10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 6, 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 June 30, 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 August 6, 2020: 24,483,555 shares.
TABLE OF CONTENTS
|
|
|
Page Number
|
|
|
PART I FINANCIAL INFORMATION
|
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
22
|
|
|
|
30
|
|
|
|
30
|
|
|
|
PART
II OTHER INFORMATION
|
|
|
|
32
|
|
|
|
32
|
|
|
|
42
|
2
ITEM 1. FINANCIAL
STATEMENTS
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
June
30,
2020
|
September
30,
2019
|
ASSETS
|
|
(Audited)
|
|
|
|
CURRENT ASSETS:
|
|
|
Cash and cash
equivalents
|
$4,662,371
|
$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
|
4,662,371
|
1,977,423
|
|
|
|
PROPERTY AND EQUIPMENT,
NET
|
107,743
|
130,472
|
|
|
|
OTHER ASSETS
|
|
|
Intangible
assets
|
144,447
|
274,446
|
Other assets
|
25,180
|
13,766
|
Operating lease right of use
asset
|
100,000
|
243,526
|
|
|
|
TOTAL ASSETS
|
$5,039,741
|
$2,639,633
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$434,790
|
$810,943
|
Accounts payable - related
parties
|
6,628
|
7,048
|
Accrued expenses
|
166,235
|
460,055
|
Accrued expenses - related
parties
|
683,677
|
458,500
|
Convertible notes
payable
|
2,178,906
|
3,954,241
|
Note payable
|
226,170
|
-
|
Current portion of operating lease
right of use liability
|
101,832
|
124,523
|
Total current
liabilities
|
3,798,238
|
5,815,310
|
|
|
|
NON-CURRENT
LIABILITIES:
|
|
|
Operating lease right of use
liability, net of current portion
|
-
|
121,613
|
Settlement
payable
|
825,000
|
-
|
Total non-current
liabilities
|
825,000
|
121,613
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note
14)
|
-
|
-
|
|
|
|
STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
Preferred stock - $0.001 par value,
5,000,000 shares authorized, 0 shares issued and
outstanding at 6/30/2020
and 9/30/2019 respectively
|
-
|
-
|
Series A Convertible Preferred stock
- $0.001 par value, 23,334 shares authorized, 0 shares
issued and outstanding
at 6/30/2020 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 6/30/2020 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 6/30/2020 and 9/30/2019,
respectively
|
1,015
|
1,015
|
Common stock - $0.001 par value,
100,000,000 shares authorized, 23,926,245 and 18,366,178
shares issued and
outstanding at 6/30/2020 and 9/30/2019,
respectively
|
23,929
|
18,366
|
Additional paid in
capital
|
52,044,021
|
39,085,179
|
Accumulated
deficit
|
(51,654,252)
|
(42,403,640)
|
Total stockholders' equity
(deficit)
|
416,503
|
(3,297,290)
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
|
$5,039,741
|
$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,
|
Nine Months
Ended,
|
||
|
June
30,
2020
|
June
30,
2019
|
June
30,
2020
|
June
30,
2019
|
|
|
(Restated)
|
|
(Restated)
|
REVENUE
|
$-
|
$381,270
|
$121,939
|
$1,577,191
|
COST OF
SALES
|
-
|
275,819
|
69,726
|
1,202,944
|
GROSS
PROFIT
|
-
|
105,451
|
52,213
|
374,247
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
375,243
|
441,541
|
1,313,546
|
832,555
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
634,169
|
689,027
|
3,177,661
|
2,381,977
|
OPERATING
LOSS
|
(1,009,412)
|
(1,025,117)
|
(4,438,994)
|
(2,840,285)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
Interest
expense
|
(1,188,874)
|
(1,462,376)
|
(4,170,038)
|
(1,871,703)
|
Other
income
|
-
|
8,227
|
65,220
|
21,281
|
(Loss) gain on debt
settlements
|
(706,800)
|
325,000
|
(706,800)
|
325,000
|
Total other
(expense), net
|
(1,895,674)
|
(1,129,149)
|
(4,811,618)
|
(1,525,422)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(2,905,086)
|
(2,154,266)
|
(9,250,612)
|
(4,365,707)
|
|
|
|
|
|
Income taxes -
current provision
|
-
|
-
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$(2,905,086)
|
$(2,154,266)
|
$(9,250,612)
|
$(4,365,707)
|
|
|
|
|
|
Basic and diluted
loss per share
|
$(0.12)
|
$(0.12)
|
$(0.44)
|
$(0.24)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
23,715,823
|
18,197,308
|
20,842,782
|
17,955,281
|
The accompanying notes are an integral part of these consolidated
financial statements.
