10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 16, 2021
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 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
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90-0273142
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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500
Union Street, Suite 810, Seattle, Washington
USA
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98101
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(Address of principal executive offices)
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(Zip Code)
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206-903-1351
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(Registrant's telephone number, including area
code)
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(Former name, address, and fiscal year, if changed since last
report)
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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 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 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
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer (Do not check if a smaller reporting company)
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
The number of shares of common stock, $.001 par value, issued and
outstanding as of February 16, 2021: 26,301,354 shares.
TABLE OF CONTENTS
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Page Number
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PART I
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FINANCIAL INFORMATION
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3
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3
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4
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5
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6
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7
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23
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31
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32
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PART
II
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OTHER
INFORMATION
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33
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44
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45
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48
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2
ITEM 1.
FINANCIAL STATEMENTS
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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December
31,
2020
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September
30,
2020
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ASSETS
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CURRENT
ASSETS:
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Cash and cash
equivalents
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$2,927,234
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$4,298,179
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Total current
assets
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2,927,234
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4,298,179
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PROPERTY AND
EQUIPMENT, NET
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117,004
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128,671
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OTHER
ASSETS
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Intangible
assets
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57,781
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101,114
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Other
assets
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25,181
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25,180
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Operating lease
right of use asset
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96,672
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129,003
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TOTAL
ASSETS
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$3,223,872
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$4,682,147
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT
LIABILITIES:
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Accounts payable -
trade
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$573,224
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$487,810
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Accounts payable -
related parties
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7,559
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5,687
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Accrued
expenses
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480,403
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401,178
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Accrued expenses -
related parties
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613,641
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591,600
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Convertible notes
payable
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5,044,558
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3,967,578
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Note
payable
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226,170
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226,170
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Simple Agreements
for Future Equity
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840,000
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785,000
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Current portion of
operating lease right of use liability
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84,537
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108,779
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Total current
liabilities
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7,870,092
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6,573,802
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NON-CURRENT
LIABILITIES:
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Operating lease
right of use liability, net of current portion
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14,602
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23,256
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Total non-current
liabilities
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14,602
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23,256
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COMMITMENTS AND
CONTINGENCIES (Note 14)
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-
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-
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STOCKHOLDERS'
DEFICIT
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Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
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outstanding at
12/31/2020 and 9/30/2020 respectively
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-
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-
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Series C
Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
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1,785,715 shares
issued and outstanding at 12/31/2020 and 9/30/2020,
respectively
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1,790
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1,790
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Series D
Convertible Preferred stock - $0.001 par value, 1,016,014 shares
authorized,
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1,016,004 shares
issued and outstanding at 12/31/2020 and 9/30/2020,
respectively
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1,015
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1,015
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Common stock -
$0.001 par value, 100,000,000 shares authorized, 25,370,224 and
24,804,874
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shares issued and
outstanding at 12/31/2020 and 9/30/2020, respectively
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25,372
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24,807
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Additional paid in
capital
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56,576,613
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54,023,758
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Accumulated
deficit
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(61,265,612)
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(55,966,281)
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Total stockholders'
deficit
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(4,660,822)
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(1,914,911)
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TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
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$3,223,872
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$4,682,147
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The accompanying notes are an integral part of these consolidated
financial statements.
3
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
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Three Months
Ended,
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December 31,
2020
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December 31,
2019
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REVENUE
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$-
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$117,393
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COST OF
SALES
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-
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65,935
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GROSS
PROFIT
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-
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51,458
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RESEARCH AND
DEVELOPMENT EXPENSES
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966,861
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491,138
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SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
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2,598,732
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920,551
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OPERATING
LOSS
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(3,565,593)
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(1,360,231)
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OTHER INCOME
(EXPENSE):
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Interest
expense
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(1,733,738)
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(1,679,490)
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Other
income
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-
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24,708
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Total other
(expense), net
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(1,733,738)
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(1,654,782)
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LOSS BEFORE INCOME
TAXES
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(5,299,331)
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(3,015,013)
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Income tax
expense
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-
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-
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NET
LOSS
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$(5,299,331)
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$(3,015,013)
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Basic and diluted
loss per share
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$(0.21)
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$(0.16)
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Weighted average
shares of common stock outstanding- basic and diluted
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25,208,726
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18,409,902
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The accompanying notes are an integral part of these consolidated
financial statements.
4
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT
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Series C
Convertible
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Series D
Convertible
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Additional
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Total
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Preferred
Stock
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Preferred
Stock
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Common
Stock
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Paid
in
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Accumulated
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Stockholders'
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Shares
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$
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Shares
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$
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Shares
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$
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Capital
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Deficit
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Deficit
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Balance as of October 1,
2019
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1,785,715
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$1,790
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1,016,004
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$1,015
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18,366,178
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$18,366
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$39,085,179
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$(42,403,640)
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$(3,297,290)
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Stock compensation expense -
employee options
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-
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-
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-
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-
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-
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-
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175,442
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-
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175,442
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Stock option
exercise
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-
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-
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-
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-
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73,191
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73
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(73)
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-
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-
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Beneficial conversion
feature
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-
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-
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-
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-
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-
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-
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330,082
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-
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330,082
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Issuance of warrants to debt
holders
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-
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-
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-
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-
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-
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-
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168,270
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-
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168,270
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Issuance of warrants for services
related to debt offering
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-
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-
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-
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-
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-
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-
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160,427
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-
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160,427
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Issuance of common stock for
exercise of warrants
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-
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-
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-
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-
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28,688
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29
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(29)
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-
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-
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Net loss
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-
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-
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-
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-
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-
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-
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-
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(3,015,013)
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(3,015,013)
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Balance as of December 31,
2019
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1,785,715
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1,790
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1,016,004
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1,015
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18,468,057
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18,468
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39,919,298
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(45,418,653)
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(5,478,082)
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Balance as of October 1,
2020
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1,785,715
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1,790
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1,016,004
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1,015
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24,804,874
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24,807
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54,023,758
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(55,966,281)
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(1,914,911)
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Stock compensation expense -
employee options
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-
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-
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-
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-
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-
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-
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175,442
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-
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175,442
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Conversion of debt offering and
accrued interest (Note 9 and 11)
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-
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-
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-
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-
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561,600
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562
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561,038
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-
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561,600
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Issuance of warrant for services to
related party
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-
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-
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-
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-
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-
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-
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1,811,691
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-
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1,811,691
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Issuance of common stock for
exercise of warrants
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-
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-
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-
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-
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3,750
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4
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4,684
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-
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4,688
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Net loss
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-
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-
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-
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-
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-
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-
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-
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(5,299,331)
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(5,299,331)
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Balance as of December 31,
2020
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1,785,715
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$1,790
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1,016,004
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$1,015
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25,370,224
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$25,372
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$56,576,613
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$(61,265,612)
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$(4,660,822)
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The accompanying notes are an integral part of these consolidated
financial statements.
