10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 15, 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 March 31, 2020
☐ 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)
|
Securities
registered pursuant to Section 12(b) of the Act: None
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 May 15, 2020: 23,679,245
shares.
TABLE OF
CONTENTS
|
Page
Number
|
|
|
PART
I
FINANCIAL INFORMATION
|
|
|
|
ITEM 1
Financial
Statements (unaudited except as noted)
|
3
|
|
|
Consolidated
Balance Sheets as of March 31, 2020 and September 30, 2019
(audited)
|
3
|
|
|
Consolidated
Statements of Operations for the three and six months ended
March 31, 2020 and 2019
|
4
|
|
|
Consolidated
Statements of Changes in Stockholders’
Deficit
|
5
|
|
|
Consolidated
Statements of Cash Flows for the three and six months ended March
31, 2020 and 2019
|
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
|
March
31,
2020
|
September
30,
2019
|
ASSETS
|
|
(Audited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$776,752
|
$1,900,836
|
Accounts
receivable, net of allowance of $0 and $40,000,
respectively
|
-
|
63,049
|
Prepaid
expenses
|
-
|
6,435
|
Inventories,
net
|
-
|
7,103
|
Total current
assets
|
776,752
|
1,977,423
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
119,774
|
130,472
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets
|
187,780
|
274,446
|
Other
assets
|
13,766
|
13,766
|
Operating lease
right of use asset
|
130,100
|
243,526
|
|
|
|
TOTAL
ASSETS
|
$1,228,172
|
$2,639,633
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$693,598
|
$810,943
|
Accounts payable -
related parties
|
8,439
|
7,048
|
Accrued
expenses
|
118,633
|
460,055
|
Accrued expenses -
related parties
|
677,918
|
458,500
|
Convertible notes
payable
|
2,739,330
|
3,954,241
|
Current portion of
operating lease right of use liability
|
118,568
|
124,523
|
Total current
liabilities
|
4,356,486
|
5,815,310
|
|
|
|
NON-CURRENT PORTION
OF OPERATING LEASE RIGHT OF USE LIABILITY
|
12,906
|
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
3/31/2020 and 9/30/2019 respectively
|
-
|
-
|
Series A
Convertible Preferred stock - $0.001 par value, 23,334 shares
authorized, 0 shares
|
|
|
issued and
outstanding at 3/31/2020 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 3/31/2020 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 3/31/2020 and 9/30/2019,
respectively
|
1,015
|
1,015
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 23,324,128 and
18,366,178
|
|
|
shares issued and
outstanding at 3/31/2020 and 9/30/2019, respectively
|
23,324
|
18,366
|
Additional paid in
capital
|
45,581,817
|
39,085,179
|
Accumulated
deficit
|
(48,749,166)
|
(42,403,640)
|
Total stockholders'
deficit
|
(3,141,220)
|
(3,297,290)
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$1,228,172
|
$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,
|
Six
Months Ended,
|
||
|
March 31,
2020
|
March 31,
2019
|
March 31,
2020
|
March 31,
2019
|
|
|
|
|
|
REVENUE
|
$4,546
|
$593,712
|
$121,939
|
$1,195,921
|
COST OF
SALES
|
3,791
|
454,839
|
69,726
|
927,125
|
GROSS
PROFIT
|
755
|
138,873
|
52,213
|
268,796
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
447,165
|
184,024
|
938,303
|
391,014
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
1,622,941
|
1,003,504
|
2,543,492
|
1,692,950
|
OPERATING
LOSS
|
(2,069,351)
|
(1,048,655)
|
(3,429,582)
|
(1,815,168)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
Interest
expense
|
(1,301,674)
|
(400,201)
|
(2,981,164)
|
(409,327)
|
Other
income
|
40,512
|
6,618
|
65,220
|
13,054
|
Total other
(expense), net
|
(1,261,162)
|
(393,583)
|
(2,915,944)
|
(396,273)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(3,330,513)
|
(1,442,238)
|
(6,345,526)
|
(2,211,441)
|
|
|
|
|
|
Income taxes -
current provision
|
-
|
-
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$(3,330,513)
|
$(1,442,238)
|
$(6,345,526)
|
$(2,211,441)
|
|
|
|
|
|
Basic and diluted
loss per share
|
$(0.16)
|
$(0.08)
|
$(0.33)
|
$(0.12)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
20,424,329
|
18,094,492
|
19,412,240
|
17,829,909
|
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
|
32,334,605
|
(35,560,527)
|
(3,205,295)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
91,648
|
-
|
91,648
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
