
|
Software
and websites
|
3-
7 years
|
35,830
|
35,830
|
Less:
accumulated depreciation
|
|
(717,019)
|
(532,966)
|
|
$197,536
|
$169,333
|
7. INTANGIBLE
ASSETS
Intangible
assets as of March 31, 2019 and September 30, 2018 consisted of the
following:
|
Estimated
|
March
31,
|
September
30,
|
|
Useful
Lives
|
2019
|
2018
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
(158,888)
|
(72,222)
|
|
Intangible
assets, net
|
|
$361,112
|
$447,778
|
Total
amortization expense was $86,666 and $0 for the six months ended
March 31, 2019 and 2018, respectively.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, the Company 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 converted into the right to receive 2,000 shares
of the Company’s common stock. As a result, the Company
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.
12
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.
RAAI
had no outstanding indebtedness or assets at the closing of the
Merger. The 2,000,000 shares of the Company’s common stock
issued for RAAI’s shares were recorded at the fair value at
the date of the merger at $520,000 and the value assigned to the
patent acquired with RAAI.
The
fair value of the intellectual property associated with the assets
acquired was $520,000 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
8. ACCOUNTS PAYABLE
Accounts
payable were $1,298,278 and $1,517,617 as of March 31, 2019
and September 30, 2018, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases and technology
development, external audit, legal and other expenses incurred by
the Company. The Company had two vendors (12.3% and 10.0%) with
accounts payable in excess of 10% of its accounts payable as of
March 31, 2019. The Company does expect to have vendors with
accounts payable balances of 10% of total accounts payable in the
foreseeable future.
9. DERIVATIVE
INSTRUMENTS
In April 2008, the
FASB issued a pronouncement that provides guidance on determining
what types of instruments or embedded features in an instrument
held by a reporting entity can be considered indexed to its own
stock for the purpose of evaluating the first criteria of the scope
exception in the pronouncement on accounting for derivatives. This
pronouncement was effective for financial statements issued for
fiscal years beginning after December 15, 2008. The adoption of
these requirements can affect the accounting for warrants and many
convertible instruments with provisions that protect holders from a
decline in the stock price (or “down-round”
provisions). For example, warrants or conversion features with such
provisions are no longer recorded in equity. Down-round provisions
reduce the exercise price of a warrant or convertible instrument if
a company either issues equity shares for a price that is lower
than the exercise price of those instruments or issues new warrants
or convertible instruments that have a lower exercise
price.
There was no
derivative liability as of March 31, 2019 and September 30, 2018.
10. CONVERTIBLE NOTES PAYABLE
Convertible
notes payable as of March 31, 2019 and September 30, 2018 consisted
of the following:
Convertible Promissory Notes with Clayton A. Struve
As of March 31, 2019, the Company owes Clayton A.
Struve $1,071,000 under convertible promissory or OID notes. The
Company recorded accrued interest of $58,411 as of March 31,
2019. On May 8, 2019, the Company signed Amendment 2 to the
convertible promissory or OID notes, extending the due dates to
September 30, 2019.
Convertible
Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On March 16, 2018,
the Company 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 common stock of the Company 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. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued interest of $41,361
as of March 31, 2019. On May 8, 2019, the Company signed
Amendment 1 to the convertible redeemable promissory notes,
extending the due dates to September 30, 2019 and increasing the
interest rate to 6%.
13
Debt
Offering
As
of March 31, 2019, the Company closed rounds of a debt offering and
received gross proceeds of $3,809,976 in exchange for issuing
Subordinated Convertible Notes (the “Convertible
Notes”) and Warrants (the “Warrants”) in a
private placement to 35 accredited investors, pursuant to a series
of substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents.
The
Convertible Notes have a principal amount of $3,809,976 and bear
annual interest of 8%. Both the principal amount and the interest
are payable on a payment-in-kind basis in shares of Common Stock of
the Company (the “Common Stock”). They are due and
payable (in Common Stock) on the earlier of (a) mandatory and
automatic conversion of the Convertible Notes into a financing that
yields gross proceeds of at least $10,000,000 (a “Qualified
Financing”) or (b) on the one-year anniversary of the
Convertible Notes (the “Maturity Date”). Investors will
be required to convert their Convertible Notes into Common Stock in
any Qualified Financing at a conversion price per share equal to
the lower of (i) $1.00 per share or (ii) a 25% discount to the
price per share paid by investors in the Qualified Financing. If
the Convertible Notes have not been paid or converted prior to the
Maturity Date, the outstanding principal amount of the Convertible
Notes will be automatically converted into shares of Common Stock
at the lesser of (a) $1.00 per share or (b) any adjusted price
resulting from the application of a “most favored
nations” provision, which requires the issuance of additional
shares of Common Stock to investors if the Company issues certain
securities at less than the then-current conversion
price.
