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 June 30, 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 (Do not check if a smaller reporting company)
|
☐
|
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 August 7,
2019: 18,366,178 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 nine months ended June 30, 2019, as originally
filed with SEC on August 7, 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 nine months ended June 30,
2019.
In
connection with the review of the Form 10-Q for the Company for the
three and nine months ended June 30, 2019, management determined
that previously issued unaudited consolidated financial statements
issued for the three and nine months ended June 30, 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 June 30, 2019
|
|||
|
As Originally Reported
|
As Restated
|
||
Convertible
notes payable
|
$ 2,255,065
|
$ 2,512,007
|
||
Common
stock
|
22,568
|
18,326
|
||
Additional
paid in capital
|
37,515,550
|
38,215,464
|
||
Accumulated
deficit
|
(38,090,578)
|
(39,157,031)
|
||
|
|
|
||
|
Three
Months Ended June 30,
2019
|
|||
Selling,
general and administrative expenses
|
797,939
|
689,027
|
||
Operating
loss
|
(1,134,029)
|
(1,025,117)
|
||
Interest
expense
|
(4,631)
|
(1,462,376)
|
||
Loss
before taxes and net loss
|
(805,433)
|
(2,154,266)
|
||
|
|
|
||
|
Nine Months Ended June 30, 2019 | |
||
Selling,
general and administrative expenses
|
3,165,720
|
2,381,977
|
||
Operating
loss
|
(3,624,028)
|
(2,840,285)
|
||
Interest
expense
|
(21,507)
|
(1,871,703)
|
||
Loss
before taxes and net loss
|
(3,299,254)
|
(4,365,707)
|
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 nine months ended June 30,
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
nine months ended June 30, 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 nine months ended June 30, 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 August 7, 2019,
the filing date of the Form 10-Q or modify or update the
disclosures presented therein, except to reflect the amendment
described above.
2
TABLE OF CONTENTS
|
|||
|
|
Page
Number
|
|
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
ITEM
1
|
Financial
Statements (unaudited except as noted)
|
4
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2019 and September 30, 2018
(audited)
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended
June 30, 2019 and 2018
|
5
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’
Deficit
|
6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended June 30,
2019 and 2018
|
7
|
|
|
|
|
|
|
Notes
to the Financial Statements
|
8
|
|
|
|
|
|
ITEM
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation
|
22
|
|
|
|
|
|
ITEM
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
|
|
|
|
|
ITEM
4
|
Controls
and Procedures
|
31
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
ITEM
1A.
|
Risk
Factors
|
33
|
|
|
|
|
|
ITEM
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
42
|
|
|
|
|
|
ITEM
3
|
Defaults upon
Senior Securities
|
43
|
|
|
|
|
|
ITEM
4
|
Mine Safety
Disclosures
|
43
|
|
|
|
|
|
ITEM
5
|
Other
Information
|
43
|
|
|
|
|
|
ITEM
6
|
Exhibits
|
43
|
|
|
|
|
|
|
SIGNATURES
|
46
|
3
ITEM 1. FINANCIAL STATEMENTS
KNOW LABS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
June
30,
2019
|
September
30,
2018
|
ASSETS
|
(Restated)
|
(Audited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$ 2,688,707
|
$ 934,407
|
Accounts
receivable, net of allowance of $60,000 and $60,000,
respectively
|
81,548
|
320,538
|
Prepaid
expenses
|
11,251
|
20,140
|
Inventories,
net
|
63,937
|
203,582
|
Total current
assets
|
2,845,443
|
1,478,667
|
|
|
|
EQUIPMENT,
NET
|
146,225
|
169,333
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets
|
317,779
|
447,778
|
Other
assets
|
13,767
|
7,170
|
|
|
|
TOTAL
ASSETS
|
$ 3,323,214
|
$ 2,102,948
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$ 833,586
|
$ 1,512,617
|
Accounts payable -
related parties
|
2,546
|
12,019
|
Accrued
expenses
|
174,120
|
72,140
|
Accrued expenses -
related parties
|
721,391
|
657,551
|
Deferred
revenue
|
-
|
55,959
|
Convertible notes
payable
|
2,512,007
|
2,255,066
|
Notes payable -
current portion of long term debt
|
-
|
145,186
|
Total current
liabilities
|
4,243,650
|
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
6/30/2019 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 6/30/2019 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 6/30/2019 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 6/30/2019 and 9/30/2018,
respectively
|
1,015
|
1,015
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 18,325,171 and
17,531,502 shares
|
|
|
issued and
outstanding at 6/30/2019 and 9/30/2018,
respectively
|
18,326
|
17,532
|
Additional paid in
capital
|
38,215,464
|
32,163,386
|
Accumulated
deficit
|
(39,157,031)
|
(34,791,324)
|
Total stockholders'
deficit
|
(920,436)
|
(2,607,590)
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$ 3,323,214
|
$ 2,102,948
|
The
accompanying notes are an integral part of these consolidated
financial statements.
