10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 14, 2020
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2019
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from _______ to ________
Commission File
number 000-30262
KNOW LABS, INC.
(Exact name of registrant as specified in charter)
Nevada
|
|
90-0273142
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
500
Union Street, Suite 810, Seattle, Washington
USA
|
|
98101
|
(Address of principal executive offices)
|
|
(Zip Code)
|
206-903-1351
|
(Registrant's telephone number, including area
code)
|
|
(Former name, address, and fiscal year, if changed since last
report)
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer (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 February 14, 2020: 19,209,308
shares.
TABLE OF
CONTENTS
|
Page
Number
|
|
|
PART
I
FINANCIAL INFORMATION
|
|
|
|
ITEM 1
Financial
Statements (unaudited except as noted)
|
3
|
|
|
Consolidated
Balance Sheets as of December 31, 2019 and September 30, 2019
(audited)
|
3
|
|
|
Consolidated
Statements of Operations for the three months ended December
31, 2019 and 2018
|
4
|
|
|
Consolidated
Statements of Changes in Stockholders’
Deficit
|
5
|
|
|
Consolidated
Statements of Cash Flows for the three months ended December 31,
2019 and 2018
|
6
|
|
|
Notes to the
Financial Statements
|
7
|
|
|
ITEM 2
Management's
Discussion and Analysis of Financial Condition and Results of
Operation
|
20
|
|
|
ITEM 3
Quantitative and
Qualitative Disclosures About Market Risk
|
29
|
|
|
ITEM 4
Controls and
Procedures
|
29
|
|
|
PART
II
OTHER INFORMATION
|
|
|
|
ITEM 1A.
Risk
Factors
|
31
|
|
|
ITEM 2
Unregistered Sales
of Equity Securities and Use of Proceeds
|
40
|
|
|
ITEM 3
Defaults upon
Senior Securities
|
41
|
|
|
ITEM 4
Mine
Safety Disclosures
|
41
|
|
|
ITEM 5
Other
Information
|
41
|
|
|
ITEM 6
Exhibits
|
41
|
|
|
SIGNATURES
|
44
|
2
ITEM
1. FINANCIAL STATEMENTS
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
December
31,
2019
|
September
30,
2019
|
ASSETS
|
|
(Audited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$1,502,309
|
$1,900,836
|
Accounts
receivable, net of allowance of $0 and $40,000,
respectively
|
-
|
63,049
|
Prepaid
expenses
|
5,191
|
6,435
|
Inventories,
net
|
-
|
7,103
|
Total current
assets
|
1,507,500
|
1,977,423
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
128,846
|
130,472
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets
|
231,113
|
274,446
|
Other
assets
|
13,767
|
13,766
|
Operating lease
right of use asset
|
213,426
|
243,526
|
|
|
|
TOTAL
ASSETS
|
$2,094,652
|
$2,639,633
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$793,554
|
$810,943
|
Accounts payable -
related parties
|
5,721
|
7,048
|
Accrued
expenses
|
373,466
|
460,055
|
Accrued expenses -
related parties
|
655,380
|
458,500
|
Convertible notes
payable
|
5,303,664
|
3,954,241
|
Current portion of
operating lease right of use liability
|
124,523
|
124,523
|
Total current
liabilities
|
7,256,308
|
5,815,310
|
|
|
|
NON-CURRENT PORTION
OF OPERATING LEASE RIGHT OF USE LIABILITY
|
91,971
|
121,613
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 14)
|
-
|
-
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
|
|
|
outstanding at
12/31/2019 and 9/30/2019 respectively
|
-
|
-
|
Series A
Convertible Preferred stock - $0.001 par value, 23,334 shares
authorized, 0 shares
|
|
|
issued and
outstanding at 12/31/2019 and 9/30/2019, respectively
|
-
|
-
|
Series C
Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
|
|
|
1,785,715 shares
issued and outstanding at 12/31/2019 and 9/30/2019,
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 12/31/2019 and 9/30/2019,
respectively
|
1,015
|
1,015
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 18,468,057 and
18,366,178
|
|
|
shares issued and
outstanding at 12/31/2019 and 9/30/2019, respectively
|
18,468
|
18,366
|
Additional paid in
capital
|
40,143,753
|
39,085,179
|
Accumulated
deficit
|
(45,418,653)
|
(42,403,640)
|
Total stockholders'
deficit
|
(5,253,627)
|
(3,297,290)
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$2,094,652
|
$2,639,633
|
The accompanying notes are an integral part of these consolidated
financial statements.
3
KNOW LABS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
|
Three Months
Ended,
|
|
|
December
31,
2019
|
December
31,
2018
|
|
|
|
REVENUE
|
$117,393
|
$602,209
|
COST OF
SALES
|
65,935
|
472,286
|
GROSS
PROFIT
|
51,458
|
129,923
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
491,138
|
206,990
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
920,551
|
689,446
|
OPERATING
LOSS
|
(1,360,231)
|
(766,513)
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
Interest
expense
|
(1,679,490)
|
(9,126)
|
Other
income
|
24,708
|
6,436
|
Total other
(expense), net
|
(1,654,782)
|
(2,690)
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(3,015,013)
|
(769,203)
|
|
|
|
Income taxes -
current provision
|
-
|
-
|
|
|
|
NET
LOSS
|
$(3,015,013)
|
$(769,203)
|
|
|
|
Basic and diluted
loss per share
|
$(0.16)
|
$(0.04)
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
18,409,902
|
17,571,057
|
The accompanying notes are an integral part of these consolidated
financial statements.
4
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIT
|
Series A
Convertible
|
Series C
Convertible
|
Series D
Convertible
|
|
Additional
|
|
Total
|
||||
|
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Stockholders'
|
||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
Balance as of
October 1, 2018
|
20,000
|
$11
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
17,531,522
|
$17,531
|
$32,163,386
|
$(34,791,324)
|
$(2,607,591)
|
Stock compensation
expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
171,499
|
171,499
|
Conversion of
Series A Convertible Preferred Stock
|
-
|
-
|
|
|
|
|
279,929
|
280
|
(280)
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(769,203)
|
(769,203)
|
Balance as of
December 31, 2018
|
20,000
|
11
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
17,811,451
|
17,811
|
32,163,106
|
(35,389,028)
|
(3,205,295)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
October 1, 2019
|
-
|
-
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
18,366,178
|
18,366
|
39,085,179
|
(42,403,640)
|
(3,297,290)
|
Stock compensation
expense - employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
399,897
|
-
|
399,897
|
Stock option
exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
73,191
|
73
|
(73)
|
-
|
-
|
Beneficial
conversion feature (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
330,082
|
-
|
330,082
|
Issuance of
warrants to debt holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
168,270
|
|
168,270
|
Issuance of
warrants for services related to debt offering (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
160,427
|
|
160,427
|
Issuance of common
stock for exercise of warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
28,688
|
29
|
(29)
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,015,013)
|
(3,015,013)
|
Balance as of
December 31, 2019
|
$-
|
-
|
$1,785,715
|
1,790
|
$1,016,004
|
$1,015
|
$18,468,057
|
$18,468
|
$40,143,753
|
$(45,418,653)
|
(5,253,627)
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW LABS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Three Months
Ended,
|
|
|
December
31,
2019
|
December
31,
2018
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(3,015,013)
|
$(769,203)
|
Adjustments to
reconcile net loss to net cash (used in) operating
activities
|
|
|
Depreciation and
amortization
|
60,316
|
61,824
|
Stock based
compensation- stock option grants
|
399,897
|
171,499
|
Amortization of
debt discount
|
1,567,047
|
-
|
Provision on loss
on accounts receivable
|
40,000
|
1,371
|
Right of use,
net
|
458
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
23,049
|
113,083
|
Prepaid
expenses
|
1,243
|
5,449
|
Inventory
|
7,103
|
44,359
|
Accounts payable -
trade and accrued expenses
|
91,575
|
(94,593)
|
Deferred
revenue
|
-
|
(55,959)
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(824,325)
|
(522,170)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
research and development equipment
|
(15,357)
|
(2,848)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(15,357)
|
(2,848)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Repayments on line
of credit
|
-
|
(98,610)
|
Proceeds from
convertible notes payable
|
520,000
|
-
|
Payments for
issuance costs from notes payable
|
(78,845)
|
-
|
NET CASH PROVIDED
BY (USED IN) FINANCING ACTIVITIES
|
441,155
|
(98,610)
|
|
|
|
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
(398,527)
|
(623,628)
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
1,900,836
|
934,407
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$1,502,309
|
$310,779
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$9,126
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$330,082
|
$-
|
Issuance of
warrants to debt holders
|
$168,270
|
$-
|
Issuance of
warrants for services related to debt offering
|
$160,427
|
$-
|
Cashless warant
exercise (fair value)
|
$7,172
|
$-
|
Cashless stock
options exercise (fair value)
|
$18,298
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
6
KNOW LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Know Labs, Inc, formerly Visualant,
Incorporated (“the Company”, “us,”
“we,” or “our”) in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the fiscal periods presented have been
included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended September 30, 2019,
filed with the Securities and Exchange Commission
(“SEC”) on December 27, 2019. The results of operations
for the three months ended December 31, 2019 are not necessarily
indicative of the results expected for the full fiscal year, or for
any other fiscal period.