4
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
|
Series A
Convertible
|
Series C
Convertible
|
Series D
Convertible
|
|
|
Additional
|
|
Total
Stockholders'
|
|||
|
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Equity
|
||||
|
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)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
95,906
|
-
|
95,906
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,287,912
|
-
|
1,287,912
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
140,266
|
-
|
140,266
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
83,219
|
-
|
83,219
|
Issuance of common stock for
warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
132,222
|
134
|
(134)
|
-
|
-
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,154,266)
|
(2,154,266)
|
Balance as of June 30,
2019
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
18,325,191
|
$18,326
|
$38,215,465
|
$(39,157,031)
|
$(920,435)
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
-
|
-
|
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)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
135,744
|
-
|
135,744
|
Conversion of debt offering and
accrued interest (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
467,117
|
470
|
471,725
|
-
|
472,195
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,330,457
|
-
|
3,330,457
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,594,043
|
-
|
1,594,043
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
856,370
|
-
|
856,370
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
10,000
|
10
|
18,990
|
-
|
19,000
|
Issuance of common stock for
exercise of warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
125
|
54,875
|
-
|
55,000
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,905,086)
|
(2,905,086)
|
Balance as of June 30,
2020
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
23,926,245
|
$23,929
|
$52,044,021
|
$(51,654,252)
|
$416,503
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
Nine Months
Ended,
|
|
|
June 30,
2020
|
June 30,
2019
|
|
|
(Restated)
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(9,250,612)
|
$(4,365,707)
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation and
amortization
|
164,078
|
156,931
|
Issuance of capital
stock for services and expenses
|
1,045,000
|
348,900
|
Stock based
compensation- warrants
|
-
|
30,325
|
Stock based
compensation- stock option grants
|
701,470
|
359,053
|
Amortization of
debt discount
|
3,874,018
|
1,736,357
|
Provision on loss
on accounts receivable
|
-
|
67,792
|
Right of use,
net
|
(778)
|
-
|
Loss on sale of
assets
|
4,663
|
32,777
|
Loss (gain) on debt
settlement
|
706,800
|
(325,000)
|
|
|
|
Changes in
operating assets and liabilities:
|
-
|
|
Accounts
receivable
|
63,049
|
170,861
|
Prepaid
expenses
|
6,435
|
8,889
|
Inventory
|
7,103
|
139,645
|
Other
assets
|
(11,414)
|
(6,597)
|
Accounts payable -
trade and accrued expenses
|
24,073
|
(197,697)
|
Deferred
revenue
|
-
|
(55,946)
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(2,666,115)
|
(1,899,417)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Investment in
research and development equipment
|
(13,055)
|
(79,934)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(13,055)
|
(79,934)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Proceeds from notes
payable
|
226,170
|
-
|
Repayments on line
of credit
|
-
|
(101,518)
|
Proceeds from
convertible notes payable
|
5,639,500
|
4,242,490
|
Payments for
issuance costs from notes payable
|
(479,965)
|
(407,321)
|
Issuance of common
stock for warrant exercise
|
55,000
|
-
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
5,440,705
|
3,733,651
|
|
|
|
NET INCREASE IN
CASH AND CASH EQUIVALENTS
|
2,761,535
|
1,754,300
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
1,900,836
|
934,407
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$4,662,371
|
$2,688,707
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$21,299
|
Taxes
paid
|
$1,928
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$3,766,074
|
$2,857,960
|
Issuance of
warrants to debt holders
|
$1,783,527
|
$1,384,530
|
Issuance of
warrants for services related to debt offering
|
$1,026,339
|
$1,072,095
|
Cashless warant
exercise (fair value)
|
$57,490
|
$117,165
|
Cashless stock
options exercise (fair value)
|
$18,298
|
$-
|
Conversion of debt
offering
|
$4,235,436
|
$-
|
Conversion of
accrued interest
|
$351,089
|
$-
|
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 nine months ended June 30, 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.
