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.
On
November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On
November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The patent expires February 7,
2033. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
On
March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires July 31,
2027.
On
May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On
April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires March 12,
2033. This patent describes an enhancement to the foundational
ChromaID technology.
24
On
April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy.” The patent expires
July 2027. This patent pertains to the use of ChromaID technology
for the identification and analysis of biological tissue. It has
many potential applications in medical, industrial and consumer
markets.
On
May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled
“Systems for Fluid Analysis Using Electromagnetic Energy that
is reflected a Number of Times through a Fluid Contained within a
Reflective Chamber.” This patent expires approximately in
approximately March 2034. This patent pertains to a method for the
use of the Company’s technology analyzing
fluids.
On
April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled
“Device for Evaluation of Fluids Using Electromagnetic
Energy.” The patent expires in approximately April 2033. This
patent pertains to the use of ChromaID technology for evaluating
and analyzing fluids such as those following through an IV drip in
a hospital or water, for example.
We
continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
Product Strategy
We
are currently undertaking internal development work on potential
products for the consumer marketplace. This development work was
previously being performed through our Consulting Agreement with
Blaze Clinical, and Phillip A. Bosua, who served as our Chief
Product Officer. In his current role as Chief Executive Officer,
Mr. Bosua continues to lead these efforts. We have announced the
development of our UBAND continuous glucose monitor and our desire
to obtain US Food and Drug Administration approval for the
marketing of this product to the diabetic and pre-diabetic
population. We have also recently announced the engagement of a
manufacturing partner we will work with to bring this product to
market. We will make further announcements regarding this product
as development and manufacturing work progresses.
As
time and resources permit, we also will engage with partners
through licensing our technology in various fields of use, entering
into joint venture agreements to develop specific applications of
our technology, and in certain specific instances develop our own
products for the marketplace.
Currently
we are focusing our efforts on productizing our Bio-RFID technology
as we move it out of our research laboratory and into the
marketplace.
Research and Development
Our
current research and development efforts are primarily focused
improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for the technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications. Our current internal team along with outside
consultants have considerable experience working with the
application of our technologies and their application. We engage
third party experts as required to supplement our internal team. We
believe that continued development of new and enhanced technologies
is essential to our future success. We incurred expenses of
$391,014, $570,514 and $79,405 for the nine months ended June 30,
2019 and years ended September 30, 2018 and 2017, respectively, on
development activities, On July 6, 2017, we entered into a
Consulting Agreement with Phillip A. Bosua, our Chief Product
Officer to lead our development efforts. He has continued in that
role with expanded responsibilities upon his appointment as Chief
Executive Officer on April 19, 2018.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, we entered into an Agreement and Plan of Merger
with 500 Union Corporation, a Delaware corporation and a wholly
owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, we have
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
Under
the terms of the Merger Agreement, each share of RAAI common stock
issued and outstanding immediately before the Merger (1,000 shares)
were cancelled and we issued 2,000,000 shares of our common stock.
As a result, we issued 2,000,000 shares of its common stock to
Phillip A. Bosua, formerly the sole stockholder of RAAI. The
consideration for the Merger was determined through arms-length
bargaining by the Company and RAAI. The Merger was structured to
qualify as a tax-free reorganization for U.S. federal income tax
purposes. As a result of the Merger, the Company received certain
intellectual property, related to RAAI.
25
Merger with Know Labs, Inc.
On
May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated on
April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
Corporate Name Change and Symbol Change
On May 24, 2018,
the Financial Industry Regulatory Authority (“FINRA”)
announced the effectiveness of a change in our name from Know Labs
Incorporated to Know Labs, Inc. and a change in our ticker symbol
from VSUL to the new trading symbol KNWN which became effective on
the opening of trading as of May 25, 2018. In addition, in
connection with the name change and symbol change, we were assigned
the CUSIP number of 499238103.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange
under the symbol “KNWN.” On May 1, 2018, we filed a
corporate action with FINRA to effectively change the
Company’s OTC trading symbol and change our name to
“Know Labs, Inc.” Our name change from Know Labs,
Incorporated to Know Labs, Inc. and symbol change from VSUL to KNWN
was announced by FINRA declared effective on the opening of
trading as of May 25, 2018.
EMPLOYEES
As
of June 30, 2019 we had seven full-time employees and employed
various consultants or consulting groups as needed. Our senior
management is located in the Seattle, Washington office and
laboratory. TransTech employs two fulltime and two part time
employees in Oregon.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We
file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.knowlabs.co that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-Q.
PRIMARY RISKS AND UNCERTAINTIES
We
are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part II, Item
1A.
RESULTS OF
OPERATIONS
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 our 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..
Moreover, we have written down any goodwill associated with its
historic acquisition. We continues to closely monitor this
subsidiary and expect to wind it down completely prior to the end
of our current fiscal year.
26
The
following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in thousands)
|
Three Months
Ended June 30,
|
|||
|
2019
|
2018
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$ 381
|
$ 1,107
|
$ (726)
|
-65.6%
|
Cost of
sales
|
276
|
910
|
(634)
|
69.7%
|
Gross
profit
|
105
|
197
|
(92)
|
-46.7%
|
Research and
development expenses
|
442
|
126
|
316
|
-250.8%
|
Selling, general
and administrative expenses
|
688
|
803
|
(115)
|
14.3%
|
Operating
loss
|
(1,025)
|
(732)
|
(293)
|
-189.8%
|
Other (expense)
income:
|
|
|
|
|
Interest
expense
|
(1,462)
|
(9)
|
(1,453)
|
-16144.4%
|
Other
income
|
8
|
-
|
8
|
100.0%
|
Gain on debt
settlements
|
325
|
235
|
90
|
38.3%
|
Total other
income
|
(1,129)
|
226
|
(1,355)
|
-599.6%
|
(Loss) before
income taxes
|
(2,154)
|
(506)
|
(1,648)
|
-325.7%
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$ (2,154)
|
$ (506)
|
$ (1,648)
|
-325.7%
|
THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2018
Sales
Net
revenue for the three months ended June 30, 2019 decreased $726,000
to $381,000 as compared to $1,107,000 for the three months ended
June 30, 2018. The decrease was due to lower sales by TransTech. We
have focused TransTech on maximizing profits at the lower sales
level.
Cost of Sales
Cost
of sales for the three months ended June 30, 2019 decreased
$634,000 to $276,000 as compared to $910,000 for the three months
ended June 30, 2018. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Gross
profit was $105,000 for the three months ended June 30, 2019 as
compared to $197,000 for the three months ended June 30, 2018.