245,000
|
245
|
348,655
|
-
|
348,900
|
Conversion of Series A Preferred
Stock
|
(20,000)
|
(11)
|
-
|
-
|
-
|
-
|
80,000
|
80
|
(69)
|
-
|
-
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,570,049
|
-
|
1,570,049
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,244,263
|
-
|
1,244,263
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
988,876
|
-
|
988,876
|
Stock based compensation-
warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
30,325
|
-
|
30,325
|
Issuance of common stock for
warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
56,518
|
56
|
(56)
|
-
|
-
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,442,238)
|
(1,442,238)
|
Balance as of March 31,
2019
|
-
|
-
|
1,785,715
|
1,790
|
1,016,004
|
# 1,015
|
18,192,969
|
18,192
|
36,608,296
|
(37,002,765)
|
(373,472)
|
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)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
165,829
|
-
|
165,829
|
Conversion of debt offering and
accrued interest (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
4,114,800
|
4,115
|
4,110,685
|
-
|
4,114,800
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
105,535
|
-
|
105,535
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
21,214
|
-
|
21,214
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
9,542
|
-
|
9,542
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
540,000
|
540
|
1,025,460
|
-
|
1,026,000
|
Issuance of common stock for
exercise of warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
201,271
|
201
|
(201)
|
-
|
0
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,330,513)
|
(3,330,513)
|
Balance as of March 31,
2020
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
$23,324,128
|
$23,324
|
$45,581,817
|
$(48,749,166)
|
$(3,141,220)
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW LABS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Six
Months Ended,
|
|
|
March 31,
2020
|
March 31,
2019
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(6,345,526)
|
$(2,211,441)
|
Adjustments to
reconcile net loss to net cash (used in) operating
activities
|
|
|
Depreciation and
amortization
|
120,745
|
133,019
|
Issuance of capital
stock for services and expenses
|
1,026,000
|
348,900
|
Stock based
compensation- warrants
|
-
|
30,325
|
Stock based
compensation- stock option grants
|
565,726
|
263,147
|
Amortization of
debt discount
|
2,792,398
|
361,534
|
Provision on loss
on accounts receivable
|
2,439
|
8,728
|
Right of use,
net
|
(1,236)
|
-
|
Loss on sale of
assets
|
4,358
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
60,610
|
118,438
|
Prepaid
expenses
|
6,435
|
7,296
|
Inventory
|
7,103
|
102,593
|
Other
assets
|
-
|
(8,697)
|
Accounts payable -
trade and accrued expenses
|
72,618
|
(245,393)
|
Deferred
revenue
|
-
|
(55,959)
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(1,688,330)
|
(1,147,510)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
research and development equipment
|
(27,739)
|
(74,556)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(27,739)
|
(74,556)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Repayments on line
of credit
|
-
|
(92,094)
|
Proceeds from
convertible notes payable
|
715,000
|
3,809,976
|
Payments for
issuance costs from notes payable
|
(123,015)
|
(368,322)
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
591,985
|
3,349,560
|
|
|
|
NET (DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(1,124,084)
|
2,127,494
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
1,900,836
|
934,407
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$776,752
|
$3,061,901
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$7,750
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$435,617
|
$1,570,049
|
Issuance of
warrants to debt holders
|
$189,484
|
$1,244,263
|
Issuance of
warrants for services related to debt offering
|
$169,969
|
$988,876
|
Cashless warant
exercise (fair value)
|
$57,490
|
$84,107
|
Cashless stock
options exercise (fair value)
|
$18,298
|
$-
|
Conversion of debt
offering
|
$3,800,424
|
$-
|
Conversion of
accrued interest
|
$314,376
|
$-
|
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 six months ended March 31, 2020 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 the Company’s current
revenues, it is not central to the Company’s current focus.