5
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
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Three Months
Ended,
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December
31,
2020
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December
31,
2019
|
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CASH FLOWS FROM
OPERATING ACTIVITIES:
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Net
loss
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$(5,299,331)
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$(3,015,013)
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Adjustments to
reconcile net loss to net cash (used in)
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operating
activities
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Depreciation and
amortization
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64,633
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60,316
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Stock based
compensation- warrants
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1,811,691
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-
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Stock based
compensation- stock option grants
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175,442
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399,897
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Amortization of
debt discount
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1,596,980
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1,567,047
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Right of use,
net
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(565)
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458
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Provision on loss
on accounts receivable
|
-
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40,000
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Changes in
operating assets and liabilities:
|
|
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Accounts
receivable
|
-
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23,049
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Prepaid
expenses
|
-
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1,243
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Inventory
|
-
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7,103
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Accounts payable -
trade and accrued expenses
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230,150
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91,575
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NET CASH
(USED IN) OPERATING ACTIVITIES
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(1,421,000)
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(824,325)
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CASH FLOWS FROM
INVESTING ACTIVITIES:
|
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Purchase of
research and development equipment
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(9,633)
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(15,357)
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NET CASH (USED IN)
INVESTING ACTIVITIES:
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(9,633)
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(15,357)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
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Proceeds from
convertible notes payable
|
-
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520,000
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Proceeds from
Simple Agreements for Future Equity
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55,000
|
-
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Payments for
issuance costs from notes payable
|
-
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(78,845)
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Proceeds from
issuance of common stock for warrant exercise
|
4,688
|
-
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
59,688
|
441,155
|
|
|
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NET DECREASE IN
CASH AND CASH EQUIVALENTS
|
(1,370,945)
|
(398,527)
|
|
|
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CASH AND CASH
EQUIVALENTS, beginning of period
|
4,298,179
|
1,900,836
|
|
|
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CASH AND CASH
EQUIVALENTS, end of period
|
$2,927,234
|
$1,502,309
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
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Interest
paid
|
$-
|
$-
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$-
|
$330,082
|
Issuance of
warrants to debt holders
|
$-
|
$168,270
|
Issuance of
warrants for services related to debt offering
|
$-
|
$160,427
|
Cashless warrant
exercise (fair value)
|
$-
|
$7,172
|
Cashless stock
options exercise (fair value)
|
$-
|
$18,298
|
Conversion of debt
offering
|
$520,000
|
$-
|
Conversion of
accrued interest
|
$41,599
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
6
KNOW LABS, INCORPORATED 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, 2020,
filed with the Securities and Exchange Commission
(“SEC”) on December 29, 2020. The results of operations
for the three months ended December 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. The Company
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 we can authenticate and identify based upon
the color that is present. The color is both visible to the Company
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. Today the Company is focused upon extensions and new
inventions that are derived from and extend beyond the
Company’s ChromaID technology. The Company calls this new
technology “Bio-RFID.” The rapid advances made with the
Company’s Bio-RFID technology in our laboratory have caused
us to move quickly into the commercialization phase 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.
Particle,
Inc. was incorporated April 30, 2020 and to date has engaged in
activities consisting primarily of research and development
on threaded light bulbs that have a
warm white light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, the
Company approved and ratified entry into an intercompany Patent
License Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received 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 December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivating
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus
that causes COVID-19.
7
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct
to our business. Operating as an independent subsidiary, TransTech
was a distributor of products for employee and personnel
identification and authentication. TransTech historically provided
substantially all of the Company’s revenues. The financial
results from our TransTech subsidiary had been diminishing as
vendors of their products increasingly moved to the Internet and
direct sales to their customers. TransTech closed 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 of $5,299,331, $13,562,641 and
$7,612,316 for the three months ended December 31, 2020 and the
years ended September 30, 2020 and 2019, respectively. Net cash
used in operating activities was $1,421,000, $3,913,803 and
$3,104,035 the three months ended December 31, 2020 and the years
ended September 30, 2020 and 2019, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of December 31, 2020, the
Company’s accumulated deficit was $61,265,612. The
Company has limited capital resources. 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, 2020 includes
an explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company believes that its cash on hand will be sufficient to fund
our operations until July 31, 2021. The Company may need additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities and our
operations and financial condition may be materially adversely
affected.
3.
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
Basis of Presentation – The accompanying 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, Inc. Inter-Company items and transactions
have been eliminated in consolidation. The ownership of Particle not owned by the Company
at December 31, 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 December 31, 2020, the Company had uninsured deposits in the amount
of $2,677,234.
8
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, 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. The Company incurred expenses of
$966,861, $2,033,726
and $1,257,872 for the three months ended December 31,
2020 and the years ended September 30,
2020 and 2019, respectively, on development
activities.
Advertising – Advertising
costs are charged to selling, general and administrative expenses
as incurred. Advertising and marketing costs for the three months
ended December 31, 2020 and 2019 were $118,750 and
$0, respectively.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
9
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of December 31, 2020 and September 30, 2020 are
based upon the short-term nature of the assets and
liabilities.
The
Company has a money market account which is considered a level 1
asset. The balance as of December 31, 2020 and September 30, 2020
was $2,853,419 and $4,252,959, respectively.
The
following table represents a roll-forward of the fair value of the
Simple Agreement for Future Equity (“SAFE”) for which
fair value is determined by Level 3 inputs:
Balance
as of October 1, 2019
|
$-
|
Proceeds
from issuance of SAFE
|
785,000
|
Fair
value adjustment
|
-
|
Balance
as of September 30, 2020
|
$785,000
|
Proceeds
from issuance of SAFE
|
55,000
|
Fair
value adjustment
|
-
|
Balance
as of December 31, 2020
|
$840,000
|
Fair
value of the SAFE on issuance was determined to be equal to the
proceeds received (see Note 8). There were no transfers among Level
1, Level 2, or Level 3 categories in the periods
presented.
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 the conversion features for purposes
of bifurcation within its currently outstanding convertible notes
payable were immaterial and there was no derivative liability to be
recorded as of December 31, 2020 and
September 30, 2020.
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.
10
Net Loss per Share –
Under the provisions of ASC 260, “Earnings Per Share,”
basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. As of
December 31, 2020, the Company had 25,370,224 shares of common stock issued
and outstanding. As of December 31, 2020, there were options
outstanding for the purchase of 12,936,955 common shares (including
unearned stock option grants totaling 10,625,745 shares related to
performance targets), warrants for the purchase of 22,016,367
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
14,189,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,169,500 common shares at the current
price of $1.20 per share) reserved and are issuable upon conversion
of convertible debentures of $7,424,566. All of which could
potentially dilute future earnings per share but are excluded from
the December 31, 2020 calculation of net loss per share because
their impact is antidilutive.
As of
December 31, 2019, there were options outstanding for the purchase
of 4,812,668 common shares (including unearned stock option grants
totaling 2,680,000 and excluding certain stock option grants for a
cancelled kickstarter program), warrants for the purchase of
18,044,490 common shares, and 8,108,356 shares of the
Company’s common stock issuable upon the conversion of Series
C and Series D Convertible Preferred Stock. In addition, the
Company currently has 13,782,779 common shares (9,020,264 common
shares at the current price of $0.25 per share and 4,762,515 common
shares at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of $7,017,581. All of
which could potentially dilute future earnings per
share.
Comprehensive loss – Comprehensive loss is defined as
the change in equity of a business during a period from non-owner
sources. There were no differences between net loss for the three
months ended December 31, 2020 and 2019 and comprehensive loss for
those periods.
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 2020 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.
Other
accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on
the Company’s consolidated financial statements upon
adoption.
11
4. FIXED ASSETS
Property and equipment as of December 31, 2020 and September 30,
2020 was comprised of the following:
|
Estimated
|
December
31,
|
September
30,
|
KNWN-
|
Useful Lives
|
2020
|
2020
|
Machinery
and equipment
|
2-3
years
|
$361,020
|
$355,272
|
Leasehold
improvements
|
5
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
5
years
|
26,855
|
26,855
|
Software
and websites
|
|
-
|
-
|
Less:
accumulated depreciation
|
|
(278,044)
|
(257,068)
|
|
$113,443
|
$128,671
|
Total depreciation expense was $21,300 and $16,983 for the three
months ended December 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.
5. INTANGIBLE ASSETS
Intangible assets as of December 31, 2020 and September 30, 2020
consisted of the following:
|
Estimated
|
December 31,
|
September 30,
|
|
Useful Lives
|
2020
|
2020
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(462,219)
|
(418,886)
|
Intangible
assets, net
|
|
$57,781
|
$101,114
|
Total amortization expense was $43,333 for the three months ended
December 31, 2020 and 2019.
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.