Gross profit was 23.4% for the three months ended June 30, 2019 as
compared to 20.1% for the three months ended June 30, 2018. We have
focused TransTech on maximizing profits at the current sales
level.
Research and Development Expenses
Research and development expenses for the three
months ended June 30, 2019 increased $316,000 to $442,000 as
compared to $126,000 for the three months ended June 30, 2018. The
increase was due to expenditures related to the development of
our Bio-RFID™ technology.
27
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the three months ended June 30, 2019 decreased
$115,000 to $688,000 as compared to $803,000
for the three months ended June 30, 2018.
The decrease
primarily was due to; (i) decreased stock based compensation of
$196,000; offset by (ii) increased corporate development expense of
$49,000; (iii) increased salaries of $19,000; (iv) increased travel
of $22,000; and increased other expenses of $9,000. As
part of the selling, general and administrative expenses for the
three months ended June 30, 2019, we recorded $69,000 of investor
relation expenses and business development expenses.
Other (Expense)
Income
Other
expense for the three months ended June 30, 2019 was
$1,129,000 as compared to other income of $226,000 for
the three months ended June 30, 2018. The other expense for the
three months ended June 30, 2019 included (i) interest expense of
$1,462,000; offset by (ii) other income of $8,000; and
(iii) gain on debt settlements of $325,000. The gain on debt
settlements related to the settlement of old accounts
payable.
The
other expense for the three months ended June 30, 2018 included (i)
interest expense of $9,000; offset by gain on debt settlements of
$235,000. The gain on debt settlements related to the settlement of
old accounts payable.
Net Loss
Net loss for the three months ended June 30, 2019
was $2,154,000 as compared to a net loss of $506,000
for the three months ended June 30, 2018. The net loss for the three months ended June 30,
2019, included non-cash
expenses of $904,000. The non-cash items
include (i) gain on debt settlements of $325,000; offset by (ii)
depreciation and amortization of $24,000; (iii) stock based
compensation of $95,000; (iv) amortization of
debt discount of $1,018,000; and (v) other of
$92,000. TransTech’s net loss from operations
was $45,000 for the three months ended June 30, 2019 as compared to
a net income from operations of $21,000 for the three months ended
June 30, 2018.
The net loss for the three months ended June 30,
2018, included non-cash
expenses of $406,000. The non-cash items include (i) depreciation
and amortization of $14,000; (ii) issuance of common stock for
conversion of liabilities of $248,000; (iii) issuance of capital
stock for services and expenses of $278,000; (iv) provision for
loss on accounts receivable o $21,000; and (v) issuance of warrants
for debt conversion of $121,000; and (vi) offset by non-cash gain
on accounts payable of $234,000. TransTech’s net income from
operations was $21,000 for the three months ended June 30, 2018 as
compared to a net loss from operations of ($135,000) for the three
months ended June 30, 2017.
We expect losses to continue as we commercialize
our ChromaID™ and Bio-RFID™technology.
(dollars in thousands)
|
Nine Months
Ended June 30,
|
|||
|
2019
|
2018
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$ 1,577
|
$ 3,432
|
$ (1,855)
|
-54.1%
|
Cost of
sales
|
1,203
|
2,760
|
(1,557)
|
56.4%
|
Gross
profit
|
374
|
672
|
(298)
|
-44.3%
|
Research and
development expenses
|
833
|
367
|
466
|
-127.0%
|
Selling, general
and administrative expenses
|
2,381
|
1,796
|
585
|
-32.6%
|
Operating
loss
|
(2,840)
|
(1,491)
|
(1,349)
|
-115.2%
|
Other (expense)
income:
|
|
|
|
|
Interest
expense
|
(1,872)
|
(1,096)
|
(776)
|
-70.8%
|
Other
income
|
21
|
234
|
(213)
|
-91.0%
|
Gain on debt
settlements
|
325
|
19
|
306
|
1610.5%
|
Total other income
(expense)
|
(1,526)
|
(843)
|
(683)
|
-81.0%
|
(Loss) before
income taxes
|
(4,366)
|
(2,334)
|
(2,032)
|
-87.1%
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$ (4,366)
|
$ (2,334)
|
$ (2,032)
|
-87.1%
|
28
NINE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE NINE MONTHS ENDED
JUNE 30, 2018
Sales
Net
revenue for the nine months ended June 30, 2019 decreased
$1,855,000 to $1,577,000 as compared to $3,432,000 for the nine
months ended June 30, 2018. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Cost of Sales
Cost
of sales for the nine months ended June 30, 2019 decreased
$1,557,000 to $1,203,000 as compared to $2,760,000 for the nine
months ended June 30, 2018. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Gross
profit was $374,000 for the nine months ended June 30, 2019 as
compared to $672,000 for the nine months ended June 30, 2018. Gross
profit was 23.7% for the nine months ended June 30, 2019 as
compared to 19.6% for the nine months ended June 30, 2018. We have
focused TransTech on maximizing profits at the current sales
level.
Research and Development Expenses
Research and development expenses for the nine
months ended June 30, 2019 increased $466,000 to $833,000 as
compared to $367,000 for the nine months ended June 30, 2018. The
increase was due to expenditures related to the development of
our Bio-RFID™ technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the nine months ended June 30, 2019 increased $585,000
to $2,381,000 as compared to $1,796,000 for the nine
months ended June 30, 2018.
The
increase primarily was due to (i) increased corporate development
expense of $31,000; (ii) increased stock based
compensation of $359,000; (iii) increased rent of
$60,000; (iv) increased travel of $55,000; (v) increased legal of
$47,000; (vi) increased audit expenses of $23,000; and (vii)
increased other expenses of $10,000. As part of the
selling, general and administrative expenses for the nine months
ended June 30, 2019, we recorded $31,000 of investor
relation expenses and business development expenses.
Other (Expense)
Other
expense for the nine months ended June 30, 2019 was
$1,526,000 as compared to $843,000 for
the nine months ended June 30, 2018. The other expense for the nine
months ended June 30, 2019 included (i) interest expense of
$1,872,000; offset by (ii) other income of $22,000;
and (iii) gain on debt settlements of $325,000. The gain on debt
settlements related to the settlement of old accounts
payable.