Moreover, the Company has written down any goodwill associated with
this acquisition. The Company expects to shut down TransTech
completely by June 30, 2020.
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 fourteen 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 $6,345,526, $7,612,316 and $3,257,597
for the six
months ended March 31, 2020 and the years ended September 30, 2019
and 2018, respectively. Net cash used in operating activities was
$1,668,330, $3,104,035 and $1,117,131 for the six months ended
March 31, 2020 and the years ended September 30, 2019 and 2018,
respectively. During the six months ended March 31, 2020 and 2019,
the Company incurred non-cash expenses of $4,510,430 and
$1,145,653.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of March 31, 2020, the Company’s
accumulated deficit was $48,749,166 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 and received since March 31,
2020 will be sufficient to fund our operations until early 2021.
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 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 March 31, 2020, the Company had uninsured deposits in the amount
of $526,752.
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 March 31, 2020 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 March 31, 2020
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 $938,303, $1,257,872
and $570,514 for the six months ended March 31, 2020
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.
|
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of March 31, 2020 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 March 31, 2020 and September 30, 2019 was
$651,722 and $1,901,278, respectively.
9
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 March 31, 2020 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 March
31, 2020, there were options outstanding for the purchase of
4,891,334 common shares (including unearned stock option grants
totaling 2,680,000 shares related to performance targets), warrants
for the purchase of 17,755,448 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 had 10,167,804 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 1,147,540 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $3,402,606. All of which could potentially dilute future
earnings per share.
As of March 31, 2019, there were options outstanding for the
purchase of 2,282,668 common shares, warrants for the purchase of
17,572,583 common shares, and 4,894,071 shares of the
Company’s common stock issuable upon the conversion of Series
A, Series C and Series D Convertible Preferred Stock. In
addition, the Company currently has 12,829,329 common shares
(9,020,264 common shares at the current price of $0.25 per share
and 3,808,975 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,060,041. All of which could
potentially dilute future earnings per share.
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 March 31, 2020 and September
30, 2019, respectively. The Company has a total allowance for bad
debt in the amount of $0 and $40,000 as of March 31, 2020 and
September 30, 2019, respectively. The decrease in
accounts receivable related to the winddown of
TransTech.
5. INVENTORIES
Inventories were $0 and $7,103 as of March 31, 2020
and September 30, 2019, respectively.
Inventories consisted primarily of printers and consumable
supplies, including ribbons and cards, badge accessories, capture
devices, and access control components held for resale. There was a
$0 and $28,000 reserve for impaired inventory as of March
31, 2020 and September 30, 2019, respectively. The decrease in
inventory related to the winddown of TransTech.
6. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was $119,774 and
$130,472 as of March 31, 2020 and September 30, 2019, respectively. Accumulated
depreciation was $221,490 and $379,259 as of March 31, 2020
and September 30, 2019, respectively.
Total depreciation expense was $34,079 and $18,491 for the six
months ended March 31, 2020 and
2019, respectively. All equipment is used for selling, general and
administrative purposes and accordingly all depreciation is
classified in selling, general and administrative
expenses.
Property and equipment as of March 31, 2020 and September 30, 2019 was comprised of the
following:
|
Estimated
|
March 31,
|
September 30,
|
|
Useful Lives
|
2020
|
2019
|
Machinery
and equipment
|
2-10
years
|
$310,797
|
$412,238
|
Leasehold
improvements
|
2-3
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
2-3
years
|
26,855
|
58,051
|
Software
and websites
|
3-
7 years
|
-
|
35,830
|
Less:
accumulated depreciation
|
|
(221,490)
|
(379,259)
|
|
$119,774
|
$130,472
|
The
Company retired assets at TransTech with a net book value of $4,358
as of March 31, 2020.