6. LEASES
The
Company has entered into operating leases for office and
development facilities. These leases have terms which range from
two to three years and include options to renew. These operating
leases are listed as separate line items on the Company's December
31, 2020 and September 30, 2020
Consolidated Balance Sheets and represent the Company’s right
to use the underlying asset for the lease term. The Company’s
obligation to make lease payments are also listed as separate line
items on the Company's December 31, 2020 and September 30, 2020 Consolidated Balance
Sheets. Based on the present value of the lease payments for the
remaining lease term of the Company's existing leases, the Company
recognized right-of-use assets and lease liabilities for operating
leases of approximately $250,000 on October 1, 2018. Operating
lease right-of-use assets and liabilities commencing after October
1, 2018 are recognized at commencement date based on the present
value of lease payments over the lease term. During the three
months ended December 31, 2020 and September 30, 2020, the Company had one
lease expire and recognized the rent payments as an expense in the
current period. As of December 31, 2020 and September 30, 2020, total right-of-use
assets and operating lease liabilities for remaining long term
lease was approximately $99,000
and $132,000, respectively. In
the three months ended December 31, 2020 and the year ended
September 30, 2020, the Company
recognized approximately $37,612 and $136,718, respectively in total lease costs
for the leases.
12
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 period ended December 31, 2020
was as follows:
Cash paid for ROU operating lease liability
$34,813
Weighted-average
remaining lease term 1.2 years
Weighted-average
discount rate 7%
The
minimum future lease payments as of December 31, 2020 are as
follows:
Year
|
$
|
2021
|
$87,463
|
2022
|
17,917
|
Imputed
interest
|
(6,241)
|
Total
lease liability
|
$99,139
|
7. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of December 31, 2020 and September 30,
2020 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
$73,452 and $71,562 as of December 31, 2020 and September 30, 2020, respectively. On
December 23, 2020, the Company signed Amendments to the convertible
promissory or OID notes, extending the due dates to March 31, 2021.
Mr. Struve also invested $1,000,000 in the May 2019 Debt
Offering.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On
March 16, 2018, the Company entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $163,109 and $145,202 as of December 31, 2020 and
September 30, 2020, respectively. On December 8, 2020, the
Company signed Amendment 4 to the convertible promissory or OID
notes, extending the due dates to March 31, 2021.
Convertible Debt Offering
Beginning
in 2019, the Company entered into series of debt offerings with
similar and consistent terms. The Company issued 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 notes are convertible into one share of common stock
for each dollar invested in a Convertible Note Payable and
automatically convert to common stock after one year. The
convertible notes contain terms and conditions which are deemed to
be a Beneficial Conversion Feature (BCF). Warrants are issued
to purchase common stock with an exercise price of $1.20 per share
and the number of warrants are equal to 50% of the convertible note
balance. The Company compensates the placement agent with a
cash fee and warrants. Through December 31, 2020, the Company
has raised approximately $10 million through this offerings, of
which $0 and $520,000 were raised in the three months ended
December 31, 2020 and 2019.
13
The
Convertible Notes are initially convertible into 520,000 shares of
Common Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 260,000 shares of Common
Stock.
The
fair value of the Warrants issued to debt holders was $168,270 on
the date of issuance and were amortized over the one-year term of
the Convertible Notes.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $78,845
and warrants to purchase 71,400 shares of the Company’s
common stock, all based on 8-10% of gross proceeds to the Company.
The warrants issued for these services had a fair value of $160,427
at the date of issuance. The fair value of the warrants was
recorded as debt discount (with an offset to APIC) and will be
amortized over the one-year term of the Convertible Notes. The
$78,845 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
The
Company recorded a debt discount of $330,082 associated with a
beneficial conversion feature on the debt, which is being accreted
using the effective interest method over the one-year term of the
Convertible Notes.
During
the three months ended December 31, 2020, the Company issued
561,600 shares of common stock related to the automatic conversion
of Convertible Notes and interest from a private placement to
accredited investors in 2020. The Convertible Notes and interested
were automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on October 17, 2020.
During
the three months ended December 31, 2020, amortization related to
the 2020 debt offerings of $1,596,980 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 December 31, 2020 and September 30, 2020 are summarized
below:
|
December 31, 2020
|
September 30, 2020
|
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
|
4,242,490
|
Q1
2020 Convertible notes
|
520,000
|
520,000
|
Q2
2020 Convertible notes
|
195,000
|
195,000
|
Q3
2020 Convertible notes
|
4,924,500
|
4,924,500
|
Boustead
fee refund (originally booked as contra debt)
|
50,000
|
50,000
|
Less
conversions of 2019 and 2020 notes
|
(4,762,490)
|
(4,242,490)
|
Less
debt discount - BCF
|
(1,237,832)
|
(2,127,894)
|
Less
debt discount - warrants
|
(595,743)
|
(1,025,512)
|
Less
debt discount - warrants issued for services
|
(546,433)
|
(823,582)
|
|
$5,044,558
|
$3,967,578
|
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). As of December 31,
2020 and September 30, 2020,
the Company recorded interest expense of $1,530 and $960, respectively. The Company
is utilizing the funds in accordance with the legal requirements
and expects this loan to be forgiven. Until the loan is legally
forgiven, the loan balance will outstanding. The Company expects to
start the application for the loan forgiveness during the three
months ended March 31, 2021.
14
8.
|
SIMPLE AGREEMENTS FOR FUTURE EQUITY
|
In July 2020, Particle entered into Simple Agreements for Future
Equity (“SAFE”) with twenty two accredited investors
pursuant to which Particle received $785,000 in cash in exchange
for the providing the investor the right to receive shares of the
Particle stock. The Company expects to issue 981,250 shares of the
Particle stock that was initially valued at $0.80 per share. The
Company paid $47,100 in broker fees which were expensed as business
development expenses.
In October 2020, Particle entered into Simple Agreements for Future
Equity (“SAFE”) with two accredited investors pursuant
to which Particle received $55,000 in cash in exchange for the
providing the investor the right to receive shares of the Particle
stock. The Company expects to issue 68,750 shares of the Particle
stock that was initially valued at $0.80 per share. The Company
paid $4,125 in broker fees which were expensed as business
development expenses.
The SAFE contained a number of conversion and redemption
provisions, including settlement upon liquidity or dissolution events.
The final price and shares are not known until settlement upon
liquidity or dissolution events conditions are achieved. The
Company elected the fair value option of accounting for the
SAFE.
9. EQUITY
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
As of
December 31, 2020, the Company had 25,370,224 shares of common stock issued
and outstanding, held by 125 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 December 31, 2020, there were options
outstanding for the purchase of 12,936,995 common shares (including
unearned stock option grants totaling 10,625,745 shares related to
performance targets), warrants for the purchase of 22,016,367
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
14,189,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,169,500 common shares at the current
price of $1.20 per share) reserved and are issuable upon conversion
of convertible debentures of $7,424,566. All of which could
potentially dilute future earnings per share but are excluded from
the December 31, 2020 calculation of net loss per share because
their impact is antidilutive.
Voting Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of
preferred stock with a par value of $0.001.
Series C and D Preferred Stock and Warrants
On
August 5, 2016, the Company closed a Series C Preferred Stock and
Warrant Purchase Agreement with Clayton A. Struve, an accredited
investor for the purchase of $1,250,000 of preferred stock with a
conversion price of $0.70 per share. The preferred stock has a
yield of 8% and an ownership blocker of 4.99%. In addition, Mr.
Struve received a five-year warrant to acquire 1,785,714 shares of
common stock at $0.70 per share. On
August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per
share pursuant to the documents
governing such instruments. On December 31, 2020
and September 30, 2020 there are
1,785,715 Series C Preferred shares
outstanding.
