10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 16, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from _______ to ________
Commission File number
(Exact name of registrant as specified in charter) |
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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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(Address of principal executive offices) |
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(Zip Code) |
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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.
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).
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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Accelerated filer |
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Non-accelerated filer (Do not check if a smaller reporting company) |
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Smaller reporting company |
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Emerging growth company |
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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
The number of shares of common stock, $.001 par value, issued and outstanding as of August 16, 2021:
| 2 |
| Table of Contents |
ITEM 1. FINANCIAL STATEMENTS
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 30, 2021 |
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September 30, 2020 |
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ASSETS |
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(Audited) |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
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$ |
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Total current assets |
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PROPERTY AND EQUIPMENT, NET |
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OTHER ASSETS |
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Intangible assets |
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Other assets |
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Operating lease right of use asset |
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TOTAL ASSETS |
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$ |
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$ |
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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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$ |
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$ |
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Accounts payable - related parties |
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Accrued expenses |
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Accrued expenses - related parties |
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Convertible notes payable |
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Simple Agreements for Future Equity |
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Notes payable- PPP loans, current |
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Current portion of operating lease right of use liability |
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Total current liabilities |
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NON-CURRENT LIABILITIES: |
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Notes payable- PPP loans |
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Operating lease right of use liability, net of current portion |
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Total non-current liabilities |
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COMMITMENTS AND CONTINGENCIES (Note 12) |
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- |
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- |
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STOCKHOLDERS' EQUITY (DEFICIT) |
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Preferred stock - $ |
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outstanding at 6/30/2021 and 9/30/2020 respectively |
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Series C Convertible Preferred stock - $ |
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Series D Convertible Preferred stock - $ |
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Common stock - $ |
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shares issued and outstanding at 6/30/2021 and 9/30/2020, respectively |
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Additional paid in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders' deficit |
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( |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
| Table of Contents |
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended, |
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Nine Months Ended, |
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June 30, 2021 |
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June 30, 2020 |
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June 30, 2021 |
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June 30, 2020 |
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REVENUE |
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$ |
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$ |
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$ |
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$ |
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COST OF SALES |
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GROSS PROFIT |
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RESEARCH AND DEVELOPMENT EXPENSES |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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OPERATING LOSS |
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( |
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( |
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( |
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( |
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OTHER INCOME (EXPENSE): |
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Interest expense |
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( |
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( |
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( |
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( |
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Other income |
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(Loss) on debt settlements |
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( |
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Total other (expense), net |
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( |
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( |
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( |
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( |
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LOSS BEFORE INCOME TAXES |
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( |
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( |
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( |
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( |
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Income tax expense |
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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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Basic and diluted loss per share |
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$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Weighted average shares of common stock outstanding- basic and diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
| Table of Contents |
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
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Series C Convertible |
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Series D Convertible |
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Additional |
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Total Stockholders' |
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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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Equity |
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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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$ |
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$ |
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$ |
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$ |
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$ | ( |
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$ | ( |
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Stock compensation expense - employee options |
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- |
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- |
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399,897 |
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Stock option exercise |
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- |
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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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Issuance of warrants to debt holders |
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- |
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- |
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- |
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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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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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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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Balance as of December 31, 2019 |
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( |
) |
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( |
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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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Conversion of debt offering and accrued interest (Note 7) |
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- |
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- |
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Beneficial conversion feature (Note 7) |
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- |