The
Warrants were granted on a 1:0.5 basis (one-half Warrant for each
full share of Common Stock into which the Convertible Notes are
convertible). The Warrants have a five-year term and an exercise
price equal to 120% of the per share conversion price of the
Qualified Financing or other mandatory
conversion.
The
Convertible Notes are initially convertible into 3,809,976 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 1,904,988 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $368,322
and warrants to purchase 487,197 shares of the Company’s
common stock, all based on 8-10% of gross proceeds to the Company.
The placement agent has also received a $25,000 advisory fee. The
warrants issued for these services had a fair value of $988,876 at
the date of issuance. The fair value of the warrants was recorded
as debt discount (with an offset to APIC) and will be amortized
over the one-year term of the Convertible Notes. The $368,322 cash
fee was recorded as issuance costs and will be amortized over the
one-year term of the related Convertible Notes.
As
part of the Purchase Agreement, the Company entered into a
Registration Rights Agreement, which grants the investors
“demand” and “piggyback” registration
rights to register the shares of Common Stock issuable upon the
conversion of the Convertible Notes and the exercise of the
Warrants with the Securities and Exchange Commission for resale or
other disposition. In addition, the Convertible Notes are
subordinated to certain senior debt of the Company pursuant to a
Subordination Agreement executed by the
investors.
The
Convertible Notes and Warrants 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.
In
accordance to ASC 470-20-30, Debt with Conversion and Other
Options, the guidance therein applies to both convertible debt and
other similar instruments, including convertible preferred shares.
The guidance states that “the allocation of proceeds shall be
based on the relative fair values of the two instruments at time of
issuance. When warrants are issued in conjunction with a debt
instrument as consideration in purchase transactions, the amounts
attributable to each class of instrument issued shall be determined
separately, based on values at the time of issuance. The debt
discount or premium shall be determined by comparing the value
attributed to the debt instrument with the face amount
thereof.
In
conjunction with the issuance of Convertible Notes and the
Warrants, the Company recorded a debt discount of $1,570,049
associated with a beneficial conversion feature on the debt, which
is being accreted using the effective interest method over the
one-year term of the Convertible Notes. Intrinsic value of the
beneficial conversion feature was calculated at the commitment date
as the difference between the conversion price and the fair value
of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible. In accordance to ASC 470-20-30, if the intrinsic value
of the beneficial conversion feature is greater than the proceeds
allocated to the convertible instrument, the amount of the discount
assigned to the beneficial conversion feature shall be limited to
the amount of the proceeds allocated to the convertible instrument.
During the six months ended March 31, 2019, amortization of
$233,864 of the beneficial conversion feature was recognized as
interest expense in the consolidated statements of
operations.
The
Warrants were indexed to our own stock and no down round provision
was identified. The Warrants were not subject to ASC 718.
Therefore, the Company concluded that based upon the conversion
features, the Warrants should not be accounted for as derivative
liabilities. The fair value of the Warrants was $1,244,263 and was
recorded as Debt Discount (with an offset to APIC) on the date of
issuance and amortized over the one-year term of the notes. During
the six months ended March 31, 2019, amortization of the warrants
was $86,656 and is presented as interest expense in the
consolidated statements of operations.
The
Convertible Notes as of March 31, 2019 and September 30, 2018 are
summarized below:
|
March
31,
|
September
30,
|
|
2019
|
2018
|
Convertible
Redeemable Note - Clayon A. Struve
|
$1,071,000
|
$1,071,000
|
Convertible
Redeemable Note - J3E2A2Z-LP
|
1,184,066
|
1,184,066
|
2019
Convertible Notes
|
3,809,976
|
-
|
|
6,065,042
|
2,255,066
|
|
|
|
less
debt discount - beneficial conversion feature
|
(2,387,136)
|
-
|
less
debt discount - warrants
|
(1,157,609)
|
-
|
less
debt discount - warrants issued for services related to debt
offering
|
(265,231)
|
-
|
|
$2,255,066
|
$2,255,066
|
|
|
|
14
11.