4
STATEMENTS OF OPERATIONS
|
Three Months
Ended,
|
Nine Months
Ended,
|
||
|
June
30,
2019
|
June
30,
2018
|
June
30,
2019
|
June
30,
2018
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
REVENUE
|
$ 381,270
|
$ 1,107,216
|
$ 1,577,191
|
$ 3,432,301
|
COST OF
SALES
|
275,819
|
909,957
|
1,202,944
|
2,760,551
|
GROSS
PROFIT
|
105,451
|
197,259
|
374,247
|
671,750
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
441,541
|
125,789
|
832,555
|
366,809
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
689,027
|
803,857
|
2,381,977
|
1,796,319
|
OPERATING
LOSS
|
(1,025,117)
|
(732,387)
|
(2,840,285)
|
(1,491,378)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
Interest
expense
|
(1,462,376)
|
(8,696)
|
(1,871,703)
|
(1,095,880)
|
Other
income
|
8,227
|
436
|
21,281
|
19,192
|
Gain on debt
settlements
|
325,000
|
234,393
|
325,000
|
234,393
|
Total other
income (expense)
|
(1,129,149)
|
226,133
|
(1,525,422)
|
(842,295)
|
|
|
|
|
|
(LOSS) BEFORE
INCOME TAXES
|
(2,154,266)
|
(506,254)
|
(4,365,707)
|
(2,333,673)
|
|
|
|
|
|
Income taxes -
current provision
|
-
|
-
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$ (2,154,266)
|
$ (506,254)
|
$ (4,365,707)
|
$ (2,333,673)
|
|
|
|
|
|
Basic and diluted
loss per share
|
$ (0.12)
|
$ (0.06)
|
$ (0.24)
|
$ (0.39)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and
diluted
|
18,197,308
|
8,065,144
|
17,955,281
|
5,947,860
|
The
accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
RESTATED FOR THE 3
MONTHS ENDED JUNE 30, 2019
|
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)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
879,000
|
879
|
277,361
|
-
|
278,240
|
Issuance of common stock for
conversion of liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
605,000
|
605
|
199,045
|
-
|
199,650
|
Issuance of common stock for
cash
|
-
|
-
|
-
|
-
|
-
|
-
|
6,840,000
|
6,840
|
1,703,160
|
-
|
1,710,000
|
Issuance of warrant for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
121,710
|
-
|
121,710
|
Issuance of common stock for
acquisition of technology
|
-
|
-
|
-
|
-
|
-
|
-
|
2,000,000
|
2,000
|
518,000
|
-
|
520,000
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(506,254)
|
(506,254)
|
Balance as of June 30,
2018
|
23,334
|
23
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
15,538,726
|
15,539
|
31,438,791
|
(33,867,400)
|
(2,410,242)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1,
2018
|
20,000
|
11
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
17,531,502
|
17,532
|
32,163,386
|
(34,791,324)
|
(2,607,590)
|
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
|
32,334,605
|
(35,560,527)
|
(3,205,295)
|
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)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,570,048
|
-
|
1,570,048
|
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)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
95,906
|
-
|
95,906
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,287,912
|
-
|
1,287,912
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
140,266
|
-
|
140,266
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
83,219
|
-
|
83,219
|
Issuance of common stock for
warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
132,222
|
134
|
(134)
|
-
|
-
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,154,266)
|
(2,154,266)
|
Balance as of June 30,
2019
|
-
|
$ -
|
1,785,715
|
$ 1,790
|
1,016,004
|
$ 1,015
|
18,325,171
|
$ 18,326
|
$ 38,215,464
|
$ (39,157,031)
|
$ (920,436)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
6
KNOW LABS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Nine Months
Ended,
|
|
|
June
30,
2019
|
June
30,
2018
|
|
(Restated)
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$ (4,365,707)
|
$ (2,333,673)
|
Adjustments to