11
7. INTANGIBLE ASSETS
Intangible assets as of March 31, 2020 and September 30, 2019 consisted of the
following:
|
Estimated
|
March 31,
|
September 30,
|
|
Useful Lives
|
2020
|
2019
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(332,220)
|
(245,554)
|
Intangible
assets, net
|
|
$187,780
|
$274,446
|
Total amortization expense was $86,666 for the six months
ended March 31, 2020 and 2019,
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 $693,598 (including $308,641 related to
TransTech) and $810,943 as of March 31, 2020
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. The Company expects to
settle the TransTech accounts payable during 2020. The
Company expects to shut down TransTech completely by June 30,
2020.
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 March 31,
2020 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
March 31, 2020 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 six months ended
March 31, 2020 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 March 31, 2020 and September 30, 2019,
total right-of-use assets and operating lease liabilities for
remaining long term lease was approximately $130,000 and $246,000,
respectively. In the six months ended March 31, 2020 and 2019, the
Company recognized approximately $67,914 and $100,482, respectively
in total lease costs for the leases.
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 six months ended March 31, 2020
was as follows:
Cash paid for ROU
operating lease liability $66,998
Weighted-average
remaining lease term 2 years
Weighted-average
discount rate 10%
The
minimum future lease payments as of March 31, 2020 are as
follows:
Year
|
$
|
2021
|
$133,996
|
2022
|
12,086
|
2023
|
0
|
2024
|
-
|
|
146,082
|
Imputed
interest
|
(14,608)
|
Total lease
liability
|
$131,474
|
13
10. CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of March 31, 2020 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
$67,801 and $62,171 as of March 31, 2020 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. On May 11, 2020, the Company signed Amendments to
the convertible promissory or OID notes, extending the due dates to
September 30, 2020.
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 $109,583
and $73,964 as of March 31, 2020 and September 30, 2019,
respectively. 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 May 11, 2020, the Company signed Amendment 3 to
the convertible promissory or OID notes, extending the due dates to
September 30, 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 had an original 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.
14
The
Convertible Notes and Warrants were issued in transactions that
were not registered under the Securities Act of 1933, as amended
(the “Act”) in reliance upon applicable exemptions from
registration under Section 4(a)(2) of the Act and/or Rule 506 of
SEC Regulation D under the Act.
In
accordance to ASC 470-20-30, Debt with Conversion and Other
Options, the guidance therein applies to both convertible debt and
other similar instruments, including convertible preferred shares.
The guidance states that “the allocation of proceeds shall be
based on the relative fair values of the two instruments at time of
issuance. When warrants are issued in conjunction with a debt
instrument as consideration in purchase transactions, the amounts
attributable to each class of instrument issued shall be determined
separately, based on values at the time of issuance. The debt
discount or premium shall be determined by comparing the value
attributed to the debt instrument with the face amount
thereof.
In
conjunction with the issuance of Convertible Notes and the
Warrants, the Company recorded a debt discount of $2,857,960
associated with a beneficial conversion feature on the debt, which
is being accreted using the effective interest method over the
one-year term of the Convertible Notes. Intrinsic value of the
beneficial conversion feature was calculated at the commitment date
as the difference between the conversion price and the fair value
of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible. In accordance to ASC 470-20-30, if the intrinsic value
of the beneficial conversion feature is greater than the proceeds
allocated to the convertible instrument, the amount of the discount
assigned to the beneficial conversion feature shall be limited to
the amount of the proceeds allocated to the convertible
instrument.
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 six months ended March 31, 2020, the Company issued
4,114,800 shares of common stock related to the automatic
conversion of Convertible Notes and interest from a private
placement to accredited investors in 2019. The Convertible Notes
and interested were automatically converted to Common Stock at
$1.00 per share on the one year anniversary starting on February
15, 2020.