1.
|
ORGANIZATION
|
Know Labs, Inc. (the “Company”) was incorporated under
the laws of the State of Nevada in 1998. The Company has
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
The Company is focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these
our “Bio-RFID™” and “ChromaID™”
technologies.
Historically, the Company focused on the development of our
proprietary ChromaID technology. Using light from low-cost LEDs
(light emitting diodes) the ChromaID technology maps the color of
substances, fluids and materials. With the Company’s
proprietary processes, the Company can authenticate and identify
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, and identify, and authenticate 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 record, detect and identify 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 calls this new 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 the Company works to
create revenue generating products for the marketplace. Today, the
sole focus of the Company is on its Bio-RFID technology and its
commercialization.
In
2010, the Company acquired TransTech Systems, Inc. as an adjunct to
the Company’s 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 the Company’s current focus. Moreover, the
Company has written down any goodwill associated with its historic
acquisition. The Company continues to closely monitor this
subsidiary and expect it to wind down completely in the near
future.
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.
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.
7
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 $3,015,013, $7,612,316 and $3,257,597
for the three months ended December 31, 2019 and the years ended
September 30, 2019 and 2018, respectively. Net cash used in
operating activities was $824,325, $3,104,035 and $1,117,131 for
the three months ended December 31, 2019 and the years ended
September 30, 2019 and 2018, respectively. During the three months ended
December 31, 2019 and 2018, the Company incurred non-cash expenses
of $2,067,718 and $234,694.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of December 31, 2019, the
Company’s accumulated deficit was $45,418,653. 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
Chairman of the Board and Interim Chief Financial 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 consolidated
financial statements for the year ended September 30, 2019 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 August 31, 2020. The Company needs 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. At December 31, 2019, the Company had
uninsured deposits in the amount of $1,252,309.
Accounts Receivable and Revenue – The Company
recognizes 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, the Company extends thirty day terms to some customers.
Accounts receivable are reviewed periodically for
collectability.
TransTech Systems Inc. sells products directly to customers. Our
products are typically sold pursuant to purchase orders placed by
our customers, and our terms and conditions of sale do not require
customer acceptance. We account for a contract with a customer when
there is a legally enforceable contract, which could be the
customer’s purchase order, the rights of the parties are
identified, the contract has commercial terms, and collectability
of the contract consideration is probable. The majority of our
contracts have a single performance obligation to transfer products
and are short term in nature, usually less than one year. Our
revenue is measured based on the consideration specified in the
contract with each customer in exchange for transferring products
that is generally based upon a negotiated, formula, list or fixed
price. Revenue is recognized when control of the promised goods is
transferred to our customer, which is either upon shipment from our
dock, receipt at the customer’s dock, or removal from
consignment inventory at the customer’s location, in an
amount that reflects the consideration we expect to be entitled to
receive in exchange for those goods.
8
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 December 31, 2019 and September 30, 2019, there was a reserve
for sales returns of $0 and $40,000, respectively, which is minimal
based upon our historical experience.
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. The
Company records a provision for excess and obsolete inventory
whenever an impairment has been identified. There is a $0 and
$28,000 reserve for impaired inventory as of December 31,
2019 and September 30, 2019.
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 5
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 current research and development efforts are
primarily focused on improving our Bio-RFID technology, extending
its capacity and developing new and unique applications for this
technology. As part of this effort, the Company conducts 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. The Company
also is actively involved in identifying new applications. The
Company’s current internal team along with outside
consultants has considerable experience working with the
application of the Company’s technologies and their
applications. The Company engages third party experts as required
to supplement our internal team. The Company believes that
continued development of new and enhanced technologies is essential
to our future success. We incurred expenses of $491,138, $1,257,872
and $570,514 for the three months ended December 31, 2019 and the
years ended September 30, 2019 and 2018, respectively, on
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.
|
9
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 December 31, 2019 and September 30, 2019 are
based upon the short-term nature of the assets and
liabilities.
The
Company has a money market account which is considered a level 1
asset. The balance as of December 31, and September 30, 2019 was
$1,451,554 and $1,901,278, respectively.
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, the Company evaluates all of
its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. The Company then determines if embedded derivative
must bifurcated and separately accounted for. 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.
The
Company determined that none of the conversion features within its
currently outstanding convertible notes payable must be bifurcated
and thus there was no derivative liability as of December 31, 2019
and September 30,
2019.
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 and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit.
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. As of
December 31, 2019, there were options outstanding for the purchase
of 4,812,668 common shares (including unearned stock option grants
totaling 2,680,000 and excluding certain stock option grants for a
cancelled kickstarter program), warrants for the purchase of
18,044,490 common shares, and 8,108,356 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 13,782,779 common shares (9,020,264 common
shares at the current price of $0.25 per share and 4,762,515 common
shares at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of $7,017,581. All of
which could potentially dilute future earnings per
share.
As of December 31, 2018, there were options outstanding for the
purchase of 2,282,668 common shares, warrants for the purchase of
15,173,398 common shares, and 4,914,071 shares of the
Company’s common stock issuable upon the conversion of,
Series C and Series D Convertible Preferred Stock. In addition, the
Company has an unknown number of shares (9,020,264 common shares at
the current price of $0.25 per share) are issuable upon conversion
of convertible debentures of $2,255,066. All of which could
potentially dilute future earnings per share.
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
Based
on the Company’s review of accounting standard updates issued
since the filing of the 2019 Form 10-K, there have been no other
newly issued or newly applicable accounting pronouncements that
have had, or are expected to have, a significant impact on the
Company’s consolidated financial statements.
10
4. ACCOUNTS RECEIVABLE/CUSTOMER
CONCENTRATION
Accounts receivable were $0 and $63,049, net of allowance, as of
December 31, 2019 and September 30, 2019, respectively. The Company
has a total allowance for bad debt in the amount of $40,000 as of
September 30, 2019. The decrease in accounts receivable
related to the winddown of TransTech.