reconcile net loss to net cash (used in) operating
activities
|
|
|
Depreciation and
amortization
|
156,931
|
43,984
|
Issuance of capital
stock for services and expenses
|
348,900
|
348,881
|
Stock based
compensation- warrants
|
30,325
|
-
|
Conversion of
interest
|
-
|
64,233
|
Stock based
compensation- stock option grants
|
359,053
|
7,337
|
Amortization of
debt discount
|
1,736,357
|
475,174
|
Conversion of
accrued liabilities- related parties to notes
payable
|
-
|
491,802
|
Provision on loss
on accounts receivable
|
67,792
|
-
|
Loss on sale of
assets
|
32,777
|
-
|
Issuance of warrant
for debt conversion
|
-
|
232,255
|
Issuance of common
stock for conversion of liabilities
|
-
|
247,950
|
Non cash gain on
debt settlement
|
(325,000)
|
(234,393)
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
170,861
|
262,860
|
Prepaid
expenses
|
8,889
|
17,788
|
Inventory
|
139,645
|
55,175
|
Other
assets
|
(6,597)
|
(2,100)
|
Accounts payable -
trade and accrued expenses
|
(197,697)
|
(459,954)
|
Deferred
revenue
|
(55,946)
|
(59,692)
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(1,899,417)
|
(842,373)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Payment for
research and development equipment
|
(79,934)
|
(25,319)
|
NET CASH (USED IN)
BY INVESTING ACTIVITIES:
|
(79,934)
|
(25,319)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Repayments of line
of credit
|
(101,518)
|
(170,990)
|
Proceeds from
convertible notes payable
|
4,242,490
|
530,000
|
Payments for
issuance costs from convertible notes payable
|
(407,321)
|
-
|
Proceeds from
issuance of common/ preferred stock, net of
costs
|
-
|
1,710,000
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
3,733,651
|
2,069,010
|
|
|
|
NET INCREASE IN
CASH AND CASH EQUIVALENTS
|
1,754,300
|
1,201,318
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
934,407
|
103,181
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$ 2,688,707
|
$ 1,304,499
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$ 21,999
|
$ 8,841
|
Taxes
paid
|
$ -
|
$ -
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$ 2,857,960
|
$ -
|
Issuance of
warrants to debt holders
|
$ 1,384,530
|
$ -
|
Issuance of
warrants for services related to debt offering
|
$ 1,072,095
|
$ -
|
Cashless warrant
exercise
|
$ 117,165
|
$ -
|
The
accompanying notes are an integral part of these consolidated
financial statements.
7
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 nine months ended June
30, 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.
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 and diagnose 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. 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. Today, the sole focus of the Company is on its
Bio-RFID technology and its commercialization. The Company may
continue to develop and enhance its ChromaID technology and extend
its capacity as time and resources permit. The Company will also,
as resources permit, pursue licensing opportunities with third
parties who have ready applications for our ChromaID and Bio-RFID
technologies.
In
2010, the Company 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 the Company’s current revenues it is not central to
our current focus as a Company. Moreover, the Company written down
any goodwill associated with its historic acquisition. The Company
continues to closely monitor this subsidiary and expects to wind
down completely prior to the end of the Company’s current
fiscal year.
The Company is in the process of commercializing
its Bio-RFID technology. The Company plans its first commercial
applications to be a wearable non-invasive Continuous Glucose
Monitor. This product will require approval from the United States
Food and Drug Administration prior to introduction to the market.