Debt Offering during the Six Months Ended March 31,
2020
During
the six months ended March 31, 2020, the Company closed additional
rounds of a debt offering and received gross proceeds of $715,000
in exchange for issuing Subordinated Convertible Notes and Warrants
in a private placement to 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 715,000 shares of
Common Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 357,500 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 $230,955 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 $123,015
and warrants to purchase 94,800 shares of the Company’s
common stock, all based on 8% of gross proceeds to the Company. The
warrants issued for these services had a fair value of $118,956 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 $123,015 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 $105,535 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 six months ended March 31, 2020, amortization related to the
2019 and 2020 debt offerings of $2,792,398 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 March 31, 2020 and September 30, 2019 are
summarized below:
|
March 31,
2020
|
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
|
4,242,490
|
4,242,515
|
2020
Debt offering
|
715,000
|
-
|
less
conversions
|
(3,809,975)
|
-
|
less
debt discount - beneficial conversion feature
|
(316,894)
|
(1,273,692)
|
less
debt discount - warrants
|
(169,635)
|
(616,719)
|
less
debt discount - warrants issued for services related to debt
offering
|
(176,722)
|
(652,919)
|
|
$2,739,330
|
$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
March 31, 2020, the Company had 23,324,128 shares of common stock
issued and outstanding, held by 135 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 the
Company. As of March 31, 2020, there were options
outstanding for the purchase of 4,891,334 common shares (including
unearned stock option grants totaling 2,680,000 shares), warrants
for the purchase of 17,755,448 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 has 10,167,804 common shares
(9,020,264 common shares at the current price of $0.25 per share
and 1,147,540 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $3,402,606. 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.
16
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 March 31, 2020 and September 30, 2019 there are 1,785,715 Series
C Preferred shares outstanding.
As of March 31, 2020, 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. As of March 31, 2020 and September 30, 2019,
there are no Series F shares outstanding.
Securities Subject to Price Adjustments
In the
future, if the Company sells its common stock at a price below
$0.25 per share, the exercise price of
8,108,356 outstanding shares of Series C and 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 $3,402,606 (9,020,264 common shares at
the current price of $0.25 per share and 1,147,540 shares at $1.00
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. Warrants totaling 2,755,717 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 six months
ended March 31, 2020:
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 January 1, 2020, the Company issued 540,000 shares of restricted
common stock to two Named Executive Officer, three directors and
one consultant for services. The shares were issued in accordance
with the 2011 Stock Incentive Plan and were valued at $1.90 per
share, the market price of our common stock, or
$1,026,000.
17
During the six months ended March 31, 2020, the Company issued
4,114,800 shares of common stock related to the automatic
conversion of Convertible Notes and interest from a private
placement to accredited investors in 2019. The Convertible Notes
and interested were automatically converted to Common Stock at
$1.00 per share on the one year anniversary starting on February
15, 2020.
During the six months ended March 31, 2020, the Company issued
229,529 shares of common stock at $0.979 per share to five
investors related to the cashless exercise of
warrants.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the six months
ended March 31, 2020:
During the six months ended March 31, 2020, the Company issued
229,529 shares of common stock at $0.979 per share and cancelled
warrants to purchase 213,893 shares of common stock at $1.065 per
share to five investors 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 357,500 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 94,800
shares of the Company’s common stock, all based on 8% of
gross proceeds to the Company.
A
summary of the warrants outstanding as of March 31,
2020 were as
follows:
|
March 31, 2020
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
Issued
|
452,300
|
1.200
|
Exercised
|
(229,959)
|
(0.979)
|
Forfeited
|
(213,983)
|
(1.065)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
17,755,448
|
$0.460
|
Exerciseable
at end of period
|
17,755,448
|
|
18
The following table summarizes information about warrants
outstanding and exercisable as of March 31, 2020:
|
March 31, 2020
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
13,333,286
|
2.53
|
$0.250
|
13,333,286
|
$0.250
|
714,286
|
1.33
|
0.700
|
714,286
|
0.700
|
882,158
|
1.62
|
1.000
|
882,158
|
1.000
|
2,805,718
|
4.04
|
1.20-1.50
|
2,805,718
|
1.20-1.50
|
20,000
|
3.87
|
2.34-4.08
|
20,000
|
2.34-4.08
|
|
|
|
|
|
17,755,448
|
3.00
|
$0.460
|
17,755,448
|
$0.460
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the six months ended
March 31, 2020 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 14,047,572 as
of March 31, 2020 with an
aggregate intrinsic value of $8,809,493.