15
As of December 31, 2020 and September 30, 2020, 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 December 31, 2020 and September 30,
2020, 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 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 12,588,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments. Warrants totaling 5,191,636 would adjust below $1.20
per share pursuant to the documents governing such
instruments.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The following equity issuances occurred during the three months
ended December 31, 2020:
The Company issued 561,600 shares of common stock related to the
automatic conversion of Convertible Notes and interest from a
private placement to accredited investors in 2020. The Convertible
Notes and interested were automatically converted to Common Stock
at $1.00 per share on the one year anniversary starting on October
17, 2020.
16
The Company issued 3,750 shares
of common stock at $1.25 per share related to the exercise of
warrants.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the three months
ended December 31, 2020:
On December 15, 2020, the Company issued a fully vested warrant to
Ronald P. Erickson for 2,000,000 shares of common stock. The five
year warrant is convertible at $1.53 per share and was valued using
a Black-Scholes model at $1,811,691.
A
summary of the warrants outstanding as of December 31,
2020 were as
follows:
|
December 31, 2020
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Exercise
|
|
Shares
|
Price
|
Outstanding
at beginning of period
|
20,016,367
|
$0.556
|
Issued
|
2,000,000
|
1.530
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
22,016,367
|
$0.644
|
Exerciseable
at end of period
|
22,016,367
|
|
The following table summarizes information about warrants
outstanding and exercisable as of December 31,
2020:
|
December 31, 2020
|
|||
|
Weighted
|
Weighted
|
|
Weighted
|
|
Average
|
Average
|
|
Average
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
13,133,286
|
1.52
|
$0.250
|
13,133,286
|
$0.250
|
714,286
|
0.58
|
0.700
|
714,286
|
0.700
|
882,159
|
0.87
|
1.000
|
882,159
|
1.000
|
7,191,636
|
4.25
|
1.20-1.50
|
7,191,636
|
1.20-1.50
|
95,000
|
3.94
|
2.00-4.08
|
95,000
|
2.34-4.08
|
|
|
|
|
|
22,016,367
|
3.27
|
$0.644
|
22,016,367
|
$0.644
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants issued during the three months
ended December 31, 2020 were as follows:
Dividend yield
|
0%
|
Expected life
|
3 years
|
Expected volatility
|
140%
|
Risk free interest rate
|
0.4%
|
There were vested warrants of 22,016,367 with an aggregate intrinsic value of
$36,904,487.
17
10.
|
STOCK INCENTIVE PLANS
|
Know Labs, Inc.
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. On November 23,
2020, the Board of Directors increased the size of the stock
available under the Stock Option Plan by 9,750,000 shares. This
increase is based on an industry peer group study.
Determining Fair Value under ASC 718
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had the following stock option transactions during the
three months ended December 31, 2020:
A
consultant exercised a stock option for 3,750 shares of common
stock for a vested stock option grant. The stock option grant had
an exercise price of $1.25 per share.
The Compensation committee issued a stock option grant to an
employee for 140,000 shares at an exercise price of $1.24 per
share. The stock option grant expires in five years. The stock
option grant vests quarterly over four years after a six month
cliff vesting period.
On
December 15, 2020, the Company issued two stock option grants to Ronald P. Erickson one for
1,865,675 shares and one for 1,865,675 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
On
December 15, 2020, the Company issued two stock option grants to Phillip A. Bosua one for
2,132,195 shares and one for 2,132,200 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
There are currently 12,936,995 (including unearned stock option
grants totaling 10,625,745 shares related to performance targets)
options to purchase common stock at an
average exercise price of $1.390 per share outstanding as of
December 31, 2020 under the 2011 Stock
Incentive Plan. The Company recorded $119,483 and 175,442 of
compensation expense, net of related tax effects, relative to stock
options for the three months ended December 31, 2020 and 2019 and
in accordance with ASC 718. As of December 31,
2020, there is approximately $505,996,
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 3.84
years.
18
Stock option activity for the three months ended December 31, 2020
and the years ended September 30, 2020 and 2019 were as
follows:
|
Weighted
Average
|
||
|
Options
|
Exercise
Price
|
$
|
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
|
3,085,000
|
1.142
|
3,522,400
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,739,477)
|
(2.593)
|
(7,103,921)
|
Outstanding as of
September 30, 2020
|
4,805,000
|
1.161
|
5,580,550
|
Granted
|
8,135,745
|
1.525
|
12,407,090
|
Exercised
|
(3,750)
|
(1.250)
|
(4,688)
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
December 31, 2020
|
12,936,995
|
$1.390
|
$17,982,952
|
The following table summarizes information about stock options
outstanding and exercisable as of December 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
|
2.45
|
$0.250
|
129,375
|
$0.250
|
1.10-1.25
|
3,076,250
|
3.89
|
1.05
|
340,729
|
1.104
|
1.28-1.52
|
9,495,745
|
3.89
|
1.50
|
773,646
|
1.310
|
1.79-2.25
|
135,000
|
3.01
|
2.13
|
71,875
|
2.145
|
|
12,936,995
|
3.84
|
$1.390
|
1,315,625
|
$1.294
|
There were in the money stock option grants of 12,936,995 shares as
of December 31, 2020 with an aggregate intrinsic value of
$11,794,416.
Particle, Inc.
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.
During
the three months ended September 30, 2020, Particle approved stock
option grants to non-executive employees and consultants totaling
2,250,000 shares at an average of $0.147 per share. The stock
option grants vest annually over four years, with no vesting in the
first two quarters.
On July
2, 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. The 500,000 vested stock option grants for both Mr.
Bosua and Erickson were valued at $0.788 per share or
$394,000.
During
November 2020, Particle approved a stock option grant to a
consultant totaling 50,000 shares at an average of $0.80 per share.
The stock option grant vests quarterly over four years, with no
vesting in the first two quarters.
The Company recorded $55,959 and $0 of compensation expense, net of
related tax effects, relative to stock options for the three months
ended December 31, 2020 and 2019 and in accordance with ASC 718. As
of December 31, 2020, there is
approximately $802,445, 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 4.52
years.
19
The following table summarizes information about Particle stock
options outstanding and exercisable as of December 31,
2020:
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
Weighted
|
|
Average
|
Range of
|
Number
|
Remaining Life
|
Average
|
Number
|
Exercise Price
|
Exercise Prices
|
Outstanding
|
In Years
|
Exercise Price
|
Exerciseable
|
Exerciseable
|
$0.10
|
5,100,000
|
4.51
|
$0.10
|
1,000,000
|
$0.10
|
0.80
|
200,000
|
4.77
|
$0.80
|
-
|
-
|
|
|
|
|
|
|
|
5,300,000
|
4.52
|
$4.52
|
1,000,000
|
$0.10
|
There were in the money stock option grants of 1,000,000
shares as of December 31, 2020 with an
aggregate intrinsic value of $673,585.
11.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Notes 7, 9, 10 and 12 for related party transactions with
Ronald P. Erickson.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $619,218
and $597,177 as of December 31, 2020 and September 30, 2020,
respectively.
On December 15, 2020, the Company issued a fully vested warrant to
Ronald P. Erickson for 2,000,000 shares of common stock. The five
year warrant is convertible at $1.53 per share and was valued using
a Black-Scholes model at $1,811,691.
On
December 15, 2020, the Company issued two stock option grants to Ronald P. Erickson, one for
1,865,675 shares and one for 1,865,675 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
Related Party Transaction with Phillip A. Bosua
See Notes 10 and 12 for related party transactions with Phillip A.
Bosua.
On
December 15, 2020, the Company issued two stock option grant to Phillip A. Bosua, one for
2,132,195 shares and one for 2,132,200 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
12. 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
See the Employment Agreement for Phillip A. Bosua that was
disclosed in Form 10-K filed with the SEC on December 29, 2020.
Phillip A. Bosua.
20
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
See the Employment Agreement for Ronald P. Erickson that was
disclosed in Form 10-K filed with the SEC on December 29,
2020.