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 products derived from its
ChromaID and Bio-RFID technology. The Company is currently not
profitable. Even if the Company succeeds in introducing its
technology and related products to its target markets, the Company
may not be able to generate sufficient revenue to achieve or
sustain profitability. Regulatory requirements may also inhibit the
speed with which the Company’s products can enter the
marketplace.
8
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 thirteen patents. The
Company also has several patents pending. The Company possesses all
right, title and interest to the issued patents. Nine additional
issued and pending patents are licensed exclusively to the Company
in perpetuity by the Company’s strategic partner, Allied
Inventors.
Restatement
of Form 10-Q for the Three and Nine Months Ended June 30,
2019
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 nine months ended June 30, 2019, as originally
filed with SEC on August 7, 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 months ended June 30, 2019.
In connection with
the review of the Form 10-Q for the Company for the three and nine
months ended June 30, 2019, management determined that previously
issued unaudited consolidated financial statements issued for the
three and nine months ended June 30, 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 $4,365,707, $3,257,597 and
$3,901,232 for the nine months ended June 30, 2019 and the years
ended September 30, 2018 and 2017, respectively. Net cash used in
operating activities was $1,899,417, $1,117,131 and
$1,264,324 for the nine months ended June 30, 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 June 30, 2019, the Company’s
accumulated deficit was $39,157,031. 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.
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 June 30,
2019 and September 30, 2018, respectively.
9
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 and Development
Expenses – Research and development
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 $832,555, $570,514 and $79,405 during the nine
months ended June 30, 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 June 30,
2019 and September 30, 2018 are based upon the short-term nature of
the assets and liabilities.
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.
10
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 June 30, 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 June 30,
2019, there were options outstanding for the purchase of 2,437,668
common shares (excluding unearned stock option grants), warrants
for the purchase of 17,797,090 common shares, and
4,894,071 shares of the Company’s common stock issuable
upon the conversion of 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 4,424,515 common
shares at the current price of $1.00 per share) and are
issuable upon conversion of convertible debentures of
$6,497,556. All of which could potentially dilute
future earnings per share.
As
of June 30, 2018, there were options outstanding for the purchase
of 534,736 common shares, warrants for the purchase of 15,586,424
common shares, 4,914,405 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.
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.
4. ACCOUNTS
RECEIVABLE/CUSTOMER CONCENTRATION
Accounts receivable were $81,548 and $320,538, net
of allowance, as of June 30, 2019 and September 30, 2018,
respectively. The Company had one customer in excess of 10% (15.0%)
of the Company’s consolidated revenues for the nine months
ended June 30, 2019. The Company had five customers in excess of
10% (32.8%, 29.4%, 17.4%, 13.0% and 12.6%) with accounts receivable
in excess of 10% as of June 30, 2019. The Company has a total
allowance for bad debt in the amount of $60,000 as of June 30, 2019
and September 30, 2019. The decrease in accounts
receivable related to lower sales and purchases at
TransTech.
11
5. INVENTORIES
Inventories were and $63,937 and $203,582 as of
June 30, 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 June 30, 2019 and September 30, 2018,
respectively. The decrease in inventory related to lower
sales at TransTech.
6. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was
$146,225 and $169,333 as of June 30, 2019 and September 30, 2018,
respectively. Accumulated depreciation was $501,209 and $670,666 as
of June 30, 2019 and September 30, 2018, respectively. Total
depreciation expense was $70,265 and $43,982 for the nine months
ended June 30, 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 June 30, 2019 and September 30,
2018 was comprised of the following:
|
Estimated
|
June 30,
|
September 30,
|
|
Useful Lives
|
2019
|
2018
|
Machinery
and equipment
|
2-10
years
|
$ 454,921
|
$ 332,306
|
Leasehold
improvements
|
2-3
years
|
3,612
|
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
|
|
(501,209)
|
(532,966)
|
|
$ 146,225
|
$ 169,333
|
7. INTANGIBLE
ASSETS
Intangible
assets as of June 30, 2019 and September 30, 2018 consisted of the
following:
|
Estimated
|
June
30,
|
September
30,
|
|
Useful
Lives
|
2019
|
2018
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(202,221)
|
(72,222)
|
Intangible
assets, net
|
|
$317,779
|
$447,778
|
Total
amortization expense was $129,999 and $0 for the nine months ended
June 30, 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.