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. There were
options outstanding for the purchase of 4,891,334 common shares
(including unearned stock option grants totaling 2,680,000 shares
related to performance targets).
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
six months ended March 31, 2020:
During the six months ended March 31, 2020, the Company granted
stock option grants to executives, directors and consultants for
3,020,000 shares with an exercise price of $1.125 per share. The
grants expire in five years and generally vest quarterly over four
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.
During the six months ended March 31, 2020, two executives and
three employees voluntarily cancelled stock option grants for
2,588,143 shares with an exercise price of $2.65 per
share.
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.
There are currently 4,891,334 (including unearned stock
option grants totaling 2,680,000 shares related to performance
targets) options to purchase common
stock at an average exercise price of $1.165 per share outstanding
as of March 31, 2020 under the
2011 Stock Incentive Plan. The Company recorded $565,726 and
$263,145 of compensation expense, net of related tax effects,
relative to stock options for the six months ended March 31,
2020 and 2019 and in accordance with
ASC 718. As of March 31, 2020,
there is approximately $614,953, 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 4.19 years.
20
Stock option activity for the six months ended March 31,
2020 and the years ended September 30,
2019 and 2018 was as follows:
|
Options
|
Weighted
Average
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
|
3,020,000
|
1.125
|
3,397,600
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,588,143)
|
(2.650)
|
(6,859,712)
|
Outstanding as of
March 31, 2020
|
4,891,334
|
$1.165
|
$5,699,959
|
The following table summarizes information about stock options
outstanding and exercisable as of March 31, 2020:
|
|
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
|
3.21
|
$0.250
|
100,625
|
$0.250
|
1.10-1.25
|
2,940,000
|
4.60
|
1.37
|
233,854
|
1.096
|
1.28-1.50
|
1,610,000
|
4.60
|
1.31
|
498,438
|
1.296
|
1.79-2.25
|
110,000
|
4.39
|
1.01
|
40,000
|
1.153
|
13.50-15.00
|
1,334
|
0.19
|
13.50
|
1,334
|
13.500
|
|
4,891,334
|
4.19
|
$1.165
|
874,251
|
$1.212
|
There were in the money stock option grants of 230,000 shares as of
March 31, 2020 with an aggregate intrinsic value of
$149,500.
21
13.
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
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 May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 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.
On January 1, 2020, the Company issued 100,000 shares of restricted
common stock to Ronald P. Erickson. The shares were issued in
accordance with the 2011 Stock Incentive Plan and were valued at
$1.90 per share, the market price of the Company’s common
stock, or $190,000.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $613,525
and $487,932 as of March 31, 2020 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.
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.
22
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.
On January 1, 2020, the Company issued 150,000 shares of restricted
common stock to Phillip A. Bosua. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$285,000.
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.
On January 1, 2020, the Company issued 120,000 shares of restricted
common stock to three directors. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$228,000.
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. 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 and six months ended March 31, 2020 and
2019 was as follows (in thousands):
|
|
|
Segment
|
|
|
|
Gross
|
Net
|
Segment
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
Three
Months Ended March 31, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(3,346)
|
$1,224
|
TransTech
distribution business
|
5
|
1
|
15
|
4
|
Total
segments
|
$5
|
$1
|
$(3,331)
|
$1,228
|
|
|
|
|
|
Three
Months Ended March 31, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(1,434)
|
$3,565
|
TransTech
distribution business
|
594
|
139
|
(8)
|
379
|
Total
segments
|
$594
|
$139
|
$(1,442)
|
$3,944
|
|
|
|
Segment
|
|
|
|
Gross
|
Net
|
Segment
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
Six
Months Ended March 31, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(6,418)
|
$1,224
|
TransTech
distribution business
|
122
|
52
|
72
|
4
|
Total
segments
|
$122
|
$52
|
$(6,346)
|
$1,228
|
|
|
|
|
|
Six
Months Ended March 31, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(2,171)
|
$3,565
|
TransTech
distribution business
|
1,196
|
269
|
(40)
|
379
|
Total
segments
|
$1,196
|
$269
|
$(2,211)
|
$3,944
|
During
the six months ended March 31, 2020, the segment development of
Bio-RFID™” and
“ChromaID™” incurred non-cash expenses of
$4,510,430.