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- |
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- |
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Issuance of warrants to debt holders (Note 7) |
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- |
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- |
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- |
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Issuance of warrants for services related to debt offering (Note 7) |
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- |
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- |
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- |
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Issuance of common stock for services |
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- |
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- |
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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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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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Balance as of March 31, 2020 |
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( |
) |
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( |
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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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Conversion of debt offering and accrued interest (Note 10) |
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- |
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- |
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Beneficial conversion feature (Note 10) |
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- |
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- |
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- |
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Issuance of warrants to debt holders (Note 10) |
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- |
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- |
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- |
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Issuance of warrants for services related to debt offering (Note 10) |
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- |
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- |
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- |
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Issuance of common stock for services |
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- |
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- |
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Issuance of common stock for exercise of warrants |
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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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( |
) | ||||
Balance as of June 30, 2020 |
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( |
) |
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Balance as of October 1, 2020 |
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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 | ) | ||||
Stock compensation expense - employee options |
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- |
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- |
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- |
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Conversion of debt offering and accrued interest (Note 7) |
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- |
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- |
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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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Issuance of common stock for exercise of warrants |
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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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( |
) | ||||
Balance as of December 31, 2020 |
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( |
) |
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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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Conversion of debt offering and accrued interest (Note 7) |
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- |
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- |
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Beneficial conversion feature (Note 7) |
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- |
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- |
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- |
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|
||||||
Issuance of warrants to debt holders (Note 7) |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Issuance of warrants for services related to debt offering (Note 7) |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Issuance of common stock for services |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Issuance of warrant for services |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Issuance of common stock for exercise of warrants |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net loss |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) | ||||
Balance as of March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||||
Stock compensation expense - employee options |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Conversion of debt offering and accrued interest (Note 7) |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Issuance of common stock for exercise of warrants |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Issuance of common stock for stock option exercises |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net loss |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) | ||||
Balance as of June 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ |
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
| Table of Contents |
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended, |
|
|||||
|
|
June 30, 2021 |
|
|
June 30, 2020 |
|
||
|
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
||
Net loss |
|
$ | ( |
) |
|
$ | ( |
) |
Adjustments to reconcile net loss to net cash (used in) |
|
|
|
|
|
|
|
|
operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
||
Issuance of capital stock for services and expenses |
|
|
|
|
|
|
||
Stock based compensation- warrants |
|
|
|
|
|
|
||
Stock based compensation- stock option grants |
|
|
|
|
|
|
||
Amortization of debt discount to interest expense |
|
|
|
|
|
|
||
Right of use, net |
|
|
( |
) |
|
|
( |
) |
Loss on sale of assets |
|
|
|
|
|
|
||
Loss (gain) on debt settlement |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Inventory |
|
|
|
|
|
|
||
Other long-term assets |
|
|
|
|
|
( |
) | |
Accounts payable - trade and accrued expenses |
|
|
|
|
|
|
||
NET CASH (USED IN) OPERATING ACTIVITIES |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of research and development equipment |
|
|
( |
) |
|
|
( |
) |
NET CASH (USED IN) INVESTING ACTIVITIES: |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable |
|
|
|
|
|
|
||
Payments for issuance costs from notes payable |
|
|
( |
) |
|
|
( |
) |
Proceeds from Simple Agreements for Future Equity |
|
|
|
|
|
|
||
Proceeds from note payable - PPP |
|
|
|
|
|
|
||
Proceeds from issuance of common stock for stock options exercise |
|
|
|
|
|
|
||
Proceeds from issuance of common stock for warrant exercise |
|
|
|
|
|
|
||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
NET INCREASE N CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
$ |
|
||
Taxes paid |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Beneficial conversion feature |
|
$ |
|
|
$ |
|
||
Issuance of warrants to debt holders |
|
$ |
|
|
$ |
|
||
Issuance of warrants for services related to debt offering |
|
$ |
|
|
$ |
|
||
Cashless warrant exercise (fair value) |
|
$ |
|
|
$ |
|
||
Cashless stock options exercise (fair value) |
|
$ |
|
|
$ |
|
||
Conversion of debt offering |
|
$ |
|
|
$ |
|
||
Conversion of accrued interest |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
| Table of Contents |
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 nine months ended June 30, 2021 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 $
The Company is focused on the development and commercialization of proprietary technologies which are capable of uniquely identifying and measuring almost any material or analyte using electromagnetic energy to detect, record, identify and measure the unique “signature” of said materials or analytes. The Company’s call these its “Bio-RFID™” technology platform when pertaining to radio and microwave spectroscopy; and “ChromaID™” technology platform when pertaining to optical spectroscopy.
ChromaID is the first technology developed and patented by the Company. More recently, the Company has focused upon extensions and new patentable inventions that are derived from and extend beyond our ChromaID technology and intellectual property. The Company calls this new technology platform “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, its commercialization and development of related patent assets.
On April 30, 2020 the Company incorporated a subsidiary corporation, Particle, Inc. for the purpose of research and development on non-core Company intellectual property. The first research activity, undertaken by a separate Particle team has been on standard 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 $
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct to the Company’s business. 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. While it did provide our current revenues, it was not central to our current focus as a Company. Moreover, the Company wrote down any goodwill associated with its historic acquisition. TransTech ceased operation on June 30, 2020.
2. GOING CONCERN
The Company anticipates that it will record losses from operations for the foreseeable future. As of June 30, 2021, the Company’s accumulated deficit was $
| 7 |
| Table of Contents |
On March 15, 2021, the Company closed private placement for gross proceeds of $
The Convertible Notes had an original principal amount of $
The Company believes that its cash on hand will be sufficient to fund our operations until December 31, 2022.