12
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.
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 $833,586 and $1,517,617 as of June 30, 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 (14.1% and 10.4%) with
accounts payable in excess of 10% of its accounts payable as of
June 30, 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 June 30, 2019 and September 30, 2018.
10. CONVERTIBLE NOTES PAYABLE
Convertible
notes payable as of June 30, 2019 and September 30, 2018 consisted
of the following:
Convertible Promissory Notes with Clayton A. Struve
As of June 30, 2019, the Company owes Clayton A.
Struve $1,071,000 under convertible promissory or OID notes. The
Company recorded accrued interest of $60,281 as of June 30,
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.
13
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 $56,261
as of June 30, 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%.
Debt
Offering
On May 28, 2019,
the Company closed additional rounds of a debt offering and
received gross proceeds of $4,242,490 in exchange for issuing
Subordinated Convertible Notes (the “Convertible
Notes”) and Warrants (the “Warrants”) in a
private placement to 54 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 $4,242,490 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 4,242,490 shares of Common
Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 2,121,258 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 $407,321 and warrants to
purchase 542,102 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 $1,072,095 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 $407,321 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 $2,857,960 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 nine month
quarter ended June 30, 2019, amortization of $863,931of 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 $1,384,530 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 nine
month quarter ended June 30, 2019, amortization of the warrants was
$418,823 and is presented as interest expense in the consolidated
statements of operations.
14
The Convertible
Notes as of June 30, 2019 and September 30, 2018 are summarized
below:
|
June 30,
|
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
|
4,242,490
|
-
|
|
6,497,556
|
2,255,066
|
|
|
|
less
debt discount - beneficial conversion feature
|
(1,994,029)
|
-
|
less
debt discount - warrants
|
(965,707)
|
-
|
less
debt discount - warrants issued for services related to debt
offering
|
(1,025,813)
|
-
|
|
$ 2,512,007
|
$ 2,255,066
|
11.
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
Notes payable, capitalized leases and long-term
debt as of June 30, 2019 and September 30, 2018 consisted of the
following:
|
June
30,
|
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 June 30, 2019, the Company had 18,325,171
shares of common stock issued and outstanding, held by 115
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 June 30, 2019, there were options outstanding for the purchase
of 2,437,668 common shares (excluding unearned stock option
grants), warrants for the purchase of 17,797,090 common shares, and
4,894,071 shares of the Company’s common stock issuable
upon the conversion of 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 4,424,515 common shares at the current price of
$1.00 per share) and are issuable upon conversion of convertible
debentures of $6,497,556. 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 June 30, 2019.
15
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 June 30, 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.
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 4,242,490 common
shares at the current price of $1.00 per share). In addition, the
Company currently has outstanding warrants to purchase
13,462,286 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
2,663,359 shares of common stock would adjust below $1.20 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 nine months ended
June 30, 2019:
During
the nine months ended June 30, 2019, the Company issued 468,659
shares of common stock and cancelled warrants to purchase 73,240
shares of common stock at $0.25 per share to three consultants and
two investors related to the cashless exercise of
warrants.
During
the nine months ended June 30, 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.
Warrants to Purchase Common Stock
The
following warrants were issued during the nine months ended June
30, 2019:
The
Company issued 468,649 shares of common stock and cancelled
warrants to purchase 61,018 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 $1.989 per share. The warrants expire during
the first quarter of 2024.
The Company increased warrants by 120,000 shares
at $0.25 per shares related to the June 28, 2019 exercise of
warrants by a holder of Series A Preferred
Stock.
16
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.
Warrants are
initially exercisable for 2,121,258 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 542,102 shares of the
Company’s common stock, all based on 8-10% of gross proceeds
to the Company.