The
other expense for the nine months ended June 30, 2018 included (i)
interest expense of $1,096,000; offset by (ii) other income of
$19,000 and (iii) gain on debt settlements of $234,000. The
interest expense related a senior convertible exchangeable
debenture issued on December 12, 2017 and February 28, 2018 in
conjunction with a Securities Purchase Agreement dated August 14,
2017. The gain on debt settlements related to the settlement of old
accounts payable.
Net Loss
Net loss for the nine months ended June 30, 2019
was $4,366,000 as compared to a net loss of $2,334,000
for the nine months ended June 30, 2018. The net loss for the nine
months ended June 30, 2019 non-cash expenses of $2,407,000. The
non-cash items include (i) depreciation and amortization of
$157,000; (ii) stock based compensation of $359,000;
(iii) issuance of capital stock for services and expenses of
$349,000; (iv) amortization of debt discount of $1,736,000;
(v) other of $131,000; and offset
by (vi) non-cash gain on cash
settlement of $325,000. TransTech’s net loss from operations was
$81,000 for the nine months ended June 30, 2019 as compared to a
net income from operations of $64,000 for the nine months ended
June 30, 2018.
29
The net loss for the nine months ended June 30,
2018, included non-cash
expenses of $1,677,000. The non-cash items include (i) depreciation
and amortization of $44,000; (ii) stock based compensation of
$7,000; (iii) conversion of interest and amortization of debt
discount of $539,000; (iv) conversion of accrued liabilities of
$492,000; (v) issuance of common stock for conversion of
liabilities of $248,000; (vi) issuance of capital stock for
services and expenses of $349,000; and (vii) issuance of warrants
for debt conversion of $232,000; and (viii) offset by non-cash gain
on accounts payable of $234,000. TransTech’s net income from
operations was $64,000 for the nine months ended June 30, 2018 as
compared to a net loss from operations of ($237,000) for the nine
months ended June 30, 2017.
We expect losses to continue as we commercialize
our ChromaID™ and Bio-RFID™technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the
ability of a company to generate funds to support its current and
future operations, satisfy its obligations, and otherwise operate
on an ongoing basis. Significant factors in the management of
liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital
expenditures.
We had cash of approximately $2,689,000 and net
working capital of approximately $1,114,000 (net of
convertible notes payable and notes payable) as of June 30,
2019. We have experienced net losses since inception and
we expect losses to continue as we commercialize our
ChromaID™ technology. As of June 30, 2019, we had an
accumulated deficit of $39,157,000 and net losses in
the amount of $4,366,000, $3,258,000 and $3,901,000
for the nine months ended June 30, 2019 and years ended September
30, 2018 and 2017, respectively. We believe that our
cash on hand will be sufficient to fund our operations through
December 31, 2019.
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 opinion of our
independent registered public accounting firm on our audited
financial statements as of and for the year ended September 30,
2018 contains an explanatory paragraph regarding substantial doubt
about our ability to continue as a going concern. Our ability to
continue as a going concern is dependent upon raising capital from
financing transactions.
We need additional financing to implement our
business plan and to service our ongoing operations and pay our
current debts. There can be no assurance that we will be able to
secure any needed funding, or that if such funding is available,
the terms or conditions would be acceptable to us. If we are unable
to obtain additional financing when it is needed, we will need to
restructure our operations, and divest all or a portion of our
business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
We
have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale common stock, issuance of
common stock in conjunction with an equity line of credit, loans by
our Chairman and the exercise of warrants.
30
We
expect exercises of warrants. There were vested warrants of
16,573,772 as of June 30, 2019 with an aggregate intrinsic value of
$15,949,833.
Operating Activities
Net cash used in operating activities for the nine
months ended June 30, 2019 was $1,899,000. This amount
was primarily related to (i) a net loss of $4,366,000;
offset by (ii) working capital changes of $60,000;
and (iii) non-cash expenses of
$2,407,000. The non-cash items include
(iv) depreciation and amortization of $157,000;
(v) stock based compensation of $359,000;
(vi) issuance of capital stock for services and
expenses of $349,000; (vii) amortization of debt discout of
$1,736,000; (viii) other of $131,000;
and offset by (ix) non-cash gain
on cash settlement of
$325,000.
Investing Activities
Net
cash used in investing activities for the nine months ended June
30, 2019 was $79,000. This amount was primarily related to the
investment in equipment for research and development.
Financing Activities
Net
cash provided by financing activities for the nine months ended
June 30, 2019 was $3,734,000. This amount was
primarily related to proceeds from convertible notes
payable of $4,243,000 as discussed above, offset by
repayments of line of credit of $102,000 and payments for
issuance cost from convertible notes payable of
$407,000.
Our
contractual cash obligations as of June 30, 2019 are summarized in
the table below:
|
|
Less
Than
|
|
|
Greater
Than
|
Contractual Cash Obligations (1)
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
Operating
leases
|
$ 302,238
|
$ 132,941
|
$ 169,297
|
$ -
|
$ -
|
Convertible notes
payable (restated)
|
6,497,556
|
6,497,556
|
-
|
-
|
-
|
|
$ 6,799,794
|
$ 6,630,497
|
$ 169,297
|
$ -
|
$ -
|
(1)
Convertible notes
payable includes $4,242,490 that converts into common stock at the
maturity date during early 2020. We expect to incur capital
expenditures related to the development of the “Bio-RFID™” and
“ChromaID™” technologies. None of the
expenditures are contractual obligations as of June 30,
2019.
Off-Balance
Sheet Arrangements
We do not have any
off-balance sheet arrangements (as that term is defined in Item 303
of Regulation S-K) that are reasonably likely to have a current or
future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or
capital resources.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This
item is not applicable.
ITEM 4. CONTROLS AND
PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We conducted an
evaluation, under the supervision and with the participation of our
management, of the effectiveness of the design and operation of our
disclosure controls and procedures. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended
(“Exchange Act”), means controls and other procedures
of a company that are designed to ensure that information required
to be disclosed by the company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and
procedures also include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of
June 30, 2019 that our
disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses in our
internal controls over financial reporting discussed immediately
below.
31
Identified Material Weakness
A material weakness
in our internal control over financial reporting is a control
deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the
financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do not employ a full time
Chief Financial Officer. Our Chairman serves as interim Chief
Financial Officer. We utilize a consultant to assist with our
financial reporting.
Audit Committee: While we have an audit committee, we lack a
financial expert. During 2019, the Board expects to appoint an
additional independent Director to serve as Audit Committee
Chairman who is an “audit committee financial
expert” as defined by the Securities and Exchange Commission
(“SEC”) and as adopted under the Sarbanes-Oxley Act of
2002.