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 June 30, 2021 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 $
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
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 $
Advertising – Advertising costs are charged to selling, general and administrative expenses as incurred. Advertising and marketing costs for the nine months ended June 30, 2021 and 2020 were $
| 8 |
| Table of Contents |
Fair Value Measurements and Financial Instruments – ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 – Quoted prices in active markets for identical assets and liabilities;
Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of June 30, 2021 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 June 30, 2021 and September 30, 2020 was $
The following table represents a roll-forward of the fair value of the Simple Agreement for Future Equity (“SAFE”) for Particle, our wholly owned subsidiary, which fair value is determined by Level 3 inputs:
|
|
$ |
|
|
Balance as of October 1, 2019 |
|
$ |
|
|
Proceeds from issuance of SAFE |
|
|
|
|
Fair value adjustment |
|
|
|
|
Balance as of September 30, 2020 |
|
|
|
|
Proceeds from issuance of SAFE |
|
|
|
|
Fair value adjustment |
|
|
|
|
Balance as of June 30, 2021 |
|
$ |
|
|
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 June 30, 2021 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.
| 9 |
| Table of Contents |
Net Loss per Share – Under the provisions of ASC 260, “Earnings Per Share,” basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. As of June 30, 2021, the Company had
As of June 30, 2020, there were options outstanding for the purchase of
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 and nine months ended June 30, 2021 and 2020 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.
4. FIXED ASSETS
Property and equipment as of June 30, 2021 and September 30, 2020 was comprised of the following:
|
|
Estimated |
|
June 30, |
|
|
September 30, |
|
||
|
|
Useful Lives |
|
2021 |
|
|
2020 |
|
||
Machinery and equipment |
|
2-3 years |
|
$ |
|
|
$ |
|
||
Leasehold improvements |
|
5 years |
|
|
|
|
|
|
||
Furniture and fixtures |
|
5 years |
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
$ |
|
|
$ |
|
||
Total depreciation expense was $
| 10 |
| Table of Contents |
5. INTANGIBLE ASSETS
Intangible assets as of June 30, 2021 and September 30, 2020 consisted of the following:
|
|
Estimated |
|
June 30, |
|
|
September 30, |
|
||
|
|
Useful Lives |
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
||
Technology |
|
3 years |
|
$ |
|
|
$ |
|
||
Less: accumulated amortization |
|
|
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
|
|
$ |
|
|
$ |
|
||
Total amortization expense was $
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 June 30, 2021 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 June 30, 2021 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 $
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's operating right-of-use assets and related lease liabilities as of and for the nine months ended June 30, 2021 was as follows:
Cash paid for ROU operating lease liability $
Weighted-average remaining lease term
Weighted-average discount rate
The minimum future lease payments as of June 30, 2021 are as follows:
Year |
|
$ |
|
|
Year ended 6/30/2022 |
|
$ |
|
|
Imputed interest |
|
|
( |
) |
Total lease liability |
|
$ |
|
|
7. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of June 30, 2021 and September 30, 2020 consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve $
Mr. Struve also invested $
| 11 |
| Table of Contents |
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 $
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 exercise prices of $
The Convertible Notes issued during the nine months ended June 30, 2021 are initially convertible into
The fair value of the Warrants issued to debt holders during the nine months ended June 30, 2021 was $
In connection with the debt offering during the nine months ended June 30, 2021, the placement agent for the Convertible Notes and the Warrants received a cash fee of $
During the nine months ended June 30, 2021 and 2020, the Company recorded a debt discount of $
During the nine months ended June 30, 2021, the Company issued
During the nine months ended June 30, 2021, amortization related to the debt offerings of $
| 12 |
| Table of Contents |
Convertible notes payable as of June 30, 2021 and September 30, 2020 are summarized below:
|
|
June 30, 2021 |
|
|
September 30, 2020 |
|
||
Convertible note- Clayton A. Struve |
|
$ |
|
|
$ |
|
||
Convertible note- Ronald P. Erickson and affiliates |
|
|
|
|
|
|
||
2019 Convertible notes |
|
|
|
|
|
|
||
2020 Convertible notes |
|
|
|
|
|
|
||
Q2 2021 Convertible notes |
|
|
|
|
|
|
||
Boustead fee refund (originally booked as contra debt) |
|
|
|
|
|
|
||
Less conversions of notes |
|
|
( |
) |
|
|
( |
) |
Less debt discount - BCF |
|
|
( |
) |
|
|
( |
) |
Less debt discount - warrants |
|
|
( |
) |
|
|
( |
) |
Less debt discount - warrants issued for services |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Note Payable
On April 30, 2020, the Company received $
On February 1, 2021, the Company received $
The Company recorded $
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 $
In October 2020, Particle entered into Simple Agreements for Future Equity (“SAFE”) with two accredited investors pursuant to which Particle received $
During the three months ended March 31, 2021, Particle entered into Simple Agreements for Future Equity (“SAFE”) with five accredited investors pursuant to which Particle received $
Through June 30, 2021, $
9. EQUITY
Authorized Capital Stock
The Company authorized
| 13 |
| Table of Contents |
As of June 30, 2021, the Company had
Voting Preferred Stock
The Company is authorized to issue up to
Series C and D Preferred Stock and Warrants
On August 5, 2016, the Company closed a Series C Preferred Stock and Warrant Purchase Agreement with Clayton A. Struve, an accredited investor for the purchase of $1,250,000 of preferred stock with a conversion price of $0.70 per share. The preferred stock has a yield of 8% and an ownership blocker of 4.99%. In addition, Mr. Struve received a five-year warrant to acquire 1,785,714 shares of common stock at $0.70 per share. On August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. On June 30, 2021 and September 30, 2020 there are 1,785,715 Series C Preferred shares outstanding. On January 5, 2021, the Company extended the warrant expiration date to August 4, 2023.