A summary of the
warrants outstanding as of June 30,
2019 were as follows:
|
June
30, 2019
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
15,473,398
|
$0.326
|
Issued
|
2,853,359
|
1.179
|
Exercised
|
(468,649)
|
(0.250)
|
Forfeited
|
-
|
-
|
Expired
|
(61,018)
|
(3.501)
|
Outstanding
at end of period
|
17,797,090
|
$0.454
|
Exerciseable
at end of period
|
17,797,090
|
|
A summary of the
status of the warrants outstanding as of June 30, 2019 is presented
below:
|
June
30, 2019
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number
of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life
( In Years)
|
Price
|
Exerciseable
|
Price
|
13,467,286
|
3.27
|
$0.250
|
13,467,286
|
$0.250
|
714,286
|
2.08
|
0.700
|
714,286
|
0.700
|
882,159
|
2.37
|
1.000
|
882,159
|
1.000
|
2,713,359
|
4.74
|
1.20-1.50
|
2,713,359
|
1.20-1.50
|
20,000
|
2.99
|
2.34-4.08
|
20,000
|
2.34-4.08
|
-
|
-
|
-
|
-
|
-
|
17,797,090
|
3.69
|
$0.454
|
17,797,090
|
$0.454
|
17
The significant
weighted average assumptions relating to the valuation of the
Company’s warrants for the nine months ended June 30, 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 16,573,772 as
of June 30, 2019 with an aggregate intrinsic value of
$15,949,833.
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. On May 22,
2019, the Board approved an amendment to its 2011 Stock Incentive
Plan increasing the number of shares of common stock reserved under
the Incentive Plan from 2,000,000 to 3,000,000 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.
Stock Option Activity
The
Company had the following stock option transactions during the nine
months ended June 30, 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.
18
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.
During April 2019,
the Board awarded stock option grants to two employees and a
consultant to acquire 155,000 shares each of the Company’s
common stock. The grants were valued at $1.56 per share and expire
during April 2024. A grant for 5,000 vested immediately and grants
totaling 150,000 vests quarterly over four years, with no vesting
during the first two quarters.
On April 15, 2019,
the Board awarded an employee a stock option grant to acquire 5,000
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 50,000 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 April 15,
2024.
The Company
recently decided that it would not undertake a Kickstarter
campaign. Options are expected to have alternative Company
milestones.
There
are currently 2,437,668 options to purchase common stock at an
average exercise price of $1.744 per share outstanding as of June
30, 2019 under the 2011 Stock Incentive Plan. The Company recorded
$359,051 and $7,334 of compensation expense, net of related tax
effects, relative to stock options for the nine months ended June
30, 2019 and 2018 and in accordance with ASC 718. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.020) and ($0.000) per share, respectively. As of
June 30, 2019, there is approximately $1,595,350, 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 4.46
years.
Stock
option activity for the nine months ended June 30, 2019 was as
follows:
|
|
Weighted
Average
|
|
|
Options
|
Exercise
Price
|
$
|
Outstanding as of
September 30, 2018
|
2,182,668
|
$1.698
|
$3,706,519
|
Granted
|
255,000
|
2.136
|
544,750
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
June 30, 2019
|
2,437,668
|
$1.744
|
$4,251,269
|
19
The
following table summarizes information about stock options
outstanding and exercisable as of June 30, 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
|
4.36
|
$0.250
|
184,375
|
$0.25
|
1.28-1.90
|
1,305,000
|
4.50
|
1.31
|
359,375
|
1.31
|
3.03
|
100,000
|
4.46
|
3.03
|
100,000
|
3.03
|
4.08-4.20
|
500,000
|
4.48
|
4.13
|
125,000
|
4.13
|
13.500
|
1,334
|
0.38
|
13.50
|
1,334
|
13.50
|
15.000
|
1,334
|
-
|
15.00
|
-
|
15.00
|
|
2,437,668
|
4.46
|
$1.744
|
770,084
|
$1.746
|
The significant
weighted average assumptions relating to the valuation of the
Company’s stock option grants for the nine months ended
June 30, 2019 were as
follows:
Assumptions
Dividend
yield
|
0%
|
Expected
life
|
3
yrs
|
Expected
volatility
|
125%
|
Risk
free interest rate
|
2.0%
|
There
were stock option grants of 530,000 shares as of June 30, 2019 with
an aggregate intrinsic value of $577,700.