Properties and Operating Leases
See the Property Leases that were disclosed in Form 10-K filed with
the SEC on December 29, 2020.
13. 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 closed on June 30, 2020. Particle commenced
operations in the three months ended June 30,
2020.
The
reporting for the three months ended December 31, 2020 and 2019 was
as follows (in thousands):
|
|
|
Segment
|
|
|
|
Gross
|
Operating
|
Segment
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
Three
Months Ended December 31, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(3,190)
|
$3,158
|
Particle,
Inc. technology
|
-
|
-
|
(375)
|
66
|
TransTech
distribution business
|
-
|
-
|
-
|
-
|
Total
segments
|
$-
|
$-
|
$(3,565)
|
$3,224
|
|
|
|
|
|
Three
Months Ended December 31, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(1,393)
|
$2,077
|
TransTech
distribution business
|
117
|
51
|
32
|
18
|
Total
segments
|
$117
|
$51
|
$(1,361)
|
$2,095
|
During
the three months ended December 31, 2020 and 2019, the
Company incurred non-cash
expenses of $3,648,181 and
$2,067,718.
14. SUBSEQUENT EVENTS
The Company evaluated subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements were issued. Subsequent to December 31, 2020, there were
the following material transactions that require
disclosure:
Stock Option Exercises and Issuances
On
January 14, 2021, the Company issued a warrant to purchase 50,000
shares of common stock to Financial Genetics LLC at $2.00 per
share. The warrants were issued for investor relation services. The
warrant expires on January 14, 2026.
On
January 14, 2021, the Company issued a stock option grant to
purchase 180,000 shares of common stock to an employee at $2.00 per
share. The stock option grant expires
in five years and vests quarterly over four years (none in the
first six months).
21
On
January 15, 2021, the Company issued 30,000 shares each to three
directors shares at an exercise price of $2.00 per
share.
On
January 15, 2021, the Company issued 20,000 warrants to purchase
common stock each to three directors shares at $2.00 per share. The
warrants expire on January 15, 2026.
On
February 4, 2021, the Company issued a stock option grant to
purchase 200,000 shares of common stock to an employee at $2.04 per
share. The stock option grant expires
in five years and vests quarterly over four years (none in the
first six months).
On
February 9, 2021, the Company issued stock option grants to seven employees and two
consultants for 1,350,000 shares at an exercise price of $2.35 per
share. The stock option grants expire in five years. The stock
option grants vest when earned based on certain performance
criteria.
On
February 4, 2021, Particle issued a stock option grant to purchase
500,000 shares of common stock to an employee at $0.80 per share.
The stock option grant expires in five
years and vests quarterly over four years (none in the first six
months).
On
February 9, 2021, Particle issued stock option grants to seven employees and one
consultant to purchase 1,900,000 shares at an exercise price of
$0.80 per share. The stock option grants expire in five years. The
stock option grants vest when earned based on certain performance
criteria.
On
February 12, 2021, the Company issued 17,500 shares and received
$21,000 related to the exercise of warrants.
On
February 12, 2021, Particle entered into Simple Agreements for
Future Equity (“SAFE”) with accredited investors
pursuant to which Particle received $111,815 in cash in exchange
for the providing the investor the right to receive shares of the
Particle stock.
Transactions with Clayton A. Struve
On
January 5, 2021, the Company extended the due date of the following
warrants with Clayton A. Struve, a major investor in the
Company:
Warrant
No./Class
|
Issue
Date
|
No. Warrant
Shares
|
Exercise
Price
|
Original
Expiration Date
|
Amended
Expiration Date
|
Clayton
Struve Warrant
Series
C Warrant W98
|
08-04-2016
|
1,785,715
|
$0.25
|
08-04-2021
|
08-04-2023
|
Clayton
Struve Warrant
Series
F Warrant F-1
|
11-14-2016
|
187,500
|
$0.25
|
11-13-2021
|
11-13-2023
|
Clayton
Struve Warrant
Series
F Warrant F-2
|
12-19-2016
|
187,500
|
$0.25
|
12-18-2021
|
12-18-2023
|
On
January 28, 2021, Clayton A. Struve exercised warrants on a
cashless basis for 889,880 shares of common stock at $0.25 per
share, including 187,500 and 187,500 that were just extended as
discussed above.
Particle Test Results
The first product, the Particle bulb can be used in households,
businesses and other facilities to inactivate bacteria and
viruses. Through internal preliminary testing, Particle
personnel has confirmed the bulb’s efficacy in inactivating
common germs such as E.
coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus
that causes COVID-19.
Appointment of Financial Expert
On
February 12, 2021, the Audit Committee appointed William A. Owens
as “audit committee financial expert” as defined by the
Securities and Exchange Commission (“SEC”) and as
adopted under the Sarbanes-Oxley Act of 2002.
22
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, we have 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. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see,
and identify, and authenticate based upon the color that is
present. Our 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, we have focused upon extensions and new inventions that
are derived from and extend beyond our ChromaID technology. We call
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, our sole focus of the Company is on its Bio-RFID technology
and its commercialization.
Particle,
Inc. was incorporated April 30, 2020 and to date has engaged in
activities consisting primarily of research and development
on threaded light bulbs that have a
warm white light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received 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 December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus
that causes COVID-19.
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 shut down
TransTech on June 30, 2020.
23
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.
Our 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 marketed as a Glucose Monitor. It will provide the
user with real time information on their blood glucose levels. This
product will require US Food and Drug Administration approval prior
to its introduction to the market.
We have also announced the results of laboratory-based comparison
testing between our Bio-RFID technology and the leading continuous
glucose monitors from Abbott Labs (Freestyle Libre®) and
DexCom (G5®). These results provide evidence of a high degree
of correlation between our Bio-RFID based technology and the
current industry leaders and their continuous glucose monitors. Our
technology is fundamentally differentiated from these industry
leaders as our technology completely non-invasively monitors blood
glucose levels.
We expect to begin the process of obtaining US Food and Drug
Administration (FDA) approval of our non-invasive blood glucose
monitoring device during calendar year 2021.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.
24
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. Particle has applied
for three patents related to its light technology.
Additionally, significant aspects of our technology are maintained
as trade secrets which may not be disclosed through the patent
filing process. We intend to be diligent in maintaining and
securing our trade secrets.
The patents that have been issued to Know Labs and their dates of
issuance are:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
25
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.
26
Product Strategy
We are currently undertaking internal development work on potential
products for the consumer marketplace. We have announced the
development of our non-invasive 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
$966,861 and $491,138 for the three months ended December 31, 2020
and 2019, respectively, on development activities.
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle. Particle is focused 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. Since incorporation, Particle
has engaged in research and development activities on threaded
light bulbs that have a warm white light and can inactivate germs,
including bacteria and viruses.
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 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.
EMPLOYEES
As of December 31, 2020, we had
seven full-time employees. 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.
27
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part II, Item
1A.
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-Q.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.knowlabs.co that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-Q.
RESULTS OF OPERATIONS
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, we have 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. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see,
and identify, and authenticate based upon the color that is
present. Our 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. Today we
are focused upon extensions and new inventions that are derived
from and extend beyond our ChromaID technology. We call 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.
Particle,
Inc. was incorporated April 30, 2020 and to date has engaged in
activities consisting primarily of research and development
on threaded light bulbs that have a
warm white light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received 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 December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus
that causes COVID-19.