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
Notes payable, capitalized leases and long-term
debt as of March 31, 2019 and September 30, 2018 consisted of the
following:
|
March
31,
|
September
30,
|
|
2019
|
2018
|
|
|
|
Capital Source
Business Finance Group
|
$-
|
$145,186
|
Total
debt
|
-
|
145,186
|
Less current
portion of long term debt
|
-
|
(145,186)
|
Long term
debt
|
$-
|
$-
|
Capital
Source Business Finance Group
On March 12, 2019,
Capital Source cancelled the Loan and Security Agreement and
Capital Source Credit Facility with TransTech. TransTech repaid the
remaining $15,165 due on the Secured Credit Facility. On March 27,
2019, the Company received notice that the UCC Financing Statement
filed by Capital Source to secure a parent Company guarantee was
terminated and cancelled by the State of Nevada.
12. EQUITY
Authorized
Capital Stock
The
Company 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 preferred stock, par value $0.001
per share.
As of March 31, 2019, the Company had 18,192,949
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 March 31, 2019, there were options outstanding for the purchase
of 2,282,668 common shares, warrants for the purchase of 17,572,583
common shares, and 4,894,071 shares of the Company’s
common stock issuable upon the conversion of Series A, Series C and
Series D Convertible Preferred Stock. In addition,
the Company currently
has 13,262,779 common shares (9,020,264 common shares at the
current price of $0.25 per share and 3,808,975 common shares at the
current price of $1.00 per share) and are issuable upon conversion
of convertible debentures of $6,065,042. All of which could potentially dilute future
earnings per share.
Voting
Preferred Stock
The
Company is authorized to issue up to 5,000,000 shares of preferred
stock with a par value of $0.001.
Series A Preferred Stock
On January 29,
2019, a holder of Series A Preferred Stock converted 20,000 shares
into 80,000 shares of common stock. There are no Series A Preferred
Stock outstanding as of March 31, 2019.
Series
C and D Preferred Stock and Warrants
On August 5, 2016,
the Company 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. On August 14,
2017, the price of the Series C
Stock were adjusted to $0.25 per share pursuant to the documents governing such
instruments.
As of March 31, 2019, the Company has 3,108,356
of Series D Preferred Stock outstanding with Clayton A.
Struve, an accredited investor, outstanding. On August 14, 2017, the price of the
Series D Stock were adjusted to
$0.25 per share pursuant to the
documents governing such instruments.
15
Series
F Preferred Stock
On
August 1, 2018, the Company 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 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.
Securities Subject to Price Adjustments
In the
future, if the Company sells its common stock at a
price below $0.25 per share, the exercise price of 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 $6,065-042
(9,020,264 common shares at the current price of $0.25 per share
and 3,808,975 common shares at the current price of
$1.00 per share). In addition, the
Company currently has outstanding warrants to purchase
12,664,385 shares of common stock would adjust below $0.25 per
share pursuant to the documents governing such
instruments). Finally, the
Company currently has outstanding warrants to purchase 2,392,185
shares of common stock would adjust below $1.00 per share pursuant
to the documents governing such
instruments.
Common Stock
All
of the offerings and sales described below were deemed to be exempt
under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The
following equity issuances occurred during the six months ended
March 31, 2019:
During
the six months ended March 31, 2019, the Company issued 336,427
shares of common stock and cancelled warrants to purchase 26,573
shares of common stock at $0.25 per share to two consultants and
two investors related to the cashless exercise of
warrants.
During
the six months ended March 31, 2019, the Company issued 145,000
shares of common stock for services provided by two consultants.
The shares were valued at $246,900 or $1.703 per
share.
On
January 2, 2019, the Company issued 100,000 shares of common stock
for services provided to Ronald P. Erickson. The shares were valued
at $102,000 or $1.02 per share.
On January 29,
2019, a holder of Series A Preferred Stock converted 20,000 shares
into 80,000 shares of common stock.
16
Warrants to Purchase Common Stock
The
following warrants were issued during the six months ended March
31, 2019:
The
Company issued 336,427 shares of common stock and cancelled
warrants to purchase 26,573 shares of common stock at $0.25 per
share to two consultants and two investors related to the cashless
exercise of warrants.