5. INVENTORIES
Inventories were $0 and $7,103 as of December 31, 2019 and
September 30, 2019, 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 is a $0 and $28,000 reserve for impaired
inventory as of December 31, 2019 and September 30, 2019.
The decrease in inventory related to the winddown of
TransTech.
6. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was $128,846 and
$130,472 as of December 31, 2019 and September 30, 2019,
respectively. Accumulated depreciation was $533,943 and $379,259 as
of December 31, 2019 and September 30, 2019, respectively. Total
depreciation expense was $16,983 and $18,491 for the three months
ended December 31, 2019 and 2018, respectively. All equipment is
used for selling, general and administrative purposes and
accordingly all depreciation is classified in selling, general and
administrative expenses.
Property and equipment as of December 31, 2019 and September 30,
2019 was comprised of the following:
|
Estimated
|
December 31,
|
September 30,
|
|
Useful Lives
|
2019
|
2019
|
Machinery
and equipment
|
2-10
years
|
$470,276
|
$412,238
|
Leasehold
improvements
|
2-3
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
2-3
years
|
153,071
|
58,051
|
Software
and websites
|
3-
7 years
|
35,830
|
35,830
|
Less:
accumulated depreciation
|
|
(533,943)
|
(379,259)
|
|
$128,846
|
$130,472
|
11
7. INTANGIBLE ASSETS
Intangible assets as of December 31, 2019 and September 30, 2019
consisted of the following:
|
Estimated
|
December 31,
|
September 30,
|
|
Useful Lives
|
2019
|
2019
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(288,887)
|
(245,554)
|
Intangible
assets, net
|
|
$231,113
|
$274,446
|
Total amortization expense was $43,333 and $43,332 for the three
months ended December 31, 2019 and 2018, respectively.
Merger with RAAI Lighting, Inc.
On April 10, 2018, the Company entered into an Agreement and Plan
of Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
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) was cancelled and the Company issued 2,000,000 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.
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 technology 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.
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.
12
8. ACCOUNTS PAYABLE
Accounts payable were $793,554 and $810,943 as of December 31,
2019 and September 30, 2019, 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.
9. LEASES
The
Company has entered into operating leases for office and
development facilities. These leases have terms which range from
two to three years, and include options to renew. These operating
leases are listed as separate line items on the Company's December
31, 2019 and September 30, 2019 Consolidated Balance Sheets, and
represent the Company’s right to use the underlying asset for
the lease term. The Company’s obligation to make lease
payments are also listed as separate line items on the Company's
December 31, 2019 and September 30, 2019 Consolidated Balance
Sheets. Based on the present value of the lease payments for the
remaining lease term of the Company's existing leases, the Company
recognized right-of-use assets and lease liabilities for operating
leases of approximately $250,000 on October 1, 2018. Operating
lease right-of-use assets and liabilities commencing after October
1, 2018 are recognized at commencement date based on the present
value of lease payments over the lease term. During the three
months ended December 31, 2019 and the year ended September 30,
2019, the Company had one lease expire and recognized the rent
payments as an expense in the current period. As of December 31,
2019 and September 30, 2019, total right-of-use assets and
operating lease liabilities for remaining long term lease was
approximately $213,000 and $246,000, respectively. In the three
months ended December 31, 2019 and December 31, 2018, the Company
recognized approximately $33,957 and $133,996, respectively in
total lease costs for the lease.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the three months ended December 31,
2019 was as follows:
Cash paid for ROU
operating lease liability $33,499
Weighted-average
remaining lease term 2-3 years
Weighted-average
discount rate 10%
The
minimum future lease payments as of December 31, 2019 are as
follows:
Year
|
$
|
2020
|
$133,996
|
2021
|
86,064
|
2022
|
24,520
|
2023
|
-
|
|
244,580
|
Imputed
interest
|
(30,584)
|
Total lease
liability
|
$213,996
|
13
10. CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of December 31, 2019 and September 30,
2019 consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve $1,071,000 under convertible
promissory or OID notes. The Company recorded accrued interest of
$65,932 and $62,171 as of December 31, 2019 and September 30, 2019,
respectively. On May 8, 2019, the Company signed Amendment 2
to the convertible promissory or OID notes, extending the due dates
to September 30, 2019. On November 26, 2019, the Company signed
Amendments to the convertible promissory or OID notes, extending
the due dates to March 31, 2020. Mr. Struve also invested
$1,000,000 in the May 2019 Debt Offering.
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 $ 91,871
and $73,964 as of December 31, 2019 and September 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%. On November 26,
2019, the Company signed Amendment 2 to the convertible promissory
or OID notes, extending the due dates to March 31,
2020.
Debt Offering which Closed May 28, 2019
On May
28, 2019, the Company closed additional rounds of a debt offering
and received gross proceeds of $4,242,515 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 will
be automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
The
Convertible Notes have a principal amount of $4,242,515 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”).
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 4,242,515 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 $361,401
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
$361,401 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.
14
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 year ended September 30, 2019, amortization of
$1,584,293 of the beneficial conversion feature was recognized as
interest expense in the consolidated statements of
operations.
The
Warrants were indexed to our own stock and no down round provision
was identified. The Warrants were not subject to ASC 718.
Therefore, the Company concluded that based upon the conversion
features, the Warrants should not be accounted for as derivative
liabilities. The fair value of the Warrants was $1,384,530 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 year ended September 30, 2019, amortization of the warrants was
$767,801 and is presented as interest expense in the consolidated
statements of operations.
Debt Offering during the Three Months Ended December 31,
2019
During
the three months ended December 31, 2019, the Company closed
additional rounds of a debt offering and received gross proceeds of
$520,000 in exchange for issuing Subordinated Convertible Notes
(the “Convertible Notes”) and Warrants (the
“Warrants”) in a private placement to 9 accredited
investors, pursuant to a series of substantially identical
Securities Purchase Agreements, Common Stock Warrants, and related
documents.
The
Convertible Notes are initially convertible into 520,000 shares of
Common Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 260,000 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
The
fair value of the Warrants issued to debt holders was $168,270 on
the date of issuance and will be amortized over the one-year term
of the Convertible Notes.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $78,845
and warrants to purchase 71,400 shares of the Company’s
common stock, all based on 8-10% of gross proceeds to the Company.
The warrants issued for these services had a fair value of $160,427
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
$78,845 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
The
Company recorded a debt discount of $330,082 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.
During
the three months ended December 31, 2019, amortization related to
the 2019 and 2020 debt offerings of $1,567,047 of the beneficial
conversion feature, warrants issued to debt holders and placement
agent was recognized as interest expense in the consolidated
statements of operations.
15
Convertible
notes payable as of December 31, 2019 and September 30, 2019 are
summarized below:
|
December 31,
2019
|
September 30,
2019
|
Convertible
note- Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
Convertible
note- Ronald P. Ericksin
|
1,184,066
|
1,184,066
|
2019
Debt offering
|
4,242,515
|
4,242,515
|
2020
Debt offering
|
520,000
|
-
|
|
|
|
less
debt discount - beneficial conversion feature
|
(825,095)
|
(1,273,692)
|
less
debt discount - warrants
|
(406,253)
|
(616,719)
|
less
debt discount - warrants issued for services related to debt
offering
|
(482,569)
|
(652,919)
|
|
$5,303,664
|
$3,954,251
|
11. 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
December 31, 2019, the Company had 18,468,057 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 December 31, 2019, the Company had options
outstanding for the purchase of 4,812,668 common shares (including
unearned stock option grants totaling 2,680,000 and excluding
certain stock option grants for a cancelled kickstarter program),
warrants for the purchase of 18,044,490 common shares, and
8,108,356 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 13,782,779 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 4,762,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $7,017,581. 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 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. On December 31 and September 30, 2019
there are 1,785,715 Series C Preferred shares
outstanding.