As of June 30, 2021 and September 30, 2020, the Company has $750,000 of Series D Preferred Stock outstanding with Clayton A. Struve, an accredited investor. On August 14, 2017, the price of the Series D Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. The Series D Preferred Stock is convertible into shares of common stock at a price of $0.25 per share or by multiplying the number of Series D Preferred Stock shares by the stated value and dividing by the conversion price then in effect, subject to certain diluted events, and has the right to vote the number of shares of common stock the Series D Preferred Stock would be issuable on conversion, subject to a 4.99% blocker. The Preferred Series D has an annual yield of 8% The Series D Preferred Stock is convertible into shares of common stock at a price of $0.25 per share or by multiplying the number of Series D Preferred Stock shares by the stated value and dividing by the conversion price then in effect, subject to certain diluted events, and has the right to vote the number of shares of common stock the Series D Preferred Stock would be issuable on conversion, subject to a 4.99% blocker. The Preferred Series D has an annual yield of 8% if and when dividends are declared.
Series F Preferred Stock
On August 1, 2018, the Company filed with the State of Nevada a Certificate of Designation establishing the Designations, Preferences, Limitations and Relative Rights of Series F Preferred Stock. The Designation authorized 500 shares of Series F Preferred Stock. The Series F Preferred Stock shall only be issued to the current Board of Directors on the date of the Designation’s filing and is not convertible into common stock. As set forth in the Designation, the Series F Preferred Stock has no rights to dividends or liquidation preference and carries rights to vote 100,000 shares of common stock per share of Series F upon a Trigger Event, as defined in the Designation. A Trigger Event includes certain unsolicited bids, tender offers, proxy contests, and significant share purchases, all as described in the Designation. Unless and until a Trigger Event, the Series F shall have no right to vote. The Series F Preferred Stock shall remain issued and outstanding until the date which is 731 days after the issuance of Series F Preferred Stock (“Explosion Date”), unless a Trigger Event occurs, in which case the Explosion Date shall be extended by 183 days. As of June 30, 2021 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
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.
| 14 |
| Table of Contents |
The following equity issuances occurred during the nine months ended June 30, 2021:
The Company issued 6,091,960 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.
The Company issued 2,710,260 shares of common stock at an average price of $0.561 per share related to the exercise of warrants.
The Company issued 97,000 shares related to services. The shares were valued at the fair market value of $202,820.
The Company issued 16,875 shares related to the exercise of stock option grants at $1.38 per share.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the nine months ended June 30, 2021:
The Company issued warrants to Ronald P. Erickson for 2,000,000 shares of common stock. The five year warrant is immediately vested and exercisable on a cash or cashless basis at $1.53 per share and was valued using a Black-Scholes model at $1,811,691.
During January 2021, the Company issued warrants to five directors and service providers for 181,610 shares of common stock. The five year warrant is convertible at $2.00 per share and was valued using a Black-Scholes model at $382,566.
The Convertible Notes issued during the nine months ended June 30, 2021 are initially convertible into 7,104,500 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 3,552,250 shares of Common Stock.
In connection with the convertible debt offering during the nine months ended June 30, 2021, the placement agent for the Convertible Notes and the Warrants received a cash fee of $727,117 and warrants to purchase 492,090 shares of the Company’s common stock, all based on 2-8% of gross proceeds to the Company. The warrants issued for these services had a fair value of $1,667,281 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 $727,117 cash fee was recorded as issuance costs and will be amortized over the one-year term of the related Convertible Notes.