28
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. Operating as an independent subsidiary, TransTech was a
distributor of products for employee and personnel identification
and authentication. TransTech historically provided substantially
all of the Company’s revenues. The financial results from our
TransTech subsidiary had been diminishing as vendors of their
products increasingly moved to the Internet and direct sales to
their customers. TransTech closed on 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 December 31,
|
|||
|
2020
|
2019
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$-
|
$117
|
$(117)
|
-100.0%
|
Cost of
sales
|
-
|
66
|
(66)
|
100.0%
|
Gross
profit
|
-
|
51
|
(51)
|
-100.0%
|
Research and
development expenses
|
967
|
491
|
476
|
-96.9%
|
Selling, general
and administrative expenses
|
2,598
|
921
|
1,677
|
-182.1%
|
Operating
loss
|
(3,565)
|
(1,361)
|
(2,204)
|
-161.9%
|
Other (expense)
income:
|
|
|
|
|
Interest
expense
|
(1,734)
|
(1,679)
|
(55)
|
-3.3%
|
Other income
(expense)
|
-
|
25
|
(25)
|
-100.0%
|
Total other income
(expense)
|
(1,734)
|
(1,654)
|
(80)
|
-4.8%
|
(Loss) before
income taxes
|
(5,299)
|
(3,015)
|
(2,284)
|
-75.8%
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(5,299)
|
$(3,015)
|
$(2,284)
|
-75.8%
|
THREE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2019
Sales
Revenue for the three months ended December 31, 2020 decreased
$117,000 to $0 as compared to $$117,000 for the three months ended
December 30, 2019. TransTech closed June 30,
2020.
Cost of Sales
Cost of sales for the three months ended December 31, 2020
decreased $66,000 to $0 as compared to $66,000 for the three months
ended December 30, 2019. TransTech closed June 30,
2020.
Research and Development Expenses
Research and development expenses for the three months ended
December 31, 2020 increased $476,000 to $967,000 as compared to
$491,000 for the three months ended December 30, 2019. The increase
was due to increased personnel, use of consultant and
expenditures related to the
development of our Bio-RFID™ and Particle
technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months
ended December 31, 2020 increased $1,678,000 to $2,599,000 as compared to $921,000 for the
three months ended December 30, 2019.
29
The increase primarily was due to (i) decreased professional fees
of $84,000; (ii) increased stock based compensation of $1,587,000;
(iii) increased other expenses of $146,000; and increased Particle
expenses of $375,000 (primarily payroll); offset by (iv) decreased
TransTech expenses of $20,000 (primarily salaries and rent). As
part of the selling, general and administrative expenses for the
three months ended December 31, 2020 and 2019, we recorded $60,000
and $40,000, respectively, of
investor relation expenses and business development
expenses.
Other (Expense), Net
Other expense, net for the three months ended December 31, 2020 was
$1,734,000 as compared to other expense, net of $1,679,000 for the
three months ended December 30, 2019. The other expense, net for
the three months ended December 31, 2020 included interest expense
of $1,734,000 related to convertible notes payable and the
amortization of the beneficial conversion feature.
The other expense for the three months ended December 31, 2019
included (i) interest expense of $1,679,000; offset by (ii) other
income of $25,000. The interest expense related to convertible
notes payable and the amortization of the beneficial conversion
feature.
Net Loss
Net loss for the three months ended December 31, 2020
was $5,299,000 as compared to
$3,015,000 for the three months ended December 30, 2019. The net
loss for the three months ended December 31, 2020 included
non-cash expenses of $3,648,000. The
non-cash items include (i) depreciation and amortization of
$65,000; (ii) stock based compensation- warrants of $1,812,000;
(iii) stock based compensation- stock options of $175,000; and (iv)
amortization of debt discount as interest expense of $1,596,000. On
December 15, 2020, we issued a warrant to Ronald P. Erickson for
2,000,000 shares of common stock. The five year warrant is
convertible at $1.53 per share and was valued using a
“Black-Scholes” model at
$1,812,000.
The net loss for the three months ended December 31, 2019
included non-cash items of $2,068,000.
The non-cash items include (i) depreciation and amortization of
$60,000; (ii) stock based compensation of $400,000; (iii)
amortization of debt discount of $1,567,000; and (iv) other of
$41,000. TransTech’s net
income from operations was $57,000 for the three months ended
December 31, 2019.
We expect losses to continue as we commercialize our
ChromaID™ and Bio-RFID™ technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. Significant factors in the
management of liquidity are funds generated by operations, levels
of accounts receivable and accounts payable and capital
expenditures.
We had cash of approximately $2,927,000 and net working capital of
approximately $187,000 (net of convertible notes payable and right
of use asset and liabilities) as of December 31,
2020. We have experienced
net losses since inception and we expect losses to continue as we
commercialize our ChromaID™ technology. As of December
31, 2020, we had an accumulated
deficit of $61,266,000 and net losses in the amount of $5,299,000,
$13,563,000, and $7,612,000 for the three months ended December 31,
2020 and the years ended 2020 and 2019, respectively. During
the three months ended December 31, 2020, the Company incurred
non-cash expenses of $3,648,000.
We believe that our cash on hand including funding closed since
December 31, 2020 will be sufficient to fund our operations through
July 31, 2021.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2020 contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon raising capital
from financing transactions.
30
We need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, or eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected.
We have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale of common stock and the
exercise of warrants.
The proceeds of warrants which are not expected to be cashless are
expected to generate potential proceeds of up to
$10,519,000.
Operating Activities
Net cash used in operating activities for the three months ended
December 31, 2020 was $1,421,000. This amount was primarily related
to (i) a net loss of $5,299,000; offset by (ii) working capital
changes of $230,000; and (iii) non-cash
expenses of $3,648,000. The non-cash items include (iv)
depreciation and amortization of $65,000; (v) stock based
compensation- warrants of $1,812,000; (vi) stock based
compensation- stock options of $175,000; and (vii) amortization of
debt discount as interest expense of $1,596,000. On December 15,
2020, we issued a warrant to Ronald P. Erickson for 2,000,000
shares of common stock. The five year warrant is convertible at
$1.53 per share and was valued using a “Black-Scholes”
model at $1,812,000.
Investing Activities
Net cash used in investing activities for the three months ended
December 31, 2020 and 2019 was
$10,000 and $15,000. This amount was primarily related to the
investment in equipment for research and
development.
Financing Activities
Net cash provided by financing activities for the three months
ended December 31, 2020 and 2019 was $60,000 and $441,000. This amount was
primarily related to (i) issuance of Simple Agreements for future
Equity of $55,000; and (ii) issuance of common stock for warrant
exercises of $5,000.
Our contractual cash obligations as of December 31, 2020
are summarized in the table
below:
|
|
Less
Than
|
|
|
Greater
Than
|
Contractual Cash
Obligations (1)
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
Operating
leases
|
$99,038
|
$84,437
|
$14,601
|
$-
|
$-
|
Convertible notes
payable
|
7,424,566
|
7,424,566
|
-
|
-
|
-
|
|
$7,523,604
|
$7,509,003
|
$14,601
|
$-
|
$-
|
(1)
Convertible notes
payable includes $5,169,500
that converts into common stock at the maturity date during 2021
and $2,255,066 under various
convertible promissory notes as of December 31, 2020 including
$1,184,066 owed to entities
controlled by our chairman. Through
December 31, 2020, $840,000 has been raised through the sale of
SAFE instruments. The Company expects to issue 1,050,000 shares of
the Particle stock that was initially valued at $0.80 per
share. We expect to incur capital expenditures related to
the development of the “Bio-RFID™” and
“ChromaID™” technologies. None of the
expenditures are contractual obligations as of December 31,
2020.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
This item is not applicable.
31
ITEM 4.
|
CONTROLS AND PROCEDURES
|
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of December
31, 2020 that our disclosure controls and procedures were not
effective at the reasonable assurance level due to the material
weaknesses in our internal controls over financial reporting
discussed immediately below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do not employ a full time Chief Financial
Officer. Our Chairman serves as interim Chief Financial Officer. We
also utilize a consultant who is a qualified Chief Financial
Officer to assist with our financial reporting. This consultant has
increased his involvement in the Company.