(b) Management's Report on Internal Control Over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
Management assessed the effectiveness of the
Company’s internal control over financial reporting as of
June 30, 2019. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the
2013 Internal Control-Integrated
Framework. Based on
its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as of
June 30, 2019.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate. A control system, no matter
how well designed and operated can provide only reasonable, but not
absolute, assurance that the control system’s objectives will
be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
c) Changes in Internal Control over Financial
Reporting
During the three
months ended June 30, 2019,
there were no changes in our internal controls over financial
reporting during this fiscal quarter that materially affected, or
is reasonably likely to have a materially affect, on our internal
control over financial reporting.
32
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
We may from time to
time become a party to various legal proceedings arising in the
ordinary course of our business. We are currently not a party to
any pending legal proceeding that is not ordinary routine
litigation incidental to our business.
ITEM 1A. RISK
FACTORS
There are certain inherent risks which will have
an effect on the Company’s development in the future
and the most significant risks and uncertainties known and
identified by our management are described
below.
RISK FACTORS
There are certain inherent risks which will have
an effect on the Company’s development in the future
and the most significant risks and uncertainties known and
identified by our management are described below.
Risks Relating to the Company Generally
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently
operating at a loss. We believe that our cash on hand will be
sufficient to fund our operations through December 31, 2019.
We need additional financing to
implement our business plan and to service our ongoing operations,
pay our current debts (described below) and maintain ownership of
our intellectual property. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations and/or divest all or a
portion of our business. We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected. There
can there can be no assurance that we will be able to sell that
number of shares, if any.
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash
flows from operations, the audit report of our independent
registered public accountants on our consolidated financial
statements for the year ended September 30, 2018 contains an
explanatory paragraph stating that there is substantial doubt about
our ability to continue as a going concern. Factors
identified in the report include our historical net losses,
negative working capital, and the need for additional financing to
implement our business plan and service our debt repayments. If we
are not able to attain profitability in the near future our
financial condition could deteriorate further, which would have a
material adverse impact on our business and prospects and result in
a significant or complete loss of your investment. Further, we may
be unable to pay our debt obligations as they become due, which
include obligations to secured creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of June 30, 2019, we owe approximately $2,749,951 and if we do
not satisfy these obligations, the lenders may have the right to
demand payment in full or exercise other remedies.
Mr.
Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $494,886
as of March 31, 2019.
Including Mr.
Erickson, we owe $2,255,066 under various convertible
promissory notes as of June 30, 2019.
This excludes
$4,242,490 of 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 that closed on May 28, 2019. The Convertible Notes
converts into common stock at the maturity date during early
2020.
33
We
require additional financing, to service and/or repay these debt
obligations. If we raise additional capital through borrowing or
other debt financing, we may incur substantial interest expense. If
and when we raise more equity capital in the future, it will result
in substantial dilution to our current stockholders.
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As
of June 30, 2019, we had an accumulated deficit of
$39,157,000 and net losses in the amount of
$4,366,000, $3,258,000 and $3,901,000 for the nine
months ended June 30, 2019 and years ended September 30, 2018 and
2017, respectively. There can be no assurance that we will achieve
or maintain profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID and Bio-RFID business has produced minimal revenues, and
may not produce significant revenues in the near term, or at all,
which would harm our ability to continue our operations or obtain
additional financing and require us to reduce or discontinue our
operations. You must consider our business and prospects in light
of the risks and difficulties we will encounter as business with an
early-stage technology in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could significantly harm our business,
operating results and financial condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If
we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID technology and
related products to achieve or sustain profitability.
We
are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID technology, grant additional
licenses and obtain royalties or develop other revenue streams will
have a material adverse effect on our business, financial condition
and results of operations.
To date, we have generated minimal revenue from
sales of our products. We believe that our commercialization
success is dependent upon our ability to significantly increase the
number of customers that are using our products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our success depends
upon our ability to develop products that are accurate and provide
solutions for our customers. Achieving the desired results for our
customers requires solving engineering issues in concert with them.
Any failure of our ChromaID and Bio-RFID technology or related
products to meet customer expectations could result in customers
choosing to retain their existing methods or to adopt systems other
than ours.
We have not
historically had sufficient internal resources which can work on
engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
34
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our
success depends on our ability to develop and market products that
are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, potential customers are required
to devote significant time and effort to testing and validating our
products. In addition, during the implementation phase, customers
may be required to devote significant time and effort to training
their personnel on appropriate practices to ensure accurate results
from our technology and products. Any failure of our technology or
related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt systems other than ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30, 2018, our
management identified material weaknesses in our internal control
over financial reporting. If these weaknesses continue, investors
could lose confidence in the accuracy and completeness of our
financial reports and other disclosures.
In addition, our management has concluded that our
disclosure controls and procedures were not effective due to the
lack of an audit committee “financial expert.”
These
material weaknesses, if not remediated, create an increased risk of
misstatement of the Company’s financial results, which, if
material, may require future restatement thereof. A failure to
implement improved internal controls, or difficulties encountered
in their implementation or execution, could cause future delays in
our reporting obligations and could have a negative effect on us
and the trading price of our common
stock.
If components used in our finished products become unavailable, or
third-party manufacturers otherwise experience delays, we may incur
delays in shipment to our customers, which would damage our
business.
We
depend on a third-party manufacturer and third party suppliers for
substantially all of our components and products. We purchase these
products and components from third-party suppliers that serve the
advanced lighting systems market and we believe that alternative
sources of supply are readily available for most products and
components. However, consolidation could result in one or more
current suppliers being acquired by a competitor, rendering us
unable to continue purchasing necessary amounts of key components
at competitive prices. In addition, for certain of our customized
components, arrangements for additional or replacement suppliers
will take time and result in delays. We purchase products and
components pursuant to purchase orders placed from time to time in
the ordinary course of business. This means we are vulnerable to
unanticipated price increases and product shortages. Any
interruption or delay in the supply of components and products, or
our inability to obtain components and products from alternate
sources at acceptable prices in a timely manner, could harm our
business, financial condition and results of
operations.
While we believe alternative manufacturers for these products are
available, we have selected these particular manufacturers based on
their ability to consistently produce these products per our
specifications ensuring the best quality product at the most
cost-effective price. We depend on our third-party manufacturers to
satisfy performance and quality specifications and to dedicate
sufficient production capacity within scheduled delivery times.