The Company issued 2,710,260 shares of common stock at an average price of $0.561 per share related to the exercise of warrants.
Warrants to exercise 373,855 shares of common stock were forfeited at an average of $1.181 per share.
A summary of the warrants outstanding as of June 30, 2021 were as follows:
|
|
June 30, 2021 |
|
|||||
|
|
|
|
|
Weighted |
|
||
|
|
|
|
|
Average |
|
||
|
|
|
|
|
Exercise |
|
||
|
|
Shares |
|
|
Price |
|
||
Outstanding at beginning of period |
|
|
|
|
$ |
|
||
Issued |
|
|
|
|
|
|
||
Exercised |
|
|
( |
) |
|
|
( |
) |
Forfeited |
|
|
( |
) |
|
|
( |
) |
Expired |
|
|
- |
|
|
|
|
|
Outstanding at end of period |
|
|
|
|
$ |
|
||
Exerciseable at end of period |
|
|
|
|
|
|
|
|
| 15 |
| Table of Contents |
The following table summarizes information about warrants outstanding and exercisable as of June 30, 2021:
|
|
|
June 30, 2021 |
|
||||||||||||||
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|||||
|
|
|
Average |
|
|
Average |
|
|
|
|
|
Average |
|
|||||
Number of |
|
|
Remaining |
|
|
Exercise |
|
|
Shares |
|
|
Exercise |
|
|||||
Warrants |
|
|
Life ( In Years) |
|
|
Price |
|
|
Exerciseable |
|
|
Price |
|
|||||
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
The significant weighted average assumptions relating to the valuation of the Company’s warrants issued during the nine months ended June 30, 2021 were as follows:
Dividend yield |
|
Expected life |
|
Expected volatility |
|
Risk free interest rate |
There were vested warrants of 23,169,587 with an aggregate intrinsic value of $63,879,811.
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
Determining Fair Value under ASC 718
The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
Stock Option Activity
The Company had the following stock option transactions during the nine months ended June 30, 2021:
During the nine months ended June 30, 2021, the Company issued stock option grants to fifteen employees and consultants totaling
During the nine months ended June 30, 2021, two consultants exercised stock option grants for
During the nine months ended June 30, 2021, an employee forfeited a stock option grant for
| 16 |
| Table of Contents |
There are currently 14,650,120 (including unearned stock option grants totaling
Stock option activity for the nine months ended June 30, 2021 and the years ended September 30, 2020 and 2019 were as follows:
|
|
Weighted Average |
|
|||||||||
|
|
Options |
|
|
Exercise Price |
|
|
$ |
|
|||
Outstanding as of September 30, 2018 |
|
|
|
|
$ |
|
|
$ |
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
- |
|
|
|
|
|
|
|
||
Forfeitures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding as of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Forfeitures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding as of September 30, 2020 |
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Forfeitures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding as of June 30, 2021 |
|
|
|
|
$ |
|
|
$ | 21,900,109 |
|
||
The following table summarizes information about stock options outstanding and exercisable as of June 30, 2021:
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
Weighted |
|
||||||||
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
Average |
|
||||||||
Range of |
|
|
Number |
|
|
Remaining Life |
|
|
Exercise Price |
|
|
Number |
|
|
Exercise Price |
|
||||||
Exercise Prices |
|
|
Outstanding |
|
|
In Years |
|
|
Outstanding |
|
|
Exerciseable |
|
|
Exerciseable |
|
||||||
| $ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
There were stock options of
Particle, Inc.
On May 21, 2020, Particle approved a 2020 Stock Incentive Plan and reserved
During the nine months ended June 30, 2021, Particle approved a stock option grant to nine employees and consultants totaling 1,900,000 shares at an average of $0.80 per share. The stock option grant vests (i) 33.3% with the first shipment; (ii) 33.3% with $50 million in sales are achieved; and (iii) 33.4% after $200 million in sales are achieved.
During the nine months ended June 30, 2021, Particle approved stock option grants to employees totaling 550,000 shares at $0.80 per share. The stock option grants vest annually over four years, with no vesting in the first two quarters.
As of June 30, 2021, the company had outstanding stock option grants for
| 17 |
| Table of Contents |
The following table summarizes information about Particle stock options outstanding and exercisable as of June 30, 2021:
|
Range of Exercise Prices |
|
|
Number Outstanding |
|
|
Weighted Average Remaining Life In Years |
|
|
Weighted Average Exercise Price |
|
|
Number Exerciseable |
|
|
Weighted Average Exercise Price Exerciseable |
|
||||||
| $ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
$ |
|
|
|
- |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
There were in the money stock options of
11. OTHER SIGNIFICANT TRANSACTIONS AND TRANSACTIONS WITH RELATED PARTIES
Transactions with Clayton A. Struve
See Notes 7, 9 and 12 for related party transactions with Clayton A. Struve.