The
Company issued warrants to purchase 70,000 shares of common stock
at $1.61 to$2.72 per share to three consultants. The warrants were
valued at $30,325 or 0.79 to $1.11 per share. The warrants expire
during the first quarter of 2024.
Debt Offering Warrants
The Warrants issued
for the private placements discussed above were granted on a 1:0.5
basis (one-half Warrant for each full share of Common Stock into
which the Convertible Notes are convertible). The Warrants have a
five-year term and an exercise price equal to 120% of the per share
conversion price of the Qualified Financing or other mandatory
conversion.
The Warrants are
initially exercisable for 1,904,988 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
In connection with
the private placement, the placement agent for the Convertible
Notes and the Warrants received warrants to purchase 487,197 shares
of the Company’s common stock, all based on 8% of gross
proceeds to the Company.
17
A summary of the
warrants outstanding as of March 31,
2019 were as follows:
|
March
31, 2019
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
15,473,398
|
$0.326
|
Issued
|
2,462,185
|
1.222
|
Exercised
|
(336,427)
|
(0.250)
|
Forfeited
|
-
|
-
|
Expired
|
(26,573)
|
(0.250)
|
Outstanding
at end of period
|
17,572,583
|
$0.453
|
Exerciseable
at end of period
|
17,572,583
|
|
A summary of the
status of the warrants outstanding as of March 31, 2019 is presented
below:
|
March
31, 2019
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number
of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life
( In Years)
|
Price
|
Exerciseable
|
Price
|
13,507,286
|
3.50
|
$0.250
|
13,507,286
|
$0.250
|
714,286
|
2.33
|
0.700
|
714,286
|
0.700
|
882,159
|
2.62
|
1.000
|
882,159
|
1.000
|
2,442,185
|
4.93
|
1.20-1.50
|
2,442,185
|
1.20-1.50
|
20,000
|
4.92
|
2.34-4.08
|
20,000
|
2.34-4.08
|
6,667
|
-
|
30.000
|
6,667
|
30.000
|
17,572,583
|
3.78
|
$0.453
|
17,572,583
|
$0.453
|
The significant
weighted average assumptions relating to the valuation of the
Company’s warrants for the six months ended March 31, 2019 were as
follows:
Assumptions
Dividend
yield
|
0%
|
Expected
life
|
5
years
|
Expected
volatility
|
180%-182
|
Risk
free interest rate
|
2.06%-2.52%
|
There
were vested and in the money warrants of 16,613,757 as
of March 31, 2019 with an aggregate intrinsic value of
$14,664,327.
13.
STOCK OPTIONS
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.
Determining Fair Value under ASC
718
The
Company records compensation expense associated with stock options
and other equity-based compensation using the Black-Scholes-Merton
option valuation model for estimating fair value of stock options
granted under our plan. The Company amortizes the fair value of
stock options on a ratable basis over the requisite service
periods, which are generally the vesting periods. The expected life
of awards granted represents the period of time that they are
expected to be outstanding. The Company estimates the
volatility of our common stock based on the historical volatility
of its own common stock over the most recent period corresponding
with the estimated expected life of the award. The Company bases
the risk-free interest rate used in the Black Scholes-Merton option
valuation model on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term equal
to the expected life of the award. The Company has not paid any
cash dividends on our common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the
Company uses an expected dividend yield of zero in the
Black-Scholes-Merton option valuation model and adjusts share-based
compensation for changes to the estimate of expected equity award
forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate is recognized in the period the
forfeiture estimate is changed.
18
Stock Option Activity
The
Company had the following stock option transactions during the six
months ended March 31, 2019:
On October 31,
2018, the Board awarded stock option grants to two directors to
acquire 50,000 shares each of the Company’s common stock. The
grants were valued at $3.03 per share and expire on October 31,
2013. The grants vested immediately.
On October 31,
2018, the Board awarded Phillip A. Bosua a stock option grant to
acquire 100,000 shares of the Company’s Common stock for each
$1,000,000 raised by the Company in revenue generated in a planned
Kickstarter campaign. In addition, Mr. Bosua was granted a stock
option grant to acquire 1,000,000 shares of the Company’s
common which vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration. The grants were valued at $3.03 per share and
expire on October 31, 2023.
On October 31,
2018, the Board awarded Ronald P Erickson a stock option grant to
acquire 1,000,000 shares of the Company’s common which vests
upon the Company’s successful listing of its Common Stock on
Nasdaq or the New York Stock Exchange (including the NYSE American
Market). The grant was valued at $3.03 per share and expires on
October 31, 2023.