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.
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle, Inc., a Nevada corporation. The Company is the sole
shareholder as of the date of incorporation. As a result, Particle
is a direct, majority 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.
7
On June 1, 2020, the Company approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with its
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain patents and trademarks of the Company, in exchange the
Company shall receive: (i) a one-time fee of $250,000 upon a
successful financing of Particle, and (ii) a quarterly royalty
payment equal to the greater of 5% of the Gross Sales, net of
returns, from Particle or $5,000. As of June 30, 2020 the
operations of Particle have generated no sales and operations are
just commencing.
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 shut down TransTech on June 30,
2020.
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 $9,250,612, $7,612,316 and $3,257,597
for the nine months ended June 30, 2020 and the years ended
September 30, 2019 and 2018, respectively. Net cash used in
operating activities was $2,666,115, $3,104,035 and $1,117,131 for
the nine months ended June 30, 2020 and the years ended September
30, 2019 and 2018, respectively. During the nine months ended June
30, 2020 and 2019, the Company incurred non-cash expenses of
$6,613,451 and $2,407,135.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of June 30, 2020, the Company’s
accumulated deficit was $51,654,252. 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 June 30,
2020 will be sufficient to fund our operations through June 30,
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, its wholly owned subsidiaries,
TransTech Systems, Inc. and RAAI Lighting, Inc., and majority-owned
subsidiary, Particle. Inter-Company items and transactions have
been eliminated in consolidation. The ownership of Particle not
owned by the Company at June 30, 2020 is not material and thus no
non-controlling interest is recognized.
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 June 30, 2020, the Company had uninsured deposits in the amount
of $4,412,371.
8
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 were reviewed periodically for
collectability.
TransTech Systems Inc. sold products directly to customers. the
products were typically sold pursuant to purchase orders placed by
our customers, and our terms and conditions of sale did not require
customer acceptance. We accounted 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 had a single performance obligation to transfer products
and are short term in nature, usually less than one year. Our
revenue was 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 expected to be entitled
to receive in exchange for those goods. The Company shut
down TransTech on June 30, 2020.
Allowance for Doubtful Accounts - We maintain an allowance
for uncollectible accounts receivable. It is our practice to
regularly review and revise, when deemed necessary, our estimates
of uncollectible accounts receivable, which are based primarily on
actual historical return rates. We record estimated uncollectible
accounts receivable as selling, general and administrative expense.
As of June 30, 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. The Company shut down TransTech on
June 30, 2020.
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 2-5
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
$1,313,546, $1,257,872 and
$570,514 for the nine months ended June 30, 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:
9
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of June 30, 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 June 30, 2020 and September 30, 2019 was
$4,352,188 and $1,901,278, respectively.
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, the Company evaluates all of
its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. The Company then determines if embedded derivative
must bifurcated and separately accounted for. For derivative
financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and
is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses a
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
The
Company determined that none of the conversion features within its
currently outstanding convertible notes payable must be bifurcated
and thus there was no derivative liability as of June 30, 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 June
30, 2020, there were options outstanding for the purchase of
4,895,000 common shares (including unearned stock option grants
totaling 2,680,000 shares related to performance targets), warrants
for the purchase of 20,663,573 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 14,659,764 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 5,639,500 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $7,894,566. All of which could potentially dilute future
earnings per share but excluded from the June 30, 2020 calculation
of net loss per share because their impact is
antidilutive.