Accordingly, the loss of all or one of these manufacturers or
delays in obtaining shipments could have a material adverse effect
on our operations until such time as an alternative manufacturer
could be found.
Revenues of our wholly-owned subsidiary, TransTech, are
declining
We have not been
able to successfully address this revenue decline of this
subsidiary during the three months ending June 30, 2019 which is
expected to result in the winding down of operations. The
loss of the TransTech subsidiary revenue will impact the
Company’s top line revenues and its operating results and may
result in expenses associated with the winding down. We cannot
predict with certainty how the winding down will affect our overall
operations.
35
We are dependent on key personnel.
Our success depends to a significant degree upon
the continued contributions of key management and other personnel,
some of whom could be difficult to replace, including Ronald P.
Erickson, our Chairman and Phil Bosua, our Chief Executive Officer.
We do not maintain key person life insurance covering any of our
officers. Our success will depend on the performance of our
officers, our ability to retain and motivate our officers, our
ability to integrate new officers into our operations, and the
ability of all personnel to work together effectively as a team.
Our failure to retain and recruit officers and other key personnel
could have a material adverse effect on our business, financial
condition and results of operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We
have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and
trade secret laws, confidentiality procedures and licensing
arrangements to protect our intellectual property rights.
Obtaining
and maintaining a strong patent position is important to our
business. Patent law relating to the scope of claims in the
technology fields in which we operate is complex and uncertain, so
we cannot be assured that we will be able to obtain or maintain
patent rights, or that the patent rights we may obtain will be
valuable, provide an effective barrier to competitors or otherwise
provide competitive advantages. Others have filed, and in the
future are likely to file, patent applications that are similar or
identical to ours or those of our licensors. To determine the
priority of inventions, or demonstrate that we did not derive our
invention from another, we may have to participate in interference
or derivation proceedings in the USPTO or in court that could
result in substantial costs in legal fees and could substantially
affect the scope of our patent protection. We cannot be assured our
patent applications will prevail over those filed by others. Also,
our intellectual property rights may be subject to other challenges
by third parties. Patents we obtain could be challenged in
litigation or in administrative proceedings such
as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There
can be no assurance that:
●
any
of our existing patents will continue to be held valid, if
challenged;
●
patents
will be issued for any of our pending applications;
●
any
claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
●
our patents will be issued in the primary
countries where our products are sold in order to protect our
rights and potential commercial
advantage; or
●
any
of our products or technologies will not infringe on the patents of
other companies.
If
we are enjoined from selling our products, or if we are required to
develop new technologies or pay significant monetary damages or are
required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining
and maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could suffer.
36
Legal
actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In
recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. We
may receive notices that claim we have infringed upon the
intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
If we are unable to secure a sales and marketing partner or
establish satisfactory sales and marketing capabilities at the Know
Labs parent Company level we may not be able to successfully
commercialize our technology.
If
we are not successful entering into appropriate collaboration
arrangements, or recruiting sales and marketing personnel or in
building a sales and marketing infrastructure, we will have
difficulty successfully commercializing our technology, which would
adversely affect our business, operating results and financial
condition.
We
may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize technology without
strategic partners or licensees include:
●
our inability to
recruit and retain adequate numbers of effective sales and
marketing personnel;
●
the lack of
complementary products to be offered by sales personnel, which may
put us at a competitive disadvantage relative to companies with
more extensive product lines; and
●
unforeseen costs
and expenses associated with creating an independent sales and
marketing organization.
Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Our technology may
have a number of potential applications in fields of use which will
require prior governmental regulatory approval before the
technology can be introduced to the marketplace. For example, we
are exploring the use of our technology for certain medical
diagnostic applications, with an initial focus on the continuous
monitoring of blood glucose.
There is no
assurance that we will be successful in developing continuous
glucose monitoring (CGM) medical applications for our
technology.
If we were to be
successful in developing continuous glucose monitoring medical
applications of our technology, prior approval by the FDA and other
governmental regulatory bodies will be required before the
technology could be introduced into the
marketplace.
There is no
assurance that such regulatory approval would be obtained for a
continuous glucose monitoring medical diagnostic or other
applications requiring such approval.
37
The FDA can refuse
to grant, delay, and limit or deny approval of an application for
approval of our UBAND CGM for many reasons.
We may not obtain
the necessary regulatory approvals or clearances to market these
continuous glucose monitoring systems in the United States or
outside of the United States.
Any delay in, or
failure to receive or maintain, approval or clearance for our
products could prevent us from generating revenue from these
products or achieving profitability.
Cybersecurity risks and cyber incidents could result in the
compromise of confidential data or critical data systems and give
rise to potential harm to customers, remediation and other
expenses, expose us to liability under HIPAA, consumer protection
laws, or other common law theories, subject us to litigation and
federal and state governmental inquiries, damage our reputation,
and otherwise be disruptive to our business and
operations.
Cyber incidents can
result from deliberate attacks or unintentional events. We collect
and store on our networks sensitive information, including
intellectual property, proprietary business information and
personally identifiable information of our customers. The secure
maintenance of this information and technology is critical to our
business operations. We have implemented multiple layers of
security measures to protect the confidentiality, integrity and
availability of this data and the systems and devices that store
and transmit such data. We utilize current security technologies,
and our defenses are monitored and routinely tested internally and
by external parties. Despite these efforts, threats from malicious
persons and groups, new vulnerabilities and advanced new attacks
against information systems create risk of cybersecurity incidents.
These incidents can include, but are not limited to, gaining
unauthorized access to digital systems for purposes of
misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may not immediately produce signs of
intrusion, we may be unable to anticipate these incidents or
techniques, timely discover them, or implement adequate
preventative measures.
These threats can
come from a variety of sources, ranging in sophistication from an
individual hacker to malfeasance by employees, consultants or other
service providers to state-sponsored attacks. Cyber threats may be
generic, or they may be custom-crafted against our information
systems. Over the past several years, cyber-attacks have become
more prevalent and much harder to detect and defend against. Our
network and storage applications may be vulnerable to cyber-attack,
malicious intrusion, malfeasance, loss of data privacy or other
significant disruption and may be subject to unauthorized access by
hackers, employees, consultants or other service providers. In
addition, hardware, software or applications we develop or procure
from third parties may contain defects in design or manufacture or
other problems that could unexpectedly compromise information
security. Unauthorized parties may also attempt to gain access to
our systems or facilities through fraud, trickery or other forms of
deceiving our employees, contractors and temporary
staff.