On January 5, 2021, the Company extended the warrant expiration date to August 4, 2023 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 |
|
|
|
|
|
$ |
|
|
|
||||||
|
Clayton Struve Warrant Series F Warrant F-1 |
|
|
|
|
|
$ |
|
|
|
||||||
|
Clayton Struve Warrant Series F Warrant F-2 |
|
|
|
|
|
$ |
|
|
|
12-18-2023 |
|||||
On January 28, 2021, Clayton A. Struve exercised warrants on a cashless basis for
The Company owes Clayton A. Struve $
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 accounts payable and accrued liabilities $
On December 15, 2020, the Company issued a fully vested warrant to Ronald P. Erickson for
On December 15, 2020, the Company issued two stock option grants to Ronald P. Erickson, one for 1,865,675 shares and one for
On February 9, 2021, Particle approved a stock option grant to Mr. Erickson totaling
| 18 |
| Table of Contents |
On April 29, 2021, the Company signed Amendment 5 to the convertible promissory or OID notes with J3E2A2Z, extending the due dates to September 30, 2021.
Related Party Transactions 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
On February 9, 2021, Particle approved a stock option grant to Mr. Bosua totaling
On March 18, 2021, the Company approved a $
Related Party Transactions with Directors
On January 15, 2021, the Company issued
On January 15, 2021, the Company issued
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.
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.
| 19 |
| Table of Contents |
The reporting for the three and nine months ended June 30, 2021 and 2020 was as follows (in thousands):
|
|
|
|
|
Gross |
|
|
Operating |
|
|
Segment |
|
||||
Segment |
|
Revenue |
|
|
Margin |
|
|
(Loss) |
|
|
Assets |
|
||||
Three Months Ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Development of the Bio-RFID™” and “ChromaID™” technologies |
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ | 13,993 |
|
||
Particle, Inc. technology |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
TransTech distribution business |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
||
Total segments |
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development of the Bio-RFID™” and “ChromaID™” technologies |
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ |
|
|||
Particle, Inc. technology |
|
|
|
|
|
- |
|
|
|
( |
) |
|
|
146 |
|
|
TransTech distribution business |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Total segments |
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ | 5,040 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development of the Bio-RFID™” and “ChromaID™” technologies |
|
$ | - |
|
|
$ | - |
|
|
$ | ( |
) |
|
$ |
|
|
Particle, Inc. technology |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
33 |
|
TransTech distribution business |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total segments |
|
$ |
|
|
$ | - |
|
|
$ | ( |
) |
|
$ | 14,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development of the Bio-RFID™” and “ChromaID™” technologies |
|
$ |
|
|
$ | - |
|
|
$ | ( |
) |
|
$ | 4,894 |
|
|
Particle, Inc. technology |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
|
|
TransTech distribution business |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||
Total segments |
|
$ |
|
|
$ |
|
|
$ | ( |
) |
|
$ |
|
|||
During the nine months ended June 30, 2021 and 2020, the Company incurred non-cash expenses of $
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 June 30, 2021, there were the following material transactions that require disclosure:
On July 14, 2021, the Company announced that it had received U.S. Patent No. 11,058,331 that was issued by the United States Patent and Trademark Office and is titled “Analyte Sensor and System with Multiple Detector Elements that can Transmit or Receive.” The patent relates to the technology that allows the implementation of radio frequency scans using different combinations of antennas to improve the detection capabilities of the Bio-RFID sensors in non-invasively measuring and identifying analytes, including glucose. This patent covers how the antennas used by the Bio-RFID technology platform could be arranged, which will be critical for building a variety of medical devices focused on other analytes.
On July 26, 2021, the Company issued a warrant to a service provider for
On July 27, 2021, the Company announced that it had been granted the following three patents:
|
- |
U.S. Patent No. 11,063,373: Non-invasive analyte sensor and system with decoupled transmit and receive antennas |
|
|
|
|
- |
U.S. Patent No. 11,031,970: Non-invasive analyte sensor and system with decoupled and inefficient transmit and receive antennas |
|
|
|
|
- |
U.S. Patent No. 11,058,317: Non-invasive detection of an analyte using decoupled and inefficient transmit and receive antennas |
The patents were issued by the United States Patent and Trademark Office. Each of the newly issued patents relates to the unique configuration of the antennas used in Know Labs’ Bio-RFID sensors. This unique arrangement enhances Bio-RFID’s performance and improves its detection capabilities in identifying and measuring a variety of analytes non-invasively. The patents support the Company’s medical diagnostic focus while also signaling potential for additional non-medical applications. These new patents expand Know Labs’ intellectual property portfolio in radio frequency and microwave spectroscopy, further improving its technological position as it readies to launch non-invasive diagnostic devices.