On March 26, 2019,
the Board awarded an employee a stock option grant to acquire
10,000 shares of the Company’s Common stock for each
$1,000,000 raised by the Company in revenue generated in a planned
Kickstarter campaign. In addition, the employee was granted a stock
option grant to acquire 130,000 shares of the Company’s
common which vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration. The grants were valued at $1.50 per share and
expire on March 26, 2024.
On March 26, 2019,
the Board awarded an employee a stock option grant to acquire
10,000 shares of the Company’s Common stock for each
$1,000,000 raised by the Company in revenue generated in a planned
Kickstarter campaign. In addition, the employee was granted a stock
option grant to acquire 130,000 shares of the Company’s
common which vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration. The grants were valued at $1.50 per share and
expire on March 26, 2024.
There
are currently 2,282,668 options to purchase common stock at an
average exercise price of $1.757 per share outstanding as of March
31, 2019 under the 2011 Stock Incentive Plan. The Company recorded
$263,145 and $7,334 of compensation expense, net of related tax
effects, relative to stock options for the six months ended March
31, 2019 and 2018 and in accordance with ASC 708. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.010) and ($0.000) per share, respectively. As of
March 31, 2019, there is approximately $1,606,089, net of
forfeitures, of total unrecognized costs related to employee
granted stock options that are not vested. These costs are expected
to be recognized over a period of approximately 4.69
years.
Stock
option activity for the three months ended March 31, 2019 was as
follows:
|
|
Weighted
Average
|
|
|
Options
|
Exercise
Price
|
$
|
Outstanding as of
September 30, 2018
|
2,182,668
|
$1.698
|
$3,706,519
|
Granted
|
100,000
|
3.030
|
303,000
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
March 31, 2019
|
2,282,668
|
$1.757
|
$4,009,519
|
19
The
following table summarizes information about stock options
outstanding and exercisable as of March 31, 2019:
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
Average
|
Average
|
|
Average
|
Range
of
|
Number
|
Remaining
Life
|
Exercise
Price
|
Number
|
Exercise
Price
|
Exercise
Prices
|
Outstanding
|
In
Years
|
Exerciseable
|
Exerciseable
|
Exerciseable
|
0.25
|
530,000
|
4.61
|
$0.250
|
99,375
|
$0.25
|
1.28
|
1,150,000
|
4.71
|
1.28
|
143,750
|
1.28
|
3.03
|
100,000
|
4.71
|
3.03
|
100,000
|
3.03
|
4.08-4.20
|
500,000
|
4.73
|
4.08-4.20
|
31,250
|
4.08-4.20
|
13.500
|
1,334
|
0.38
|
13.50
|
1,334
|
13.50
|
15.000
|
1,334
|
-
|
15.00
|
-
|
15.00
|
|
2,282,668
|
4.69
|
$1.757
|
375,709
|
$1.755
|
There
were stock option grants of 530,000 shares as of March 31, 2019
with an aggregate intrinsic value of $535,300.
14.
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Related Party Transactions with Ronald P. Erickson
See
Notes 10 and 13 for related party transactions with Ronald P.
Erickson.
Mr.
Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $478,861
as of March 31, 2019.
Related Party Transaction with Phillip A. Bosua
See
Note 13 for related party transactions with Phillip A.
Bosua.
Stock
Option Grants to Directors
See
Note 13 for related party transactions with Directors.
15.
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
The Company may
from time to time become a party to various legal proceedings
arising in the ordinary course of our business. The Company is
currently not a party to any pending legal proceeding that is not
ordinary routine litigation incidental to our
business.
Properties
and Operating Leases
The
Company is obligated under the following non-cancelable operating
leases for its various facilities and certain
equipment.
Years Ended March
31,
|
Total
|
2020
|
$187,652
|
2021
|
196,526
|
2022
|
5,816
|
2023
|
-
|
2024
|
-
|
Beyond
|
-
|
Total
|
$389,994
|
20
Corporate Offices
On
April 13, 2017, the Company leased its 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, the Company leased its lab facilities and executive
offices located at 304 Alaskan Way South, Suite 102, Seattle,
Washington, USA, 98101. The Company leases 2,800 square feet and
the net monthly payment is $4,000. The lease expired on April 30,
2019.