16
As of December 31, and September 30, 2019, the Company has
1,106,014 of Series D Preferred Stock outstanding with
Clayton A. Struve, an accredited investor. 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.
The
Series D Preferred Stock is convertible into shares of common stock
at a price of $0.25 per share or by multiplying the number of
Series D Preferred Stock shares by the stated value and dividing by
the conversion price then in effect, subject to certain diluted
events, and has the right to vote the number of shares of common
stock the Series D Preferred Stock would be issuable on conversion,
subject to a 4.99% blocker. The
Preferred Series D has an annual yield of 8% The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% if and when dividends are
declared.
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 sell 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
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share) and the exercise price of additional outstanding
warrants to purchase 12,838,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
The conversion price of the Convertible Notes Payable of $4,762,515
(4,762,515 common shares at the
current price of $1.00 per share) which closed during 2019 would
adjust below $1.00 per share pursuant to the documents governing
such instruments. Warrants totaling 2,994,715 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 three months
ended December 31, 2019:
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants. The stock option grant
had an exercise price of $0.25 per share. The former employee forfeited stock option grants
226,809 at an exercise price of $0.25 per share, 150,000 at an
exercise price of $1.28 per share and,130,000 at an exercise price
of $1.50 per share.
On December 27, 2019, the Company issued 28,688 shares of common
stock and cancelled warrants to purchase 5,312 shares of common
stock at $0.25 per share to an investor related to the cashless
exercise of warrants.
17
Warrants to Purchase Common Stock
The following warrant transactions occurred during the three months
ended December 31, 2019:
On December 27, 2019, the Company issued 28,688 shares of common
stock and cancelled warrants to purchase 5,312 shares of common
stock at $0.25 per share to an investor related to the cashless
exercise of warrants.
Debt Offering Warrants
The
Warrants issued for the 2019 and 2020 Debt Offering 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
issued in connection with 2020 debt offering are initially
exercisable for 260,000 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 2020 debt offering, the placement agent for the
Convertible Notes and the Warrants received warrants to 71,400
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 December 31, 2019 were as
follows:
|
December 31, 2019
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
Issued
|
331,400
|
1.200
|
Exercised
|
(28,688)
|
(0.250)
|
Forfeited
|
(5,312)
|
(0.250)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
18,044,490
|
$0.469
|
Exerciseable
at end of period
|
18,044,490
|
|
18
A
summary of the status of the warrants outstanding as of
December 31, 2019 is presented
below:
|
December 31, 2019
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
13,383,286
|
2.79
|
$0.250
|
13,383,286
|
$0.250
|
714,286
|
1.58
|
0.700
|
714,286
|
0.700
|
882,158
|
1.87
|
1.000
|
882,158
|
1.000
|
3,044,760
|
4.31
|
1.20-1.50
|
3,044,760
|
1.20-1.50
|
20,000
|
4.17
|
2.34-4.08
|
20,000
|
2.34-4.08
|
|
|
|
|
|
18,044,490
|
3.29
|
$0.469
|
18,044,490
|
$0.469
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the three months ended
September 30, 2019 were as
follows:
Assumptions
|
|
Dividend yield
|
0%
|
Expected life
|
5 years
|
Expected volatility
|
176%-177%
|
Risk free interest rate
|
1.51%-1.71%
|
There were vested and in the money warrants of 17,974,490 as of
December 31, 2019 with an aggregate intrinsic value of
$25,829,839.
12.
|
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 January
23, 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 2,200,000 to 2,500,000 to
common shares. On May 22, 2019, the Compensation Committee
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 2,500,000 to 3,000,000 to common
shares.
19
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
three months ended December 31, 2019:
On October 4, 2019, Ronald P. Erickson voluntarily cancelled a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On October 4, 2019, Philip A. Bosua voluntarily cancelled a stock
option grant for 1,000,000 shares with an exercise price of $3.03
per share. The grants was related to performance and was not
vested.
On October 4, 2019, an employee voluntarily cancelled a stock
option grant for 80,000 shares with an exercise price of $4.20 per
share. The grant was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Ronald P. Erickson for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon uplisting to the NASDAQ or NYSE exchanges.
On November 4, 2019, the Company granted a stock option grant to
Philip A. Bosua for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon FDA approval of the UBAND blood glucose
monitor.
On November 4, 2019, the Company granted stock option grants to two
directors totaling 105,000 shares with an exercise price of $1.10
per share. The stock option grants expire in five years. The stock
option grants vested immediately.
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants totaling 93,750 shares.
The stock option grant had an exercise price of $0.25 per share.
The former employee forfeited stock
option grants 226,809 at an exercise price of $0.25 per share,
150,000 at an exercise price of $1.28 per share and,130,000 at an
exercise price of $1.50 per share.
During the three months ended December 31, 2019, the Company issued
stock option grants to two employees and two consultants totaling
435,000 shares with a weighted average exercise price of $1.113 per
share. The stock option grants expire in five years. The stock
option grants have various vesting terms and expire during the
fourth quarter of 2024.
There are currently 4,812,668 options to purchase common stock at
an average exercise price of $1.156 per share outstanding as of
December 31, 2019 under the 2011 Stock Incentive Plan. The Company
recorded $399,897 and $171,499 of compensation expense, net of
related tax effects, relative to stock options for the three months
ended December 31, 2019 and 2018 and in accordance with ASC 718.
Net loss per share (basic and diluted) associated with this expense
was approximately ($0.022) and ($0.010) per share, respectively. As
of December 31, 2019, there is approximately $780,781, 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 4.45
years. Stock option grants totaling 2,680,000 shares of common
stock are performance stock option grants and are not vested until
the performance is achieved.
20
Stock option activity for the three months ended December 31, 2019
and the years ended September 30, 2019 and 2018 was as
follows:
|
|
Weighted
Average
|
|
|
Options
|
Exercise
Price
|
$
|
Outstanding as of
September 30, 2017
|
15,404
|
$14.68
|
$226,059
|
Granted
|
2,180,000
|
1.683
|
3,668,500
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(12,736)
|
14.764
|
(188,040)
|
Outstanding as of
September 30, 2018
|
2,182,668
|
1.698
|
3,706,519
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
Outstanding as of
September 30, 2019
|
4,532,668
|
2.025
|
9,180,369
|
Granted
|
2,940,000
|
1.102
|
3,239,500
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,586,809)
|
(2.644)
|
(6,839,702)
|
Outstanding as of
December 31, 2019
|
4,812,668
|
$1.156
|
$5,561,869
|
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2019:
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
Average
|
Average
|
|
Average
|
Range of
|
Number
|
Remaining Life
|
Exercise Price
|
Number
|
Exercise Price
|
Exercise Prices
|
Outstanding
|
In Years
|
Outstanding
|
Exerciseable
|
Exerciseable
|
$0.25
|
230,000
|
3.46
|
$0.250
|
86,250
|
$0.25
|
1.10-1.25
|
2,940,000
|
4.85
|
1.10
|
200,000
|
1.10
|
1.28-1.50
|
1,580,000
|
4.85
|
1.34
|
414,375
|
1.29
|
1.79-1.90
|
60,000
|
4.30
|
1.85
|
17,500
|
1.84
|
13.50-15.00
|
2,668
|
0.25
|
14.25
|
1,334
|
13.50
|
|
4,812,668
|
4.45
|
$1.156
|
719,459
|
$1.179
|
There were in the money stock option grants of 4,810,000 shares as
of September 30, 2019 with an aggregate intrinsic value of
$3,615,150.