On August 2, 2021, an investor exercised a warrant for $500,000 by paying cash of $
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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, the Company has been focused primarily on research and development of proprietary spectroscopic technologies spanning the electromagnetic spectrum which can be used to accurately identify and measure a wide range of organic and inorganic materials, analytes and compositions of matter. Our Common Stock trades on the OTCQB Exchange under the symbol “KNWN.”
BUSINESS
We are focused on the development and commercialization of proprietary technologies which are capable of uniquely identifying and measuring almost any material or analyte using electromagnetic energy to detect, record, identify and measure the unique “signature” of said materials or analytes. We call these our “Bio-RFID™” technology platform when pertaining to radio and microwave spectroscopy; and “ChromaID™” technology platform when pertaining to optical spectroscopy.
ChromaID is the first technology developed and patented by the Company. More recently, we have focused upon extensions and new patentable inventions that are derived from and extend beyond our ChromaID technology and intellectual property. We call this new technology platform “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, its commercialization and development of related patent assets.
The Know Labs Technology
We have internally and under contract with third parties developed proprietary platform technologies to uniquely identify and measure almost any organic and inorganic material or analyte. Our patented technology utilizes electromagnetic energy along the electromagnetic spectrum from visible light and infrared to radio and microwave wavelengths to perform analytics which allow the user to accurately identify and measure materials and analytes depending upon the specified targets or endpoints and field of use. The Company’s proprietary platform technologies are called Bio-RFID and ChromaID.
Our most recent technology platform is called Bio-RFID, which utilizes spectroscopy at higher wavelengths than ChromaID’s optical range, to span radio wave and microwave segments of the electromagnetic spectrum. Working in our lab over the last three years, we have developed extensions and new inventions derived in part from our ChromaID technology which we refer to as Bio-RFID. We believe an important competitive differentiator for Bio-RFID to be its ability to not only identify a wide range of organic and inorganic materials and analytes, but to do so concurrently, and in real time, which potentially enables new multivariate models of clinical diagnostics and health wellness monitoring. We are rapidly advancing the development of this technology by increasing its accuracy, sensitivity and specificity. We have announced over the past year that we have successfully been able to non-invasively measure 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, which we plan to pursue.
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 patented technology is fundamentally differentiated from these industry leaders as our technology completely non-invasively monitors blood glucose levels.
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In addition to internal testing, the Company has engaged a world-renowned research institution to perform third party validation testing of the Bio-RFID technology. The purpose of the independent pre-clinical research was to confirm that Know Labs’ Bio-RFID technology is able to precisely and non-invasively measure and identify a variety of analytes in vitro by detecting their unique radio frequency spectral responses.
We have begun the internal process of obtaining US Food and Drug Administration (FDA) approval of our non-invasive blood glucose monitoring device as soon as possible. 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. Additionally, we have retained third party quality assurance and documentation consultants to ensure that the rigorous requirements of the FDA are met. 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.
Bio-RFID and ChromaID: Foundational Platform Technologies
Our Bio-RFID and ChromaID technologies provide a unique 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. While the Company is pursuing its core focus on commercializing its Glucose Monitor, it believes non-core clinical and non-clinical applications represent a myriad of opportunity for strategic collaboration and joint development agreements with leading companies in their respective industries.
As with other foundational technologies, a single application may reach across multiple industries. The Bio-RFID technology can non-invasively identify the presence and quantity of blood glucose in the human body. By extension, there may be other analytes or molecular structures this same technology can identify 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 biomarkers of disease or pre-conditions 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 portfolio. We have pursued an active intellectual property strategy and have been granted 19 patents and 6 design 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.
Our Patents and Intellectual Property
We believe that our 19 patents and 6 design 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 2041. 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 and Bio-RFID technology and a number of unique applications. We have filed patents on the fundamental aspects of our Bio-RFID technology and growing number of unique applications. We will continue to expand the Company’s patent portfolio.
Additionally, significant aspects of our technology are maintained as trade secrets which may not be disclosed through the patent filing process. We intend to be diligent in maintaining and securing our trade secrets.
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The patents that have been issued to Know Labs and their dates of issuance are:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires November 7, 2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2 entitled “Method, Apparatus, and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 21, 2014, we were issued US Patent No. 8,888,207 B2 entitled “Systems, Methods, and Articles Related to Machine-Readable Indicia and Symbols” by the United States Office of Patents and Trademarks. The patent expires February 7, 2033. This patent describes using ChromaID to see what we call invisible bar codes and other identifiers.