On February 1,
2019, the Company leased its lab facilities and executive offices
located at 915 E Pine Street, Suite 212, Seattle, WA 98122. The
Company leases 2,642 square feet and the net monthly payment is
$8,256. The monthly payment increases approximately 3% on July 1,
2019 and annually thereafter. The lease expires on June 30, 2021
and can be extended.
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. TransTech terminated this lease effective May 31,
2019.
16. SUBSEQUENT
EVENTS
The
Company evaluates subsequent events, for the purpose of adjustment
or disclosure, up through the date the financial statements are
available. Subsequent to March 31, 2019, there were the following
material transactions that require disclosure:
Convertible Promissory Notes with Clayton A. Struve
As of March 31, 2019, the Company owes Clayton A.
Struve $1,071,000 under convertible promissory or OID notes. The
Company recorded accrued interest of $58,411 as of March 31,
2019. On May 8, 2019, the Company signed Amendment 2 to the
convertible promissory or OID notes, extending the due dates to
September 30, 2019.
Convertible
Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On March 16, 2018,
the Company 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 common stock of the Company 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. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $41,361 as of March 31, 2019. On May 8, 2019,
the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking
statements in this report reflect the good-faith judgment of our
management and the statements are based on facts and factors as we
currently know 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 as well as those discussed
elsewhere in this report (including in Part II, Item 1A (Risk
Factors)). Readers are urged not to place undue reliance on these
forward-looking statements because they 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.
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 into 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. We expect it to wind down completely prior
to the end of our current fiscal year.
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.
22
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 our newly developed 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 and a half, we have developed
extensions and new inventions derived in part from our ChromaID
technology which we refer to as Bio-RFID technology. We are rapidly
advancing the development of this technology. We have
announced over the past several months that we have successfully
been able to non-invasively ascertain blood glucose levels in
humans. 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 also 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 (FDA) approval of our non-invasive continuous blood
glucose monitoring device during calendar year 2019. To guide us in
that undertaking we have announced the hiring of a Chief Medical
Officer and formed a Medical and Regulatory Advisory Board to guide
us through the FDA process. We are unable, however, 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.
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 more than 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, a spin-off entity of Intellectual Ventures, an
intellectual property fund.
Our Patents and Intellectual Property
We
believe that our 12 patents, more than 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.
23
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.
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.
24
Product Strategy
We
are currently undertaking internal development work on potential
products for the consumer marketplace. This development work was
previously 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. We have announced the
development of our UBAND Calorie Counter and our UBAND CGM. We have
also recently announced the engagement of a manufacturing partner
we will work with to bring these products to market. We will make
further announcements regarding these products as development and
manufacturing work on them progresses.
As
time and resources permit, we also will engage with partners
through licensing our technology in various fields of use, entering
into joint venture agreements to develop specific
applications of our technology, and in certain specific instances
develop our own products for the marketplace.
Currently
we are focusing our current efforts on productizing our Bio-RFID
technology as we move it out of the research laboratory and
into 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
$391,014, $570,514 and $79,405 for the six months ended March 31,
2019 and years 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.
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.
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.
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.
25
EMPLOYEES
As
of March 31, 2019, we had twelve 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-Q.
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 II, Item
1A.
RESULTS OF
OPERATIONS
The
following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in thousands)
|
Three Months Ended March 31,
|
|||
|
2019
|
2018
|
$ Variance
|
% Variance
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Revenue
|
$594
|
$1,092
|
$(498)
|
-45.6%
|
Cost
of sales
|
455
|
866
|
(411)
|
47.5%
|
Gross
profit
|
139
|
226
|
(87)
|
-38.5%
|
Research
and development expenses
|
184
|
153
|
31
|
-20.3%
|
Selling,
general and administrative expenses
|
1,004
|
578
|
426
|
-73.7%
|
Operating
loss
|
(1,049)
|
(505)
|
(544)
|
55.5%
|
Other
(expense) income:
|
|
|
|
|
Interest
expense
|
(400)
|
(793)
|
393
|
49.6%
|
Other
income (expense)
|
7
|
(1)
|
8
|
800.0%
|
Total
other income (expense)
|
(393)
|
(794)
|
401
|
50.5%
|
(Loss)
before income taxes
|
(1,442)
|
(1,299)
|
(143)
|
-11.0%
|
Income
taxes - current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$(1,442)
|
$(1,299)
|
$(143)
|
-11.0%
|
|
|
|
|
|
T