21
13.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Notes 10, 11 12 and 14 for related party transactions with
Ronald P. Erickson.
On January 16, 2018, Mr. Erickson was issued 100,000 of restricted
common stock at the grant date market value of $0.21 per
share. On January 2, 2019, Mr. Erickson was issued
100,000 shares of restricted common stock at the grant date market
value of $1.02 per share.
On
January 25, 2018, the Company entered into amendments to two demand
promissory notes, totaling $600,000 with Mr. Erickson, our former
Chief Executive Officer and current chairman of the board and/or
entities in which Mr. Erickson has a beneficial interest. The
amendments extend the due date from December 31, 2017 to September
30, 2018 and continue to provide for interest of 3% per annum and a
third lien on company assets if not repaid by September 30, 2018 or
converted into convertible debentures or equity on terms acceptable
to the Holder. On March 16, 2018, the demand promissory notes and
accrued interest were converted into convertible notes
payable.
On
March 16, 2018, 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 $73,964 as of September 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%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020.
On July 9, 2018, the Company repaid a $199,935 Business Loan
Agreement with Umpqua Bank from funds previously provided by
an entity affiliated with Ronald P. Erickson, our Chairman of the
Board. The Company paid $27,041 and issued 800,000 shares of common stock in exchange
for the conversion of this debt. Mr. Erickson is an accredited
investor. These shares were issued in transactions that were not
registered under the Act in reliance upon applicable exemptions
from registration under Section 4(a)(2) of the Act and/or Rule 506
of SEC Regulation D under the Act.
On October 4, 2019, Ronald P. Erickson voluntarily cancellated a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Ronald P. Erickson for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon uplisting to the NASDAQ or NYSE exchanges.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $589,667
and $487,932 as of December 31, 2019 and September 30, 2019,
respectively.
Related Party Transaction with Phillip A. Bosua
On
February 7, 2018, the Company issued 50,000 shares of our common
stock to Phillip A. Bosua under the terms of a consulting agreement
dated July 6, 2017. The fair value of the shares issued was
$12,000.
On
April 10, 2018, the Company issued 2,000,000 shares of our common
stock to Phillip A. Bosua under the terms of the Merger Agreement
with RAAI common stock. The fair value of the shares issued was
$520,000.
On June
25, 2018, we issued 500,000 shares of our common stock to Phillip
A. Bosua under the terms of an Employment agreement dated April 10,
2018. The fair value of the shares issued was
$165,000.
On June
25, 2018, we closed a debt conversion
with an entity controlled by Phillip A. Bosua and issued 255,000
shares of common stock in exchange for the conversion of $63,750 in
preexisting debt owed by the Company to this
entity.
22
On July 30, 2018, Mr. Bosua was awarded a stock option grant for
1,000,000 shares of our common stock that was awarded at $1.28 per
share and was valued at the black scholes value of $0.96 per
share.
On October 4, 2019, Philip A. Bosua voluntarily cancellated a stock
option grant for 1,000,000 shares with an exercise price of $3.03
per share. The grants was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Philip A. Bosua for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon FDA approval of the UBAND blood glucose
monitor.
Other Stock Option Grants and Cancellations
During January to May 2018, the Company issued 275,000 shares of
restricted common stock to one Named Executive Officer and two
directors for services during 2018. The shares were issued in
accordance with the 2011 Stock Incentive Plan and were valued at
$0.246 per share, the market price of our common
stock.
On September 17, 2019, two directors voluntarily forfeited stock
option grants for 100,000 shares of common stock with an exercise
price of $3.03 per share.
On November 4, 2019, the Company granted stock option grants to two
directors totaling 105,000 shares with an exercise price of $1.10
per share. The stock option grants expire in five years. The stock
option grants vested immediately.
14.
|
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.
Employment Agreement with Phillip A. Bosua, Chief Executive
Officer
On April 10, 2018, the Company appointed Mr. Bosua as Chief
Executive Officer of the Company, replacing Ronald P. Erickson, who
remains Chairman of the Company. Mr. Erickson has been a director
and officer of Know Labs since April 2003. He was appointed as our
CEO and President in November 2009 and as Chairman of the Board in
February 2015. Previously, Mr. Erickson was our President and Chief
Executive Officer from September 2003 through August 2003 and was
Chairman of the Board from August 2004 until May 2011.
Phillip A. Bosua was appointed the Company’s CEO on April 10,
2018. Previously, Mr. Bosua served as the Company’s Chief
Product Officer since August 2017. The Company entered into a
Consulting Agreement with Mr. Bosua’s company, Blaze Clinical
on July 7, 2017. From September 2012 to February 2015, Mr. Bosua
was the founder and Chief Executive Officer of LIFX Inc. (where he
developed and marketed an innovative “smart” light
bulb) and from August 2015 until February 2016 was Vice President
Consumer Products at Soraa (which markets specialty LED light
bulbs). From February 2016 to July 2017, Mr. Bosua was the founder
and CEO of RAAI, Inc. (where he continued the development of his
smart lighting technology). From May 2008 to February 2013 he was
the Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, the Company entered into an Employment Agreement
with Mr. Bosua reflecting his appointment as Chief Executive
Officer. The Employment Agreement is for an initial term of 12
months (subject to earlier termination) and will be automatically
extended for additional 12-month terms unless either party notifies
the other party of its intention to terminate the Employment
Agreement with at least ninety (90) days prior to the end of
the Initial Term or renewal term. Mr.
Bosua will be paid a base salary of $225,000 per year, received
500,000 shares of common stock valued at $0.33 per share and may be
entitled to bonuses and equity awards at the discretion of the
Board or a committee of the Board. The Employment Agreement
provides for severance pay equal to 12 months of base salary if Mr.
Bosua is terminated without “cause” or voluntarily
terminates his employment for “good reason.” On
March 5, 2019, Mr. Bosua’s annual compensation was increased
to $240,000.
23
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
On
August 4, 2017, the Board of Directors approved an Employment
Agreement with Ronald P. Erickson pursuant to which we engaged Mr.
Erickson as our Chief Executive Officer through September 30, 2018.
On April 10, 2018, the Company entered
into an Amended Employment Agreement for Ronald P. Erickson which
amends the Employment Agreement dated July 1, 2017. The Agreement
expires March 21, 2019. automatically be extended for
additional one (1) year periods unless either Party delivers
written notice of such Party’s intention to terminate this
Agreement at least ninety (90) days prior to the end of the Initial
Term or renewal term.
Mr.
Erickson’s annual compensation was $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus. On March 5,
2019, Mr. Erickson’s annual compensation was increased to
$195,000.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements.
If the Company terminates Mr. Erickson’s employment at any
time prior to the expiration of the Term without Cause, as defined
in the Employment Agreement, or if Mr. Erickson terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
Properties and Operating Leases
The Company is obligated under the following leases for its various
facilities.
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
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.
15. SEGMENT REPORTING
The
management of the Company considers the business to have two
operating segments (i) the development of the Bio-RFID™” and
“ChromaID™” technologies.and (ii)
TransTech, a distributor of products
for employee and personnel identification and authentication.
TransTech has historically provided substantially all of the
Company’s revenues. The financial results from our TransTech
subsidiary have been diminishing as vendors of their products
increasingly move to the Internet and direct sales to their
customers. While it does provide our current revenues, it is not
central to our current focus as a Company. Moreover, we have
written down any goodwill associated with its historic acquisition.