Audit Committee: While we
have an audit committee, we lack a financial expert. On February
12, 2021, the Audit Committee appointed William A. Owens as
“audit committee financial expert” as defined by the
Securities and Exchange Commission (“SEC”) and as
adopted under the Sarbanes-Oxley Act of
2002.
(b) Management's Report on Internal Control Over Financial
Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31,
2020. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in the
2013 Internal Control-Integrated
Framework. Based on
its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as
of December 31, 2020.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate. A control system, no matter how well designed and
operated can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be
met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
c) Changes in Internal Control over Financial
Reporting
During
the three months ended December 31, 2020, there were no changes in
our internal controls over financial reporting during this fiscal
quarter that materially affected, or is reasonably likely to have a
materially affect, on our internal control over financial
reporting.
32
PART II. OTHER
INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS
|
We may
from time to time become a party to various legal proceedings
arising in the ordinary course of our business. We are currently
not a party to any pending legal proceeding that is not ordinary
routine litigation incidental to our business.
ITEM 1A.
|
RISK FACTORS
|
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
RISK FACTORS
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
Risks
Related to Pandemics
The near-term effects of the recent COVID-19 coronavirus pandemic
are known, as they adversely affected our business. Longer term effects are not immediately known and
may adversely affect our business, results of operations, financial
condition, liquidity and cash flow.
Presently,
the impact of COVID-19 has had adverse effects on our business by
slowing down our ability to work with third parties outside of
Seattle on testing and validation. It is difficult to predict what
other adverse effects, if any, COVID-19 can have on our business,
or against the various aspects of same.
As of
the date of this Quarterly Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the
ability of people to move and travel and require non-essential
businesses and organizations to close. While some states have
lifted certain “shelter-in-place” restrictions and
travel bans, as they are removed there is no certainty that an
outbreak will not occur and additional restrictions imposed again
in response. Additionally, several states have lifted restrictions
only to reimpose such restrictions as the number of cases rise
again.
It is
unclear how such restrictions, which will contribute to a general
slowdown in the global economy, will affect our business, results
of operations, financial condition and our future strategic
plans.
Shelter-in-place
and essential-only travel regulations could negatively impact our
employees, partners, and customers. In addition, we still could
experience significant supply chain disruptions due to
interruptions in operations at any or all of our suppliers’
facilities or downline suppliers. If we experience significant
delays in receiving our products, we will experience delays in
fulfilling orders and ultimately receiving payment, which could
result in loss of sales and a loss of customers, and adversely
impact our financial condition and results of operations. The
current status of COVID-19 coronavirus closures and restrictions
could also negatively impact our ability to receive funding from
our existing capital sources as each business is and has been
affected uniquely.
If any
of our employees, consultant, customers, or visitors were to become
infected we could be forced to close our operations temporarily as
a preventative measure to prevent the risk of spread which could
delay our progress and interfere with our ability to meet
obligations.
In
addition, our headquarters are located in Seattle, Washington which
has been the subject of large COVID-19 outbreak resulting in
restrictions on individuals and businesses. It is unclear at this
time how these restrictions will be continued and/or amended as the
pandemic evolves. We are hopeful that COVID-19 closures will have
only a limited effect on our operations and revenues.
General securities
market uncertainties resulting from the COVID-19
pandemic.
Since
the outset of the pandemic the United States and worldwide national
securities markets have undergone unprecedented stress due to the
uncertainties of the pandemic and the resulting reactions and
outcomes of government, business and the general population. These
uncertainties have resulted in declines in all market sectors,
increases in volumes due to flight to safety and governmental
actions to support the markets. As a result, until the pandemic has
stabilized, the markets may not be available to the Company for
purposes of raising required capital. Should we not be able
to obtain financing when required, in the amounts necessary to
execute on our plans in full, or on terms which are economically
feasible we may be unable to sustain the necessary capital to
pursue our strategic plan and may have to reduce the planned future
growth and/or scope of our operations.
33
Risks Relating to the Company Generally
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through July 31,
2021. We may need additional
financing to implement our business plan and to service our ongoing
operations, pay our current debts (described below) and maintain
ownership of our intellectual property. There can be no assurance
that we will be able to secure any needed funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing when it is
needed, we will need to restructure our operations and/or divest
all or a portion of our business. We, including our
wholly owned subsidiary Particle, are each seeking additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected. There can be no assurance that we
will be able to sell that number of shares, if
any.
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash flows from
operations, the audit report of our independent registered public
accountants on our consolidated financial statements for the year
ended September 30, 2020 contains an explanatory paragraph stating
that there is substantial doubt about our ability to continue as a
going concern. Factors identified in the report include our
historical net losses, negative working capital, and the need for
additional financing to implement our business plan and service our
debt repayments. If we are not able to attain profitability in the
near future our financial condition could deteriorate further,
which would have a material adverse impact on our business and
prospects and result in a significant or complete loss of your
investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured
creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of December 31,
2020, we owe
approximately $2,874,284
and if we
do not satisfy these obligations, the lenders may have the right to
demand payment in full or exercise other
remedies.
Mr. Erickson, our current chairman, and/or entities with which he
is affiliated also have accrued compensation, travel and interest
of approximately $619,218 as of December 31,
2020.
We owe
$2,255,066 under various
convertible promissory notes as of December 31, 2020 including
$1,184,066 owed to entities
controlled by our chairman.
We may need additional financing, to service and/or repay these
debt obligations. If we raise additional capital through borrowing
or other debt financing, we may incur substantial interest expense.
If and when we raise more equity capital in the future, it will
result in substantial dilution to our current
stockholders.
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As of
December 31, 2020, we had an
accumulated deficit of $61,266,000 and net losses in the amount of
$5,299,000, $13,563,000, and $7,612,000 for the three months ended
December 31, 2020 and the years ended September 30, 2020 and 2019,
respectively. During the three
months ended December 31, 2020, we incurred non-cash
expenses of $3,648,000.
34
There can be no assurance that we will achieve or maintain
profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID and Bio-RFID and Particle businesses have produced minimal
revenues and may not produce significant revenues in the near term,
or at all, which would harm our ability to continue our operations
or obtain additional financing and require us to reduce or
discontinue our operations. You must consider our business and
prospects in light of the risks and difficulties we will encounter
as business with an early-stage technology in a new and rapidly
evolving industry. We may not be able to successfully address these
risks and difficulties, which could significantly harm our
business, operating results and financial
condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID technology and
related products to achieve or sustain profitability.
We are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID technology, grant additional
licenses and obtain royalties or develop other revenue streams will
have a material adverse effect on our business, financial condition
and results of operations.
To date, we have generated minimal revenue from sales of our
ChromaID and Bio-RFID products. We believe that our
commercialization success is dependent upon our ability to
significantly increase the number of customers that are using our
products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
35
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our success depends on our ability to develop and market products
that are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, some potential customers may be
required to devote significant time and effort to testing and
validating our products. In addition, during the implementation
phase, some customers may be required to devote significant time
and effort to training their personnel on appropriate practices to
ensure accurate results from our technology and products. Any
failure of our technology or related products to meet customer
expectations could result in customers choosing to retain their
existing testing methods or to adopt systems other than
ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30,
2020,
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel:
We do not employ a full time Chief Financial Officer. Our Chairman
serves as interim Chief Financial Officer. We also utilize a
consultant who is a qualified Chief Financial Officer to assist
with our financial reporting. This consultant has increased his
involvement in the Company.
Audit
Committee: While we have an audit committee, we lack a financial
expert. On February 12, 2021, the Audit Committee appointed William
A. Owens as “audit committee financial expert” as
defined by the Securities and Exchange Commission
(“SEC”) and as adopted under the Sarbanes-Oxley Act of
2002.
If these weaknesses continue, investors could lose confidence in
the accuracy and completeness of our financial reports and other
disclosures.