As of June 30, 2019, there were options outstanding for the
purchase of 2,437,668 common shares (excluding unearned stock
option grants), warrants for the purchase of 17,797,090 common
shares, and 4,894,071 shares of the Company’s common
stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company had
13,262,779 common shares (9,020,264 common shares at the current
price of $0.25 per share and 4,424,515 common shares at the current
price of $1.00 per share) and are issuable upon conversion of
convertible debentures of $6,497,556. These amounts are excluded
from the June 30, 2019 net loss per share because their impact is
antidilutive.
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.
10
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.
4. ACCOUNTS RECEIVABLE/CUSTOMER
CONCENTRATION
Accounts receivable were $0 and
$63,049, net of allowance, as of June 30, 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 June 30, 2020 and
September 30, 2019, respectively. The decrease in
accounts receivable related to the shutdown of TransTech on June
30, 2020.
5. INVENTORIES
Inventories were $0 and $7,103
as of June 30, 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 June 30, 2020 and September 30, 2019, respectively. The
decrease in inventory related to the shutdown of TransTech on June
30, 2020.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment as of June 30, 2020 and September 30, 2019 was comprised of the
following:
|
Estimated
|
|
|
|
Useful Lives
|
June 30, 2020
|
September 30, 2019
|
Machinery
and equipment
|
2-10 years
|
$315,692
|
$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
|
|
(238,416)
|
(379,259)
|
|
|
$107,743
|
$130,472
|
Total depreciation expense was $51,005 and $70,265 for the nine months ended June 30, 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.
The
Company retired assets at TransTech with a net book value of $4,358
as of June 30, 2020. The Company shut down TransTech on June 30,
2020.
7. INTANGIBLE ASSETS
Intangible assets as of June 30, 2020 and September 30, 2019 consisted of the
following:
|
Estimated
|
June 30,
|
September 30,
|
|
Useful Lives
|
2020
|
2019
|
|
|
|
|
Technology
|
3
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(375,553)
|
(245,554)
|
Intangible
assets, net
|
|
$144,447
|
$274,446
|
11
Total amortization expense was $129,999 for the nine months ended June 30, 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.
The fair value of the intellectual property associated with the
assets acquired was $520,000 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
8. ACCOUNTS PAYABLE
Accounts payable were $434,790 and $810,943 as of June 30, 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 shut down TransTech on 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 June 30,
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
June 30, 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 nine months ended
June 30, 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 June 30, 2020 and September 30, 2019,
total right-of-use assets and operating lease liabilities for
remaining long term lease was approximately $100,000 and $246,000,
respectively. In the nine months ended June 30, 2020 and 2019, the
Company recognized approximately $135,828 and $133,996,
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 nine months ended June 30, 2020
was as follows:
Cash
paid for ROU operating lease liability $100,497
Weighted-average
remaining lease term 1.75 years
Weighted-average
discount rate 10%
The
minimum future lease payments as of June 30, 2020 are as
follows:
Year
|
$
|
2021
|
$133,996
|
Imputed
interest
|
(32,164)
|
Total lease
liability
|
$101,832
|
10. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of June 30, 2020 and September 30, 2019 consisted of the
following:
12
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
$69,671 and $62,171 as
of June 30, 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 June 30, 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
$127,295 and $73,964 as of June
30, 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 June 30, 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.
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.
13
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 nine months ended June 30, 2020, the Company
issued 4,581,917 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 Nine months ended June 30,
2020
During
the nine months ended June 30, 2020, the Company closed additional
rounds of a debt offering and received gross proceeds of $5,639,500
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 5,639,500 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 2,819,750 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 $1,594,083 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 $411,950
and warrants to purchase 615,675 shares of the Company’s
common stock, all based on 6.3-8%% of gross proceeds to the
Company. The warrants issued for these services had a fair value of
$1,016,797 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
$411,950 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 $3,766,074 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 nine months ended June 30, 2020, amortization related to the
2019 and 2020 debt offerings of $4,109,599 of the beneficial
conversion feature, warrants issued to debt holders and placement
agent was recognized as interest expense in the consolidated
statements of operations.