We continue to closely monitor this subsidiary and expect it to
wind down completely in the near future.
24
The
reporting for the three months ended December 31, 2019 and 2018 was
as follows (in thousands):
|
|
|
Segment
|
|
|
|
Gross
|
Net
|
Segment
|
Segment
|
Revenue
|
Margin
|
Loss
|
Assets
|
Three
Months Ended December 31, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(3,072)
|
$2,077
|
TransTech
distribution business
|
117
|
51
|
57
|
18
|
Total
segments
|
$117
|
$51
|
$(3,015)
|
$2,095
|
|
|
|
|
|
Three
Months Ended December 31, 2018
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(737)
|
$775
|
TransTech
distribution business
|
602
|
130
|
(32)
|
481
|
Total
segments
|
$602
|
$130
|
$(769)
|
$1,256
|
During
the three months ended December 31, 2019, the segment development
of Bio-RFID™” and
“ChromaID™” incurred non-cash expenses of
$2,067,718.
16. SUBSEQUENT EVENTS
The Company evaluated subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements were issued. Subsequent to December 31, 2019, there were
the following material transactions that require
disclosure:
On January 8, 2020, the Company cancelled all kickstarter stock
option grants. The grants were not earned.
During January 2020, the Company issued 540,000 shares of
restricted common stock to two Named Executive Officers, three
directors and one consultant for services during 2020. The shares
were valued at $1.90 per share, the market price of our common
stock.
During January 2020, the Company issued 201,271 shares of common
stock at $0.25 per share to four investors related to the cashless
exercise of warrants.
The
Company recently announced its YouTube channel where it posts video
updates. The YouTube channel can be found at www.youtube.com/c/KnowLabs.
The
Company also recently updated its website at www.knowlabs.co
25
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. 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
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these
our “Bio-RFID™” and “ChromaID™”
technologies.
Historically, the Company focused on the development of our
proprietary ChromaID technology. Using light from low-cost LEDs
(light emitting diodes) the ChromaID technology maps the color of
substances, fluids and materials. With our proprietary processes we
can authenticate and identify 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, and identify, and
authenticate 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
record, detect and identify 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 calls this new 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.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues, it is not central to our current
focus as a Company. Moreover, we have written down any goodwill
associated with its historic acquisition. We continue to closely
monitor this subsidiary and expect it to wind down completely in
the near future.
The Know Labs Technology
We have internally and under contract with third parties developed
proprietary platform technologies to uniquely identify or
authenticate almost any material and substance. Our technology
utilizes electromagnetic energy along the electromagnetic spectrum
to perform analytics which allow the user to identify and
authenticate substances and materials depending upon the
user’s unique application and field of use. The
Company’s proprietary platform technologies are called
Bio-RFID and ChromaID.
The Company’s latest technology platform is called Bio-RFID.
Working in our lab over the last 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 year 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
or ankle 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 initial product will require US
Food and Drug Administration approval prior to its introduction to
the market.
26
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 2020. 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.
Our ChromaID patented technology utilizes light at the photon
(elementary particle of light) level through a series of emitters
and detectors to generate a unique signature or
“fingerprint” from a scan of almost any solid, liquid
or gaseous material. This signature of reflected or transmitted
light is digitized, creating a unique ChromaID signature. Each
ChromaID signature is comprised of from hundreds to thousands of
specific data points.
The ChromaID technology looks beyond visible light frequencies to
areas of near infra-red and ultraviolet light and beyond that are
outside the humanly visible light spectrum. The data obtained
allows us to create a very specific and unique ChromaID signature
of the substance for a myriad of authentication, verification and
identification 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 Data 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 Data Libraries for our newly developed Bio-RFID
will have a similar promise regarding their utility and
value.
Bio-RFID and ChromaID: Foundational Platform
Technologies
Our Bio-RFID and ChromaID 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. Bio-RFID and ChromaID 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 significant businesses can be built.
As with other foundational technologies, a single application may
reach across multiple industries. 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.
Similarly, 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 could identify pure water from water with contaminants
present. It could provide real time detection of liquid medicines
such as morphine that have been adulterated or compromised. It
could 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.
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 and continue, on a
regular basis the filing of new patents. 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.
27
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 and when 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 number of unique applications. We have
filed patents on the fundamental aspects of our Bio-RFID technology
and growing number of unique applications. We will continue to
expand the Company’s patent portfolio. .
Additionally, significant aspects of our technology are maintained
as trade secrets which may not be disclosed through the patent
filing process. We intend to be diligent in maintaining and
securing our trade secrets.
The patents that have been issued to Know Labs and their dates of
issuance are:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2
entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The patent expires February 7,
2033. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
On March 23, 2015, we were issued US Patent No. 8,988,666 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 31, 2027.
On May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On April 19, 2016, we were issued US Patent No. 9,316,581 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
March 12, 2033. This patent describes an enhancement to the
foundational ChromaID technology.
On April 18, 2017, we were issued US Patent No. 9,625,371 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy.” The
patent expires July 2027. This patent pertains to the use of
ChromaID technology for the identification and analysis of
biological tissue. It has many potential applications in medical,
industrial and consumer markets.
28
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. 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 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, manufacturing and regulatory approval work
progresses.
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
on improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for this 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
$491,138, $1,257,872 and $570,514 for the three months ended
December 31, 2019 and the years ended September 30, 2019 and 2018,
respectively, on development activities.
Merger with RAAI Lighting, Inc.
On April 10, 2018, we entered into an Agreement and Plan of Merger
with 500 Union Corporation, a Delaware corporation and a wholly
owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, we have
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
Under the terms of the Merger Agreement, each share of RAAI common
stock issued and outstanding immediately before the Merger (1,000
shares) were cancelled and we issued 2,000,000 shares of our common
stock. As a result, we issued 2,000,000 shares of its common stock
to Phillip A. Bosua, formerly the sole stockholder of RAAI. The
consideration for the Merger was determined through arms-length
bargaining by the Company and RAAI. The Merger was structured to
qualify as a tax-free reorganization for U.S. federal income tax
purposes. As a result of the Merger, the Company received certain
intellectual property, related to RAAI.
Merger with Know Labs, Inc.
On May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated
on April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
29
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.
EMPLOYEES
As of December 31, 2019, we had twelve full-time employees,
including five personnel at TransTech. Our senior management and
five other personnel are located in our Seattle, Washington
offices. We also utilize consulting firms and people to supplement
our workforce.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol
“KNWN.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
name change from Know Labs, Incorporated to Know Labs, Inc. and
symbol change from VSUL to KNWN was announced by FINRA declared
effective on the opening of trading as of May 25,
2018.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part I, Item
1A.
CORPORATE INFORMATION
We were incorporated under the laws of the State of Nevada on
October 8, 1998. Our executive offices are located at 500 Union
Street, Suite 810, Seattle, WA 98101. Our telephone number is (206)
903-1351 and its principal website address is located at
www.knowlabs.co. The information on our website is not incorporated
as a part of this Form 10-K.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.knowlabs.co that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-K.
30
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.