The Company’s TransTech subsidiary closed on June 30,
2020.
Transtech
was not able to successfully address their revenue which resulted
in their closure on June 30, 2020. The loss of the TransTech
subsidiary revenue will impact our top line revenues and our
operating results and may result in future expenses associated with
its closure.
The Company Particle, Inc. subsidiary was incorporated April 30,
2020 and has no operating history.
Particle,
Inc. was incorporated April 30, 2020 and to date has engaged in
activities consisting primarily of research and development
on threaded light bulbs that have a
warm white light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received 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 December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus
that causes COVID-19.
36
To date, we have generated no revenue from Particle. We may not
generate revenues in the near future while products are being
developed. We believe that Particle’s commercialization
success is dependent upon its ability to develop successful
products to take to market. Further, Particle products are awaiting laboratory
testing for efficacy in killing certain germs and viruses; there
are no assurances the results of laboratory testing will be in our
favor. In addition, once developed, demand for its products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as
expected. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We are dependent on key personnel.
Our success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace, including Ronald P. Erickson, our
Chairman and Phil Bosua, our Chief Executive Officer. We maintain
key person life insurance on our Chief Executive Officer, Phil
Bosua. Our success will depend on the performance of our officers,
our ability to retain and motivate our officers, our ability to
integrate new officers into our operations, and the ability of all
personnel to work together effectively as a team. Our
failure to retain and recruit officers and other key personnel
could have a material adverse effect on our business, financial
condition and results of operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions, or demonstrate that we did not derive our invention
from another, we may have to participate in interference or
derivation proceedings in the USPTO or in court that could result
in substantial costs in legal fees and could substantially affect
the scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
37
There can be no assurance that:
●
|
any of our existing patents will continue to be held valid, if
challenged;
|
●
|
patents will be issued for any of our pending
applications;
|
●
|
any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
|
●
|
our patents will be issued in the primary countries where our
products are sold in order to protect our rights
and potential commercial advantage;
or
|
●
|
any of our products or technologies will not infringe on the
patents of other companies.
|
If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining and maintaining a patent portfolio entails significant
expense and resources. Part of the expense includes periodic
maintenance fees, renewal fees, annuity fees, various other
governmental fees on patents and/or applications due in several
stages over the lifetime of patents and/or applications, as well as
the cost associated with complying with numerous procedural
provisions during the patent application process. We may or may not
choose to pursue or maintain protection for particular inventions.
In addition, there are situations in which failure to make certain
payments or noncompliance with certain requirements in the patent
process can result in abandonment or lapse of a patent or patent
application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. If we choose to forgo patent
protection or allow a patent application or patent to lapse
purposefully or inadvertently, our competitive position could
suffer.
Legal actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We may receive notices that claim we have infringed upon
the intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
If we are unable to secure a sales and marketing partner or
establish satisfactory sales and marketing capabilities at Know
Labs we may not be able to successfully commercialize our
technology.
If we are not successful entering into appropriate collaboration
arrangements or recruiting sales and marketing personnel or in
building a sales and marketing infrastructure, we will have
difficulty successfully commercializing our technology, which would
adversely affect our business, operating results and financial
condition.
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We may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize technology without
strategic partners or licensees include:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Our
technology may have a number of potential applications in fields of
use which will require prior governmental regulatory approval
before the technology can be introduced to the marketplace. For
example, we are exploring the use of our technology for certain
medical diagnostic applications, with an initial focus on the
continuous monitoring of blood glucose.
There
is no assurance that we will be successful in developing continuous
glucose monitoring (CGM) medical applications for our
technology.
If we
were to be successful in developing continuous glucose monitoring
medical applications of our technology, prior approval by the FDA
and other governmental regulatory bodies will be required before
the technology could be introduced into the
marketplace.
There
is no assurance that such regulatory approval would be obtained for
a continuous glucose monitoring medical diagnostic or other
applications requiring such approval.
The FDA
can refuse to grant, delay, and limit or deny approval of an
application for approval of a glucose monitoring device for many
reasons.
We may
not obtain the necessary regulatory approvals or clearances to
market these continuous glucose monitoring systems in the United
States or outside of the United States.
Any
delay in, or failure to receive or maintain, approval or clearance
for our products could prevent us from generating revenue from
these products or achieving profitability.
Cybersecurity risks and cyber incidents could result in the
compromise of confidential data or critical data systems and give
rise to potential harm to customers, remediation and other
expenses, expose us to liability under HIPAA, consumer protection
laws, or other common law theories, subject us to litigation and
federal and state governmental inquiries, damage our reputation,
and otherwise be disruptive to our business and
operations.
Cyber
incidents can result from deliberate attacks or unintentional
events. We collect and store on our networks sensitive information,
including intellectual property, proprietary business information
and personally identifiable information of our customers. The
secure maintenance of this information and technology is critical
to our business operations. We have implemented multiple layers of
security measures to protect the confidentiality, integrity and
availability of this data and the systems and devices that store
and transmit such data. We utilize current security technologies,
and our defenses are monitored and routinely tested internally and
by external parties. Despite these efforts, threats from malicious
persons and groups, new vulnerabilities and advanced new attacks
against information systems create risk of cybersecurity incidents.
These incidents can include, but are not limited to, gaining
unauthorized access to digital systems for purposes of
misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may not immediately produce signs of
intrusion, we may be unable to anticipate these incidents or
techniques, timely discover them, or implement adequate
preventative measures.
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These
threats can come from a variety of sources, ranging in
sophistication from an individual hacker to malfeasance by
employees, consultants or other service providers to
state-sponsored attacks. Cyber threats may be generic, or they may
be custom-crafted against our information systems. Over the past
several years, cyber-attacks have become more prevalent and much
harder to detect and defend against. Our network and storage
applications may be vulnerable to cyber-attack, malicious
intrusion, malfeasance, loss of data privacy or other significant
disruption and may be subject to unauthorized access by hackers,
employees, consultants or other service providers. In addition,
hardware, software or applications we develop or procure from third
parties may contain defects in design or manufacture or other
problems that could unexpectedly compromise information security.
Unauthorized parties may also attempt to gain access to our systems
or facilities through fraud, trickery or other forms of deceiving
our employees, contractors and temporary staff.
There
can be no assurance that we will not be subject to cybersecurity
incidents that bypass our security measures, impact the integrity,
availability or privacy of personal health information or other
data subject to privacy laws or disrupt our information systems,
devices or business, including our ability to deliver services to
our customers. As a result, cybersecurity, physical security and
the continued development and enhancement of our controls,
processes and practices designed to protect our enterprise,
information systems and data from attack, damage or unauthorized
access remain a priority for us. As cyber threats continue to
evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures
or to investigate and remediate any cybersecurity
vulnerabilities.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
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We have made strategic acquisitions in the past and may do so in
the future, and if the acquired companies do not perform as
expected, this could adversely affect our operating results,
financial condition and existing business.
We may continue to expand our business through strategic
acquisitions. The success of any acquisition will depend on, among
other things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
We cannot assure you that we will be able to fully comply with
these laws, rules, and regulations that address corporate
governance, internal control reporting, and similar matters in the
future. Failure to comply with these laws, rules and regulations
could materially adversely affect our reputation, financial
condition, and the value of our securities.
The exercise prices of certain warrants, convertible notes payable
and the Series C and D Preferred Shares may require further
adjustment.
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price of 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 $7,424,566 or
14,189,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,169,500 common shares at the current
price of $1.00 per share) and the
exercise price of additional outstanding warrants to purchase
12,588,286 shares of common stock would adjust below $0.25 per
share pursuant to the documents governing such instruments.
Warrants totaling 5,191,636 would adjust below $1.20 per share
pursuant to the documents governing such
instruments.
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Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures, strategic relationships, addition or loss of
significant customers and contracts, capital expenditure
commitments and
litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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