Convertible
notes payable as of June 30, 2020 and September 30, 2019 are
summarized below:
|
June 30,
2020
|
September 30,
2019
|
Convertible
note- Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
Convertible
note- Ronald P. Erickson and affiliates
|
1,184,066
|
1,184,066
|
2019
Convertible notes
|
4,242,490
|
4,242,515
|
Q1
2020 Convertible notes
|
520,000
|
-
|
Q2
2020 Convertible notes
|
195,000
|
-
|
Q3
2020 Convertible notes
|
4,924,500
|
-
|
Bousted
fee refund (originally booked as contra debt)
|
50,000
|
-
|
Less
conversions
|
(4,242,490)
|
-
|
Less
debt discount - BCF
|
(3,077,151)
|
(1,273,692)
|
Less
debt discount - warrants
|
(1,485,512)
|
(616,719)
|
Less
debt discount - warrants issued for services
|
(1,202,997)
|
(652,919)
|
|
$2,178,906
|
$3,954,251
|
14
Note Payable
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). During the nine
months ended June 30, 2020, the Company recorded interest expense
of $390. The Company is utilizing the funds in accordance with the
legal requirements and expects this loan to be
forgiven.
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
June 30, 2020, the Company had 23,926,245 shares of common stock
issued and outstanding, held by 126 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 June 30, 2020, there were options
outstanding for the purchase of 4,895,000 common shares (including
unearned stock option grants totaling 2,680,000 shares related to
performance targets), warrants for the purchase of 20,663,573
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and are issuable upon conversion of
convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share.
Voting Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of
preferred stock with a par value of $0.001.
Series C and D Preferred Stock and Warrants
On
August 5, 2016, the Company closed a Series C Preferred Stock and
Warrant Purchase Agreement with Clayton A. Struve, an accredited
investor for the purchase of $1,250,000 of preferred stock with a
conversion price of $0.70 per share. The preferred stock has a
yield of 8% and an ownership blocker of 4.99%. In addition, Mr.
Struve received a five-year warrant to acquire 1,785,714 shares of
common stock at $0.70 per share. On
August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per
share pursuant to the documents
governing such instruments. On June 30, 2020 and September 30, 2019 there are 1,785,715 Series
C Preferred shares outstanding.
As of June 30, 2020, and
September 30, 2019, the Company has 1,016,014 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 June 30, 2020 and September 30, 2019,
there are no Series F shares outstanding.
15
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 Convertible
Notes Payable of $7,894,566 or 14,659,764 common shares (9,020,264
common shares at the current price of $0.25 per share and 5,639,500
common shares at the current price of $1.00 per share) and the exercise price of additional outstanding
warrants to purchase 12,738,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments. Warrants totaling 5,763,842 would adjust below $1.20
per share pursuant to the documents governing such
instruments.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The following equity issuances occurred during the nine months
ended June 30, 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.
During the nine months ended June 30, 2020, the Company issued
550,000 shares of restricted common stock for services. The shares
were issued were valued at $1.90 per share, the market price of our
common stock, or $1,045,000.
During the nine months ended June 30, 2020, the Company
issued 4,581,917 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 nine months ended June 30, 2020, the Company
issued 354,959 shares of common
stock at $0.789 per share related to the exercise of
warrants.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the nine months
ended June 30, 2020:
During the nine months ended June 30, 2020, the Company
issued 354,959 shares of common
stock at $0.923 per share and cancelled warrants to purchase
213,983 shares of common stock at
$$1.065 per share to related to the exercise of
warrants.
During the nine months ended June 30, 2020, the Company
issued 50,000 shares of common
stock at $2.00 per share. The warrant was valued at $1.765 per
share.