There can be no
assurance that we will not be subject to cybersecurity incidents
that bypass our security measures, impact the integrity,
availability or privacy of personal health information or other
data subject to privacy laws or disrupt our information systems,
devices or business, including our ability to deliver services to
our customers. As a result, cybersecurity, physical security and
the continued development and enhancement of our controls,
processes and practices designed to protect our enterprise,
information systems and data from attack, damage or unauthorized
access remain a priority for us. As cyber threats continue to
evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures
or to investigate and remediate any cybersecurity
vulnerabilities.
We may engage in acquisitions, mergers, strategic alliances, joint
ventures and divestures that could result in final results that are
different than expected.
In the normal course of business, we engage in
discussions relating to possible acquisitions, equity investments,
mergers, strategic alliances, joint ventures and divestitures. Such
transactions are accompanied by a number of risks, including the
use of significant amounts of cash, potentially dilutive issuances
of equity securities, incurrence of debt on potentially unfavorable
terms as well as impairment expenses related to goodwill and
amortization expenses related to other intangible assets, the
possibility that we may pay too much cash or issue too many of our
shares as the purchase price for an acquisition relative to the
economic benefits that we ultimately derive from such acquisition,
and various potential difficulties involved in integrating acquired
businesses into our operations.
From
time to time, we have also engaged in discussions with candidates
regarding the potential acquisitions of our product lines,
technologies and businesses. If a divestiture such as this does
occur, we cannot be certain that our business, operating results
and financial condition will not be materially and adversely
affected. A successful divestiture depends on various factors,
including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
38
If
we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our growth strategy depends in part on our ability to execute
successful strategic acquisitions. We have made strategic
acquisitions in the past and may do so in the future, and if the
acquired companies do not perform as expected, this could adversely
affect our operating results, financial condition and existing
business.
We
may continue to expand our business through strategic acquisitions.
The success of any acquisition will depend on, among other
things:
●
the availability of
suitable candidates;
●
higher than
anticipated acquisition costs and expenses;
●
competition from
other companies for the purchase of available
candidates;
●
our ability to
value those candidates accurately and negotiate favorable terms for
those acquisitions;
●
the availability of
funds to finance acquisitions and obtaining any consents necessary
under our credit facility;
●
the ability to
establish new informational, operational and financial systems to
meet the needs of our business;
●
the ability to
achieve anticipated synergies, including with respect to
complementary products or services; and
●
the availability of
management resources to oversee the integration and operation of
the acquired businesses.
We
may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We
must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
Our
management has concluded that our disclosure controls and
procedures were not effective due to the lack of an audit committee
“financial expert.” We expect to appoint an additional
independent director to serve as Audit Committee Chairman. This
director will be an “audit committee financial expert”
as defined by the SEC. However, we cannot assure you that we will
be able to fully comply with these laws, rules, and regulations
that address corporate governance, internal control reporting, and
similar matters in the future. Failure to comply with these laws,
rules and regulations could materially adversely affect our
reputation, financial condition, and the value of our
securities.
The
exercise prices of certain securities are 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.
39
Risks
Relating to Our Stock
The price of our common stock is volatile, which may cause
investment losses for our stockholders.
The
market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
●
Announcements by us regarding liquidity,
significant acquisitions, equity investments and
divestitures, strategic
relationships, addition or loss of significant customers and
contracts, capital expenditure commitments and litigation;
●
Issuance
of convertible or equity securities and related warrants for
general or merger and acquisition purposes;
●
Issuance or repayment of debt, accounts payable or
convertible debt for general or merger and acquisition
purposes;
●
Sale
of a significant number of shares of our common stock by
stockholders;
●
General
market and economic conditions;
●
Quarterly
variations in our operating results;
●
Investor
and public relation activities;
●
Announcements
of technological innovations;
●
New
product introductions by us or our competitors;
●
Competitive
activities; and
●
Additions
or departures of key personnel.
These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or
securities regulations laws promulgated by various states and
foreign jurisdictions, commonly referred to as “blue
sky” laws. Absent compliance with such individual state laws,
our common stock may not be traded in such jurisdictions. Because
the securities held by many of our stockholders have not been
registered for resale under the blue sky laws of any state, the
holders of such shares and persons who desire to purchase them
should be aware that there may be significant state blue sky law
restrictions upon the ability of investors to sell the securities
and of purchasers to purchase the securities. These restrictions
may prohibit the secondary trading of our common stock. Investors
should consider the secondary market for our securities to be a
limited one.
Four individual investors could have significant influence over
matters submitted to stockholders for approval.
As
of June 30, 2019, four individuals in the aggregate, assuming the
exercise of all warrants to purchase common stock, hold shares
representing approximately 80% of our common stock on a
fully-converted basis and could be considered a control group for
purposes of SEC rules. However, the agreement with one of these
individuals limits his ownership to 4.99% individually. Beneficial
ownership includes shares over which an individual or entity has
investment or voting power and includes shares that could be issued
upon the exercise of options and warrants within 60 days after the
date of determination. If these persons were to choose to act
together, they would be able to significantly influence all matters
submitted to our stockholders for approval, as well as our
officers, directors, management and affairs. For example, these
persons, if they choose to act together, could significantly
influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may
desire.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales or issuances of a large number of shares of
common stock in the public market or the perception that sales may
occur could cause the market price of our common stock to decline.
As of 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 4,424,490 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.
40
Significant
shares of common stock are held by our principal stockholders,
other company insiders and other large stockholders. As
“affiliates” of Know Labs, as defined under Securities
and Exchange Commission Rule 144 under the Securities Act of 1933,
our principal stockholders, other of our insiders and other large
stockholders may only sell their shares of common stock in the
public market pursuant to an effective registration statement or in
compliance with Rule 144.
These
options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common
stockholders and may affect the market price of the common
stock.
Future issuance of additional shares of
common stock and/or preferred stock could dilute existing
stockholders. We have and may
issue preferred stock that could have rights that are preferential
to the rights of common stock that could discourage potentially
beneficially transactions to our common
stockholders.
Pursuant to our certificate of incorporation, we currently have
authorized 100,000,000 shares of common stock and 5,000,000 shares
of preferred stock. To the extent that common shares are available
for issuance, subject to compliance with applicable stock exchange
listing rules, our board of directors has the ability to issue
additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient.
The issuance of any additional securities could, among other
things, result in substantial dilution of the percentage ownership
of our stockholders at the time of issuance, result in substantial
dilution of our earnings per share and adversely affect the
prevailing market price for our common stock.