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 December 31,
|
|||
|
2019
|
2018
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$117
|
$602
|
$(485)
|
-80.6%
|
Cost of
sales
|
66
|
472
|
(406)
|
86.0%
|
Gross
profit
|
51
|
130
|
(79)
|
-60.8%
|
Research and
development expenses
|
491
|
207
|
284
|
-137.2%
|
Selling, general
and administrative expenses
|
921
|
689
|
232
|
-33.7%
|
Operating
loss
|
(1,361)
|
(766)
|
(595)
|
-77.7%
|
Other (expense)
income:
|
|
|
|
|
Interest
expense
|
(1,679)
|
(9)
|
(1,670)
|
-18555.6%
|
Other
income
|
25
|
6
|
19
|
316.7%
|
Total other income
(expense), net
|
(1,654)
|
(3)
|
(1,651)
|
-55033.3%
|
Loss before income
taxes
|
(3,015)
|
(769)
|
(2,246)
|
-292.1%
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
loss
|
$(3,015)
|
$(769)
|
$(2,246)
|
-292.1%
|
THREE MONTHS ENDED DECEMBER 31, 2019 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2018
Sales
Revenue for the three months ended December 31, 2019 decreased
$485,000 to $117,000 as compared to $602,000 for the three months
ended December 31, 2018. The decrease was due to lower sales by
TransTech as we winddown TransTech. We have focused TransTech on
maximizing sales at the lower sales level. We are seeing customers
purchase similar products directly from other sources and we have
not been investing in this business.
31
Cost of Sales
Cost of sales for the three months ended December 31, 2019
decreased $406,000 to $66,000 as compared to $472,000 for the three
months ended December 31, 2018. The decrease was due to lower sales
by TransTech as we winddown TransTech. We have focused TransTech on
maximizing sales at the lower sales level. We are seeing customers
purchase similar products directly from other sources and we have
not been investing in this business.
Gross profit was $51,000 for the three months ended December 31,
2019 as compared to $130,000 for the three months ended December
31, 2018. Gross profit was 43.8% for the three months ended
December 31, 2019 as compared to 21.6% for the three months ended
December 31, 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
December 31, 2019 increased $284,000 to $491,000 as compared to
$207,000 for the three months ended December 31, 2018. The increase
was due to the hiring of additional personnel, the use of
consultant and expenditures related to
the development of our Bio-RFID™ technology, including
obtaining FDA approval.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months
ended December 31, 2019 increased $232,000 to $921,000 as compared
to $689,000 for the three months ended December 31,
2018.
The increase primarily was due to (i) increased professional fees
of $104,000; (ii) increased stock based compensation of $228,000;
and (iii) increased insurance of $22,000; offset by (iv) decreased
TransTech expenses of $99,000 (primarily salaries and rent); and
(v) decreased other expenses of $23,000. As part of the selling,
general and administrative expenses for the three months ended
December 31, 2019, we recorded $40,000 of investor relation
expenses and business development expenses.
Other (Expense)
Other expense for the three months ended December 31, 2019 was
$1,654,000 as compared to other expense of $3,000 for the three
months ended December 31, 2018. The other expense for the three
months ended December 31, 2019 included (i) interest expense of
$1,679,000; offset by (ii) other income of $25,000. The interest
expense related to convertible notes payable and the amortization
of the beneficial conversion feature. During the three
months ended December 31, 2019, we closed a private placement and
received gross proceeds of $520,000 in exchange for issuing
Subordinated Convertible Notes and Warrants in a private placement
to 9 accredited investors, pursuant to a series of substantially
identical Securities Purchase Agreements, Common Stock Warrants,
and related documents.
Other expense for the three months ended December 31, 2018 was
$3,000 as compared to other expense of $274,000 for the three
months ended December 31, 2017. The other expense for the three
months ended December 31, 2018 included (i) interest expense of
$9,000; offset by other income of $6,000.
32
Net Loss
Net loss for the three months ended December 31, 2019 was
$3,015,000 as compared to $769,000 for the three months ended
December 31, 2018. The net loss for the three months ended December
31, 2019 included non-cash
items of $2,068,000. The non-cash items include (i) depreciation
and amortization of $60,000; (ii) stock based compensation of
$400,000; (iii) amortization of debt discount of $1,567,000; and
(iv) other of $41,000. TransTech’s net income from operations was
$57,000 for the three months ended December 31,
2019.
Net loss for the three months ended December 31, 2018 was $769,000
The net loss for the three months ended December 31, 2018,
included non-cash expenses of
$235,000. The non-cash expenses include (i) depreciation and
amortization of $62,000; (ii) stock based compensation of $172,000;
and (iii) other of $1,000. TransTech’s net loss from
operations was $32,000 for the three months ended December 31,
2018.
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 $1,502,000 and net working capital of
approximately $321,000 (net of convertible notes payable) as of
December 31, 2019. We have experienced net losses since
inception and we expect losses to continue as we commercialize our
ChromaID™ technology. As of December 31, 2019, we had an
accumulated deficit of $45,419,000 and net losses in the amount of
$3,015,000, $7,612,000 and $3,258,000 for the three months ended
December 31, 2019 and the year ended September 30, 2019 and 2018,
respectively. We believe that our
cash on hand will be sufficient to fund our operations through
August 31, 2020. During the three months ended December 31,
2019, the Company incurred non-cash expenses of
$2,068,000.
As of
December 31, 2019, we closed a private placement and received gross
proceeds of $4,762,515 in exchange for issuing Subordinated
Convertible Notes and Warrants in a private placement to 63
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 $4,762,515 and bear
annual interest of 8%. Both the principal amount of 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 we issue certain securities
at less than the then-current conversion price. The note principal,
interest and an additional 10% are payable in cash upon a change in
control as defined.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2019 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, or eliminate the development of
business opportunities 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 of common stock and the
exercise of warrants.
The proceeds of warrants which are not expected to be cashless are
expected to generate potential proceeds of up to
$5,936,000.
33
Operating Activities
Net cash used in operating activities for the three months ended
December 31, 2019 was $824,000. This amount was primarily related
to (i) a net loss of $3,015,000; offset by (ii) working capital
changes of $123,000; and (iii) non-cash expenses of $2,068,000. The
non-cash items include (iv) depreciation and amortization of
$60,000; (v) stock based compensation of $400,000; (vi)
amortization of debt discount of $1,567,000; and (vii) other of
$41,000.
Investing Activities
Net cash used in investing activities for the three months ended
December 31, 2019 was $15,000. This amount was primarily related to
the investment in equipment for research and
development.
Financing Activities
Net cash provided by financing activities for the three months
ended December 31, 2019 was $441,000. This amount was primarily
related to issuance of convertible notes payable of $520,000,
offset by payments of issuance costs from notes payable of
$79,000.
Our contractual cash obligations as of December 31, 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
|
$244,580
|
$133,996
|
$110,584
|
$-
|
$-
|
Convertible notes
payable
|
7,017,581
|
7,017,581
|
-
|
-
|
-
|
|
$7,262,161
|
$7,151,577
|
$110,584
|
$-
|
$-
|
(1)
Convertible notes
payable includes $4,762,515 that converts into common stock at the
maturity date during 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 December 31,
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.
34
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
December 31, 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.
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. During
2020, we expect to strengthen the finance staff and improve
internal controls over documentation.
Audit Committee: While we have
an audit committee, we lack a financial expert. During 2020, the
Board expects to appoint an 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.
35
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31,
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
December 31, 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 December 31,
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.
36
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 August 31,
2020. We will 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 are seeking
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 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, 2019 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.
37
As of December 31, 2019, we owe approximately $2,844,733 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, our current chairman, and/or entities with which he
is affiliated also have accrued compensation, travel and interest
of approximately $589,667 as of December 31, 2019.
We owe
$2,255,066 under various convertible promissory notes as of
December 31, 2019 including $1,184,066 owed to entities controlled
by our chairman.
This
excludes $4,762,515 of Subordinated Convertible Notes (the
“Convertible Notes”) and Warrants (the
“Warrants”) in a private placement to 63 accredited
investors, pursuant to a series of substantially identical
Securities Purchase Agreements, Common Stock Warrants, and related
documents that closed during 2019. The Convertible Notes converts
into common stock at the maturity date during 2020.