Debt Offering Warrants
The
Warrants issued for the 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 2,819,750 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 2020 debt offering, the placement agent for the
Convertible Notes and the Warrants received warrants to 615,675
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 June 30, 2020 were as follows:
16
|
June 30, 2020
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
Issued
|
3,485,425
|
1.211
|
Exercised
|
(354,959)
|
(0.923)
|
Forfeited
|
(213,983)
|
(1.065)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
20,663,573
|
$0.570
|
Exerciseable
at end of period
|
20,663,573
|
|
The following table summarizes information about warrants
outstanding and exercisable as of June 30, 2020:
|
June 30, 2020
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
13,233,286
|
2.00
|
$0.250
|
13,233,286
|
$0.250
|
714,286
|
1.08
|
0.700
|
714,286
|
0.700
|
882,159
|
1.37
|
1.000
|
882,159
|
1.000
|
5,763,842
|
4.40
|
1.20-1.50
|
5,763,842
|
1.20-1.50
|
70,000
|
4.26
|
2.00-4.08
|
70,000
|
2.34-4.08
|
|
|
|
|
|
20,663,573
|
3.36
|
$0.570
|
20,663,573
|
$0.570
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the nine months ended June
30, 2020 were as
follows:
0%
|
5 years
|
176%-177%
|
1.51%-1.71%
|
There were vested and in the money warrants of 20,593,573
as of June 30, 2020
with an aggregate intrinsic value of
$26,079,148.
12. STOCK
OPTIONS
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 4,895,000 common shares (including unearned stock option grants
totaling 2,680,000 shares related to performance
targets).
17
Determining Fair Value under ASC 718
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had the following stock option transactions during the
nine months ended June 30, 2020:
During the nine months ended June 30, 2020, the Company granted
stock option grants to executives, directors and consultants
for 3,025,000 shares with an
exercise price of $1.126 per share. The grants expire in five years
and generally vest quarterly over four years. Stock option grants
totaling 2,400,000 shares of
common stock are performance stock option grants and are not vested
until the performance is achieved.
During the nine months ended June 30, 2020, executives and
employees voluntarily cancelled stock option grants for
2,589,477 shares with an exercise
price of $2.656 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.
There are currently 4,895,000 (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 $1.163 per share outstanding as of
June 30, 2020 under the 2011 Stock
Incentive Plan. The Company recorded $135,744 and $359,051 of compensation expense, net of related tax
effects, relative to stock options for the nine months ended June
30, 2020 and 2019 and in
accordance with ASC 718. As of June 30, 2020, there is approximately
$479,209, 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 3.94
years.
Stock option activity for the nine months ended June 30,
2020 and the years ended September 30,
2019 and 2018 was as follows:
|
Weighted
Average
|
||
|
Options
|
Exercise
Price
|
$
|
Outstanding as of
September 30, 2017
|
15,404
|
$14.68
|
$226,059
|
Granted
|
2,180,000
|
1.683
|
3,668,500
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(12,736)
|
14.764
|
(188,040)
|
Outstanding as of
September 30, 2018
|
2,182,668
|
1.698
|
3,706,519
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
Outstanding as of
September 30, 2019
|
4,532,668
|
2.025
|
9,180,369
|
Granted
|
3,025,000
|
1.126
|
3,406,600
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,589,477)
|
(2.656)
|
(6,877,721)
|
Outstanding as of
June 30, 2020
|
4,895,000
|
$1.163
|
$5,690,950
|
18
The following table summarizes information about stock options
outstanding and exercisable as of June 30, 2020:
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted Average
Remaining Life In Years
|
Weighted Average
Exercise Price Outstanding
|
Number
Exercisable
|
Weighted Average
Exercise Price Exercisable
|
$0.25
|
230,000
|
2.96
|
$0.250
|
115,000
|
$0.250
|
1.10-1.25
|
2,940,000
|
4.35
|
1.36
|
270,833
|
1.139
|
1.28-1.50
|
1,610,000
|
4.35
|
1.31
|
585,625
|
1.292
|
1.79-2.25
|
115,000
|
4.00
|
0.96
|
65,000
|
0.852
|
|
4,895,000
|
3.94
|
$1.163
|
1,036,458
|
$1.186
|
There were in the money stock option grants of 4,895,000
shares as of June 30, 2020 with an
aggregate intrinsic value of $2,679,000.