An
issuance of additional shares of preferred stock could result in a
class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of
Directors’ authority to issue preferred stock could
discourage potential takeover attempts or could delay or prevent a
change in control through merger, tender offer, proxy contest or
otherwise by making these attempts more difficult or costly to
achieve. The issuance of preferred stock could impair
the voting, dividend and liquidation rights of common stockholders
without their approval.
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we raise
additional capital by issuing equity securities, our existing
stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. We may also issue
equity securities that provide for rights, preferences and
privileges senior to those of our common stock. If we raise
additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms
of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise
additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or
candidate products, or to grant licenses on terms that are not
favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We
have never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business, and we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our
certificate of incorporation, as amended, our bylaws and Nevada law
contain provisions that could discourage, delay or prevent a third
party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock; our Series A Preferred Stock contains
provisions that restrict our ability to take certain actions
without the consent of at least 66% of the Series A Preferred Stock
then outstanding.
Our
Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
41
In
addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
●
authorizing,
creating, designating, establishing or issuing an increased number
of shares of Series A Preferred Stock or any other class or series
of capital stock ranking senior to or on a parity with the Series A
Preferred Stock;
●
adopting
a plan for the liquidation, dissolution or winding up the affairs
of our company or any recapitalization plan (whether by merger,
consolidation or otherwise);
●
amending,
altering or repealing, whether by merger, consolidation or
otherwise, our articles of incorporation or bylaws in a manner that
would adversely affect any right, preference, privilege or voting
power of the Series A Preferred Stock; and
●
declaring
or paying any dividend (with certain exceptions) or directly or
indirectly purchase, redeem, repurchase or otherwise acquire any
shares of our capital stock, stock options or convertible
securities (with certain exceptions).
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
During
the three months ended June 30, 2019, we had the following
unregistered sales of equity securities:
We
issued 132,222 shares of common stock and cancelled warrants to
purchase 27,778 shares of common stock at $0.25 per share to a
consultant and an investor related to the cashless exercise of
warrants.
42
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
There have been no
events which are required to be reported under this
item.
ITEM 4. MINE SAFETY
DISCLOSURES
N/A.
ITEM 5. OTHER
INFORMATION
This
item is not applicable.
ITEM 6.
EXHIBITS
The
exhibits required to be filed herewith by Item 601 of
Regulation S-K, as described in the following index of exhibits,
are attached hereto unless otherwise indicated as being
incorporated by reference, as follows:
(a) Exhibits
Exhibit
No.
|
|
Description
|
|
Restatement of the
Articles of Incorporation dated September 13, 2013 (incorporated by
reference to the Company’s Current Report on Form 8-K/A2,
filed September 17, 2013)
|
|
|
Amended and
Restated Bylaws (incorporated by reference to the Company’s
Form 8-K, filed August 17, 2012)
|
|
|
Certificate of
Amendment to the Restatement of the Articles of Incorporation dated
June 11, 2015 (incorporated by reference to the Company’s
Current Report on Form 8-K, filed June 17, 2015)
|
|
|
Amended and
Restated Certificate of Designations, Preferences and Rights of the
Company’s Series A Convertible Preferred Stock dated July 21,
2015 (incorporated by reference to the Company’s Current
Report on Form 8-K, filed July 29, 2015)
|
|
|
Correction to
Amended and Restated Certificate of Designations, Preferences and
Rights of its Series A Convertible Preferred Stock dated March 8,
2016 (incorporated by reference to the Company’s Current
Report on Form 8-K, filed March 15, 2016)
|
|
|
Amendment 2 of
Series A Preferred Stock Terms dated February 19, 2016
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 15, 2016)
|
|
|
Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed August 11, 2016)
|
|
|
Form of Series C
Convertible Preferred Stock 2016 (incorporated by reference to the
Company’s Registration Statement on Form S-1, filed September
1, 2016)
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|
|
Certificate of Correction and Certificate of
Designations, Preferences and Rights of Series C Convertible
Preferred Stock (incorporated by reference to the
Company’s Amended Current Report on Form 8-K/A, filed January
9, 2017)
|
|
|
Certificate of
Designations, Preferences and Rights of Series D Convertible
Preferred Stock (incorporated by reference to the Company’s
Current Report on Form 8-K, filed on February 10,
2017)
|
|
|
Amended and
Restated Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock. (incorporated by reference to
the Company’s Current Report on Form 8-K, filed May 5,
2017)
|
|
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Second
Amended and Restated Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred Stock (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed July 19, 2018)
|
|
|
Articles of Merger (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 3, 2018)
|
|
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Second Amended and Restated Certificate of
Designations, Preferences and Rights of Series D Convertible
Preferred Stock (incorporated by reference to the
Company’s Current Report on Form 8-K, filed July 20,
2018)
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|
Certificate of
Designation of Series F Preferred Stock (incorporated by reference
to the Company’s Current Report on Form 8-K, filed August 3,
2018)
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2011 Stock
Incentive Plan (incorporated by reference to the Company’s
Definitive Proxy Statement on Schedule 14A, filed January 11,
2013)
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Form of Preferred
Stock and Warrant Purchase Agreement by and between Visualant, Incorporated and Clayton
A. Struve (incorporated by reference to the Company’s
Current Report on Form 8-K, filed May 5, 2017)
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|
Form of Amended and
Restated Registration Rights Agreement. by and between Visualant, Incorporated and Clayton
A. Struve (incorporated by reference to the Company’s
Current Report on Form 8-K, filed May 5, 2017)
|
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|
Form of Series F
Warrant to Purchase Common Stock by
and between Visualant, Incorporated and Clayton A. Struve
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed May 5, 2017)
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43
|
Securities Purchase Agreement dated August 14,
2017 by and between Visualant, Incorporated and accredited
investor (incorporated by reference to the Company’s
Current Report on Form 8-K, filed August 18, 2017)
|
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Senior Secured Convertible Redeemable Debenture
dated December 12, 2017 by and between Visualant, Incorporated and
accredited investor. (incorporated by reference to the
Company’s Current Report on Form 8-K, filed December 22,
2017)
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General Security Agreement dated December 12, 2017
by and between Visualant, Incorporated and accredited investor
(incorporated by reference to the Company’s Current
Report on Form 8-K, filed August 18, 2017)
|
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Common Stock Purchase Warrant dated December 12,
2017 issued by Visualant, Incorporated to accredited
investor. (incorporated by reference to the Company’s
Current Report on Form 8-K, filed December 22, 2017)
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Schedule A to Subordination Agreement dated
December 12, 2017 by and between an entity affiliated with Ronald
P. Erickson and accredited investor. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
December 22, 2017)
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Senior Secured
Convertible Redeemable Debenture dated February 28, 2018 by and
between Visualant, Incorporated and accredited investor.