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 December 31,
2019, we had an accumulated deficit of $45,819,000 and net losses
in the amount of $3,015,000, $7,612,000 and $3,258,000 for the
three months ended December 31, 2019 and the years ended September
30, 2019 and 2018, respectively. During the three months
ended December 31, 2019, the Company incurred non-cash expenses of
$2,068,000.
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
ChromaID and Bio-RFID 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.
38
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our success depends on our ability to develop and market products
that are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, some potential customers may be
required to devote significant time and effort to testing and
validating our products. In addition, during the implementation
phase, some 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, 2019, 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 third-party manufacturers and suppliers for
substantially all of our components and products that are used in
our ChromaID and Bio-RFID products. We purchase these products and
components from third-party suppliers 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.
39
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 ended December 31, 2019, which
is expected to result in the winding down of operations in early
2020. 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 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 maintain
key person life insurance on our Chief Executive Officer, Phil
Bosua. 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.
40
There can be no assurance that:
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any of our existing patents will continue to be held valid, if
challenged;
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patents will be issued for any of our pending
applications;
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any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
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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
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any of our products or technologies will not infringe on the
patents of other companies.
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If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining and maintaining a patent portfolio entails significant
expense and resources. Part of the expense includes periodic
maintenance fees, renewal fees, annuity fees, various other
governmental fees on patents and/or applications due in several
stages over the lifetime of patents and/or applications, as well as
the cost associated with complying with numerous procedural
provisions during the patent application process. We may or may not
choose to pursue or maintain protection for particular inventions.
In addition, there are situations in which failure to make certain
payments or noncompliance with certain requirements in the patent
process can result in abandonment or lapse of a patent or patent
application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. If we choose to forgo patent
protection or allow a patent application or patent to lapse
purposefully or inadvertently, our competitive position could
suffer.
Legal actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We may receive notices that claim we have infringed upon
the intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
If we are unable to secure a sales and marketing partner or
establish satisfactory sales and marketing capabilities at Know
Labs 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:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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41
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.
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.
42
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
We have made strategic acquisitions in the past and may do so in
the future, and if the acquired companies do not perform as
expected, this could adversely affect our operating results,
financial condition and existing business.
We may continue to expand our business through strategic
acquisitions. The success of any acquisition will depend on, among
other things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
43
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 warrants, convertible notes payable
and the Series C and D Preferred Shares may require further
adjustment.
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price of 1,785,715
outstanding shares of Series C Preferred Stock, 1,016,004
outstanding shares Series D Preferred Stock that adjust below $0.25
per share pursuant to the documents governing such instruments. In
addition, the conversion price of a Convertible Note Payable of
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share) and the exercise price of additional outstanding
warrants to purchase 12,838,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
The conversion price of the Convertible Notes Payable of $4,762,515
(4,762,515 common shares at the
current price of $1.00 per share) which closed during 2019 would
adjust below $1.00 per share pursuant to the documents governing
such instruments. Warrants totaling 2,994,715 would adjust below
$1.20 per share pursuant to the documents governing such
instruments.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures, strategic relationships, addition or loss of
significant customers and contracts, capital expenditure
commitments and
litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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Investor and public relation activities;
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Announcements of technological innovations;
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New product introductions by us or our competitors;
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Competitive
activities;
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Low
liquidity; and
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Additions or departures of key personnel.
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These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
44
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 December 31, 2019, four individuals in the aggregate,
assuming the exercise of all warrants to purchase common stock,
hold shares representing approximately 55.2% of our common stock on
a fully-converted basis and could be considered a control group for
purposes of SEC rules. However, the agreement with one of these
individuals limits his ownership to 4.99% individually. Beneficial
ownership includes shares over which an individual or entity has
investment or voting power and includes shares that could be issued
upon the exercise of options and warrants within 60 days after the
date of determination. If these persons were to choose to act
together, they would be able to significantly influence all matters
submitted to our stockholders for approval, as well as our
officers, directors, management and affairs. For example, these
persons, if they choose to act together, could significantly
influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may
desire.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales or issuances of a large number of shares of common stock in
the public market or the perception that sales may occur could
cause the market price of our common stock to decline. As of
December 31, 2019, we had 18,468,057 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 December 31, 2019, there were options outstanding for the
purchase of 4,812,668 common shares (including unearned stock
option grants totaling 2,680,000 and excluding certain stock option
grants for a cancelled kickstarter program), warrants for the
purchase of 18,044,490 common shares, and 8,108,356 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 13,782,779 common shares (9,020,264 common
shares at the current price of $0.25 per share and 4,762,515 common
shares at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of $7,017,581. All of
which could potentially dilute future earnings per
share.
Significant shares of common stock are held by our principal
stockholders, other company insiders and other large stockholders.
As “affiliates” of Know Labs, as defined under
Securities and Exchange Commission Rule 144 under the Securities
Act of 1933, our principal stockholders, other of our insiders and
other large stockholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common
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
beneficial 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.
45
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 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.
We or our manufacturers may be unable to obtain or maintain
international regulatory clearances or approvals for our current or
future products, or our distributors may be unable to obtain
necessary qualifications, which could harm our
business.
Sales of the Know Labs UBAND internationally are subject to foreign
regulatory requirements that vary widely from country to country.
In addition, the FDA regulates exports of medical devices from the
U.S. Complying with international regulatory requirements can be an
expensive and time-consuming process, and marketing approval or
clearance is not certain. The time required to obtain clearances or
approvals, if required by other countries, may be longer than that
required for FDA clearance or approvals, and requirements for such
clearances or approvals may significantly differ from FDA
requirements. We may rely on third-party distributors to obtain
regulatory clearances and approvals required in other countries,
and these distributors may be unable to obtain or maintain such
clearances or approvals. Our distributors may also incur
significant costs in attempting to obtain and in maintaining
foreign regulatory approvals or clearances, which could increase
the difficulty of attracting and retaining qualified distributors.
If our distributors experience delays in receiving necessary
qualifications, clearances or approvals to market our products
outside the U.S., or if they fail to receive those qualifications,
clearances or approvals, we may be unable to market our products or
enhancements in international markets effectively, or at
all.
Foreign governmental authorities that regulate the manufacture and
sale of medical devices have become increasingly stringent and, to
the extent we market and sell our products outside of the U.S., we
may be subject to rigorous international regulation in the future.
In these circumstances, we would be required to rely on our foreign
independent distributors to comply with the varying regulations,
and any failures on their part could result in restrictions on the
sale of our product in foreign countries.
46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
During the three months ended December 31, 2019, we had the
following unregistered sales of equity securities:
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants. The stock option grant
had an exercise price of $0.25 per share. The former employee forfeited stock option grants
226,809 at an exercise price of $0.25 per share, 150,000 at an
exercise price of $1.28 per share and,130,000 at an exercise price
of $1.50 per share.
On December 27, 2019, we issued 28,688 shares of common stock and
cancelled warrants to purchase 5,312 shares of common stock at
$0.25 per share to an investor related to the cashless exercise of
warrants.
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.
47
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.
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Description
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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)
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Amended
and Restated Bylaws (incorporated by reference to the
Company’s Form 8-K, filed August 17, 2012)
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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)
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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)
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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)
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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)
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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)
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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 , Form of
Amended and Restated Registration Rights Agreement. and
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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Securities Purchase Agreement dated August 14, 2017 by and between
Visualant, Incorporated and accredited investor (incorporated by
referenc |