25
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 March 31,
2020, there were the following
material transactions that require disclosure:
The
Company closed additional rounds of a debt offering and received
gross proceeds of $1,979,500 in exchange for issuing Subordinated
Convertible Notes and Warrants in a private placement to 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
1,979,500 shares of Common Stock, subject to certain adjustments,
and the Warrants are initially exercisable for 989,750 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 $158,360 and warrants to
purchase 237,540 shares of the Company’s common stock, all
based on 8% of gross proceeds to the Company.
The Company issued 305,117 shares of common stock related to
the automatic conversion of Convertible Notes and interest from a
private placement to accredited investors in 2019. The Convertible
Notes and interested were automatically converted to Common Stock
at $1.00 per share on the one year anniversary starting on February
15, 2020.
On April 29, 2020, the Company increased the salary of Ronald P.
Erickson and Phillip A. Bosua by $20,000 per year.
On April 30, 2020, the Company received $226,170 under the
Paycheck Protection Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES
Act), Pub. Law 116-136, 134 Stat. 281 (2020).
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle, Inc., a Nevada corporation (“Particle”).
The Company is the sole shareholder as of the date of
incorporation. As a result, Particle is a direct, wholly owned
subsidiary of the Company. Particle shall utilize the same
corporate offices as the Company and shall focus on the development
and commercialization of the Company’s extensive intellectual
property relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular
focus with its initial product, the UBAND™ non-invasive
continuous glucose monitor.
On May
11, 2020, the Company signed Amendment 3 to the convertible
promissory or OID notes with Ronald P. Erickson and J3E2A2Z,
extending the due dates to September 30, 2020.
On May
11, 2020, the Company signed Amendments to the convertible
promissory or OID notes with Clayton A. Struve, extending the due
dates to September 30, 2020.
26
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 expect to shut
down TransTech completely by June 30, 2020.
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.
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.
27
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.
Our Patents and Intellectual Property
We believe that our 14 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 2039. 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.
28
The patents that have been issued to Know Labs and their dates of
issuance are:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2
entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The patent expires February 7,
2033. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
On March 23, 2015, we were issued US Patent No. 8,988,666 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 31, 2027.
On May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On April 19, 2016, we were issued US Patent No. 9,316,581 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
March 12, 2033. This patent describes an enhancement to the
foundational ChromaID technology.
On April 18, 2017, we were issued US Patent No. 9,625,371 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy.” The
patent expires July 2027. This patent pertains to the use of
ChromaID technology for the identification and analysis of
biological tissue. It has many potential applications in medical,
industrial and consumer markets.
On 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.
On February 4, 2020, we were issued US Patent No. 10,548,503 B2,
entitled “Health Related Diagnostics Employing Spectroscopy
in Radio/Microwave Frequency Band. The patent expires in
approximately May 2039. This patent pertains to the use of Bio-RFID
technology for medical diagnostics.
We continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
29
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
$938,303 and $391,014 for the six months ended March 31,
2020 and 2019, 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.
EMPLOYEES
As of March 31, 2020, we had
six full-time employees, including one employee 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.
30
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.
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 expect to shut down TransTech
completely by June 30, 2020.
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in thousands)
|
Three Months
Ended March 31,
|
|||
|
2020
|
2019
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$5
|
$594
|
$(589)
|
-99.2%
|
Cost of
sales
|
4
|
455
|
(451)
|
99.1%
|
Gross
profit
|
1
|
139
|
(138)
|
-99.3%
|
Research and
development expenses
|
447
|
184
|
263
|
-142.9%
|
Selling, general
and administrative expenses
|
1,623
|
1,004
|
619
|
-61.7%
|
Operating
loss
|
(2,069)
|
(1,049)
|
(1,020)
|
-105.3%
|
Other (expense)
income:
|
|