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 7, 2018)
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Common Stock
Purchase Warrant dated February 28, 2018 issued by Visualant,
Incorporated to accredited investor. (incorporated by reference to
the Company’s Current Report on Form 8-K, filed March 7,
2018)
|
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Consulting and
Services Agreement dated July 6, 2017 amongst Visualant, Incorporated, Blaze, Inc. and Phillip
A. Bosua (incorporated by reference to the Company’s Form
10-K filed on December 29, 2017)
|
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Note and Account
Payable Conversion Agreement dated January 31, 2018 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed March 21,
2018)
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Convertible
Redeemable Promissory Note dated January 31, 2018 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed March 21,
2018)
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Convertible
Redeemable Promissory Note for Accounts Payable dated January 31,
2018 by and between Visualant, Incorporated and J3E2A2Z LP
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 21, 2018)
|
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Common Stock
Purchase Warrant dated January 31, 2018 by and between Visualant,
Incorporated and Ronald P. Erickson (incorporated by reference to
the Company’s Current Report on Form 8-K, filed March 21,
2018)
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Common Stock
Purchase Warrant dated January 31, 2018 by and between Visualant,
Incorporated and J3E2A2ZLP (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 21,
2018)
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Employment
Agreement dated April 10, 2018 by and between Visualant,
Incorporated and Phillip A. Bosua. (incorporated by reference to
the Company’s Annual Report on Form 10-K, filed December 21,
2018)
|
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Amended Employment
Agreement dated April 10, 2018 by and between Visualant,
Incorporated and Ronald P. Erickson. (incorporated by reference to
the Company’s Annual Report on Form 10-K, filed December 21,
2018)
|
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Agreement and Plan
of Merger, dated as of April 10, 2018, by and among Visualant,
Incorporated, 500 Union Corporation, and RAAI Lighting, Inc.
(incorporated by reference to the Company’s Annual Report on
Form 10-K, filed December 21, 2018)
|
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Certificate of
Merger, dated as of April 10, 2018, by 500 Union Corporation
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed April 17, 2018)
|
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|
Form of
subscription agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed June 29,
2018)
|
|
|
Form of common
stock purchase warrant (incorporated by reference to the
Company’s Current Report on Form 8-K, filed June 29,
2018)
|
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|
Amendment 1 dated November 16, 2018 to Senior
Secured Convertible Redeemable Note dated September 30, 2016 by and
between Know Labs, Inc. and Clayton A. Struve (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed November 16, 2018)
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Amendment 1 dated November 16, 2018 to Senior
Secured Convertible Redeemable Note dated August 14, 2017 by and
between Know Labs, Inc. and Clayton A. Struve (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed November 16, 2018)
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Amendment 1 dated November 16, 2018 to Senior
Secured Convertible Redeemable Note dated December 12, 2017 by and
between Know Labs, Inc. and Clayton A. Struve (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed November 16, 2018)
|
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|
Form of Securities
Purchase Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Form of
Subscription Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Form of
Subordinated Convertible Note (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Form of Common
Stock Purchase Warrant (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Form of
Subordination Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Form of
Registration Rights Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
Amendment 2 dated April 30, 2019 to Senior Secured
Convertible Redeemable Note dated September 30, 2016 by and between
Know Labs, Inc. and Clayton A. Struve. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
|
|
Amendment 2 dated April 30, 2019 to Senior Secured
Convertible Redeemable Note dated August 14, 2017 by and between
Know Labs, Inc. and Clayton A. Struve. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
|
|
Amendment 2 dated April 30, 2019 to Senior Secured
Convertible Redeemable Note dated December 12, 2017 by and between
Know Labs, Inc. and Clayton A. Struve. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
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|
Amendment 1 dated April 30, 2019 to Senior Secured
Convertible Redeemable Note dated February 28, 2018 by and between
Know Labs, Inc. and Clayton A. Struve. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
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|
Amendment 1 dated April 30, 2019 to
Convertible Redeemable Promissory Note dated January 31, 2018 by
and between Know Labs, Inc. and J3E2A2Z LP. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
|
|
Amendment 1 dated April 30, 2019 to
Convertible Redeemable Promissory Note dated January 31, 2018 by
and between Know Labs, Inc. and J3E2A2Z LP. (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 22, 2019)
|
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Code of Ethics dated November
2018 (incorporated by reference to the Company’s Current
Report on Form 8-K, filed November 27, 2018)
|
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14. Filed
herewith.
|
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Certification
of Principal Financial Officer Pursuant to Rule 13a-14. Filed
herewith.
|
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CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
Filed herewith.
|
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CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act.
Filed herewith.
|
44
|
Audit Committee
Charter dated November 2018 (incorporated by reference to the
Company’s Current Report on Form 8-K, filed November 27,
2018)
|
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|
Compensation
Committee Charter dated November 2018 (incorporated by reference to
the Company’s Current Report on Form 8-K, filed November 27,
2018)
|
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Nominations and
Corporate Governance Committee Charter dated November 2018
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed November 27, 2018)
|
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101.INS*
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XBRL Instance
Document
|
101.SCH*
|
|
XBRL Taxonomy
Extension Schema Document
|
101.CAL*
|
|
XBRL Taxonomy
Extension Calculation Linkbase Document
|
101.LAB*
|
|
XBRL Taxonomy
Extension Labels Linkbase Document
|
101.PRE*
|
|
XBRL Taxonomy
Extension Presentation Linkbase Document
|
101.DEF*
|
|
XBRL Taxonomy
Extension Definition Linkbase Document
|
*Filed
Herewith. Pursuant to Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of
1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
45
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KNOW LABS, INC.
(Registrant)
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|
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Date:
January 22, 2020
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By:
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/s/ Phillip A
Bosua
|
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|
|
Phillip
A. Bosua
|
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|
Chief
Executive Officer, and Director
|
|
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|
(Principal
Executive Officer)
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|
|
|
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Date:
January 22, 2020
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By:
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/s/ Ronald P.
Erickson
|
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Ronald
P. Erickson
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Interim
Chief Financial Officer, and Treasurer
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|
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(Principal
Financial and Accounting Officer)
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|
46