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 June 30, 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.
20
Properties
and Operating Leases
The
Company is obligated under the following non-cancelable operating
leases for its various facilities and certain
equipment.
Years Ended June
30,
|
Total
|
2020
|
$132,941
|
2021
|
169,297
|
2022
|
-
|
2023
|
-
|
2024
|
-
|
Beyond
|
-
|
Total
|
$302,238
|
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
was located at 12142 NE Sky Lane, Suite 130, Aurora, OR
97002.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 June 30, 2019, there were the following
material transactions that require disclosure:
The
Company issued 41,007 shares of common stock and cancelled warrants
to purchase 8,993 shares of common stock at $0.25 per share to an
investor related to the cashless exercise of warrants.
On July 8, 2019,
the Board awarded a stock option grant to a consultant to acquire
100,000 shares each of the Company’s common stock. The grant
was valued at $1.40 per share and will expire on July 8, 2024. The
grant vests quarterly over four years, with no vesting during the
first two quarters.
On July 8, 2019,
the Board awarded a stock option grant to a consultant to acquire
15,000 shares each of the Company’s common stock. The grant
was valued at $1.40 per share and will expire on July 8, 2024. The
grant vests on January 8, 2020.
On July 8, 2019,
the Board awarded an employee a stock option grant to acquire
100,000 shares of the Company’s Common stock which vests upon
approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grant was
valued at $1.40 per share and expires on July 8, 2024.
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.
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 and diagnose 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. Today, the sole
focus of the Company is on its Bio-RFID technology and its
commercialization. The Company may continue to develop and enhance
its ChromaID technology and extend its capacity as time and
resources permit. The Company will also, as resources permit,
pursue licensing opportunities with third parties who have ready
applications for our ChromaID and Bio-RFID
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 subsidiarv and 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 along the electromagnetic spectrum to
perform analytics which allow the user to identify, authenticate
and diagnose depending upon the unique application and 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.
22
The
ChromaID technology looks beyond visible light frequencies to areas
of near infra-red and ultraviolet light and beyond that are outside
the humanly visible light spectrum. The data obtained allows us to
create a very specific and unique ChromaID signature of the
substance for a myriad of authentication, verification and
diagnostic applications.
Traditional
light-based identification technology, called spectrophotometry,
has relied upon a complex system of prisms, mirrors and visible
light. Spectrophotometers typically have a higher cost and utilize
a form factor (shape and size) more suited to a laboratory setting
and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific electromagnetic frequencies resulting in a
more accurate, portable and easy-to-use solution for a wide variety
of applications. The ChromaID technology not only has significant
cost advantages as compared to spectrophotometry, it is also
completely flexible is size, shape and configuration. The ChromaID
scan head can range in size from endoscopic to a scale that could
be the size of a large ceiling-mounted florescent light
fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. We call this the ChromaID Reference
Library. The scan head can then scan similar materials to identify,
authenticate or diagnose them by comparing the new ChromaID digital
signature scan to that of the original or reference ChromaID
signature or scan result. Over time, we believe the ChromaID
Reference Libraries can become a significant asset of the Company,
providing valuable information in numerous fields of use. The
Reference Libraries for 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 two years, 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 Continuous Glucose
Monitor. 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 blood glucose levels. This product will require US Food
and Drug Administration approval prior to its introduction to the
market.
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 and their continuous glucose monitors. Our
technology is fundamentally differentiated from these industry
leaders as our UBAND continuous glucose monitor 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 previously 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 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.
23
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 13 patents. We currently
have a number of patents pending. We possess all right, title and
interest to the issued patents. Nine issued and 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 13 patents, patent applications, 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 2034. Pending
patents, if issued, may have expiration dates that extend further
in time. The duration of our trademark registrations varies from
country to country. However, trademarks are generally valid and may
be renewed indefinitely as long as they are in use and/or their
registrations are properly maintained.
The
issued patents cover the fundamental aspects of the Know Labs
ChromaID technology and a growing number of unique applications
ranging, to date, from invisible bar codes to tissue and liquid
analysis. We have filed patents on our 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.