On May
21, 2020, Particle approved a 2020 Stock Incentive Plan and
reserved 8,000,000 shares under the Plan. The Plan requires vesting
annually over four years, with no vesting in the first two
quarters.
On May
21, 2020, Particle approved stock option grants for 3,900,000
shares at $0.10 per share. The stock option grants vest annually
over four years, with no vesting in the first two quarters. On May
21, 2020, Particle approved stock option grants for 1,500,000
shares at $0.10 per share to both Phillip A. Bosua and Ronald P.
Erickson. The stock option grants vest (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved. All stock option grants were finalized
during July 2020.
13. OTHER
SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Related Party Transactions with Ronald P. Erickson
On October 4, 2019, Ronald P. Erickson voluntarily cancelled a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On 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.
On April 29, 2020, the Company increased the salary of Ronald P.
Erickson by $20,000 per year. On June 1, 2020, the Company began
paying Mr. Erickson $10,000 per month for his work on Particle,
Inc.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately
$575,797 and $487,932 as
of June 30, 2020 and September
30, 2019, respectively.
On May
21, 2020, Particle approved a stock option grant for 1,500,000
shares at $0.10 per share to Ronald P. Erickson. The stock option
grant vests (i) 33.3% upon issuance; (ii) 33.3% after the first
sale; and (iii) 33.4% after one million in sales are achieved. The
stock option grant was finalized during July 2020.
Related Party Transaction with Phillip A. Bosua
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.
19
On April 29, 2020, the Company increased the salary of Phillip A.
Bosua by $20,000 per year. On June 1, 2020, the Company began
paying Mr. Bosua $10,000 per month for his work on Particle,
Inc.
On May
21, 2020, Particle approved a stock option grant for 1,500,000
shares at $0.10 per share to Phillip A. Bosua. The stock option
grant vests (i) 33.3% upon issuance; (ii) 33.3% after the first
sale; and (iii) 33.4% after one million in sales are achieved. The
stock option grant was finalized during July 2020.
Other Stock Option Grants and Cancellations
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.
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.
On June
26, 2020, the Company leased temporary lab facilities located at
3131 Western Avenue, Suite A350, Seattle, WA 98121. The Company
leased 5,707 square feet and the net monthly payment is $11,414.
The lease expires on June 30, 2021 and can be terminated with 30
days written notice.
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; (ii) Particle, Inc.
technology; and (iii) TransTech, a distributor of products for employee
and personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. TransTech was shut down on June 30, 2020. Particle just
commenced operations in the quarter ended June 30,
2020.
20
The
reporting for the three and nine months ended June 30, 2020 and
2019 was as follows (in thousands):
|
|
|
Segment
|
|
|
|
Gross
|
Operating
|
Segment
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
Three
Months Ended June 30, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(932)
|
$4,894
|
Particle,
Inc. technology
|
-
|
-
|
(75)
|
146
|
TransTech
distribution business
|
-
|
-
|
(2)
|
-
|
Total
segments
|
$-
|
$-
|
$(1,009)
|
$5,040
|
|
|
|
|
|
Three
Months Ended June 30, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(980)
|
$3,150
|
TransTech
distribution business
|
381
|
105
|
(45)
|
173
|
Total
segments
|
$381
|
$105
|
$(1,025)
|
$3,323
|
|
|
|
Segment
|
|
|
|
Gross
|
Operating
|
Segment
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
Nine
Months Ended June 30, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(4,368)
|
$4,894
|
Particle,
Inc. technology
|
-
|
-
|
(75)
|
146
|
TransTech
distribution business
|
|