On March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled “Device for Evaluation of Fluids using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033. This patent describes a ChromaID fluid sampling devices.
On April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Substances Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033. This patent describes an enhancement to the foundational ChromaID technology.
On April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Substances Using Electromagnetic Energy.” The patent expires July 2027. This patent pertains to the use of ChromaID technology for the identification and analysis of biological tissue. It has many potential applications in medical, industrial and consumer markets.
On May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled “Systems for Fluid Analysis Using Electromagnetic Energy that is reflected a Number of Times through a Fluid Contained within a Reflective Chamber.” This patent expires approximately in approximately March 2034. This patent pertains to a method for the use of the Company’s technology analyzing fluids.
On April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled “Device for Evaluation of Fluids Using Electromagnetic Energy.” The patent expires in approximately April 2033. This patent pertains to the use of ChromaID technology for evaluating and analyzing fluids such as those following through an IV drip in a hospital or water, for example.
On February 4, 2020, we were issued US Patent No. 10,548,503 B2, entitled “Health Related Diagnostics Employing Spectroscopy in Radio/Microwave Frequency Band.” The patent expires in approximately May 2039. This patent pertains to the use of Bio-RFID technology for medical diagnostics.
On June 8, 2021, we were issued US Patent No. 11,031,970, entitled “Non-Invasive Analyte Sensor and System with Decoupled and Inefficient Transmit and Receive Antennas.” This patent expires in approximately December 2040. This patent pertains to the unique configuration of the antennas used in Know Labs’ Bio-RFID sensors.
On June 15, 2021, we were issued US Patent No. 11,033,208, entitled “Fixed Operation Time Frequency Sweeps for an Analyte Sensor.” This patent expires in approximately February 2041. This patent pertains to how operation of the Know Labs Bio-RFID sensor technology is controlled.
On July 13, 2021, we were issued US Patent No. 11,063,373, entitled “Non-Invasive Analyte Sensor and System with Decoupled Transmit and Receive Antennas.” This patent expires in approximately December 2040. This patent pertains to the unique configuration of the antennas used in Know Labs’ Bio-RFID sensors.
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On July 13, 2021, we were issued US Patent No. 11,058,317, entitled “Non-Invasive Detection of an Analyte Using Decoupled and Inefficient Transmit and Receive Antennas.” This patent expires in approximately December 2040. This patent pertains to the unique configuration of the antennas used in Know Labs’ Bio-RFID sensors.
On July 13, 2021, we were issued US Patent No. 11,058,331, entitled “Analyte Sensor and System with Multiple Detector Elements that can Transmit or Receive.” This patent expires in approximately February 2041. This patent pertains to the technology that allows the implementation of radio frequency scans using different combinations of antennas to improve the detection capabilities of the Bio-RFID sensors in non-invasively measuring and identifying analytes, including glucose.
Product Strategy
We are currently undertaking internal development work on potential products for the commercial 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. 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, testing, 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 $3,094,000 and $1,314,000 for the nine months ended June 30, 2021 and 2020, respectively, on development activities.
On April 30, 2020, the Company approved and ratified the incorporation of Particle, Inc. 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.
Related Patent Assets
Inherent in a platform technology is the ability to develop or license technology in diverse fields of use apart from the Company’s core focus. Know Labs focuses on human health and wellness with a first focus on the non-invasive monitoring of blood glucose. It will pursue the identification of a multitude of analytes in the human body important to diagnostics over time. The Company will also identify, over time, opportunities for its intellectual property to be deployed in areas outside human health and wellness. An example is Particle, Inc.
On April 30, 2020, the Company incorporated a subsidiary corporation, Particle, Inc. for the purpose of research and development on non-core Company intellectual property. The first research activity, undertaken by a separate Particle team has been on standard 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 June 30, 2021 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. Final study results from Texas Biomedical Research Institute indicate the Particle bulb’s ability to inactivate SARS-CoV-2, the virus that causes COVID-19 and most recently, the Alpha variant of the virus that causes COVID-19. Testing will continue on other variants. The Particle team is working on certification, labeling, product manufacturing and related go-to-market requirements; as well as business development activities related to interest from potential strategic and channel partners in both consumer and business applications.
The Company expects that other such subsidiaries may be created over time. Additionally, the Company may license its intellectual property to third parties so that they may pursue activities that are not a part of the Company’s core focus.
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EMPLOYEES
As of June 30, 2021, we had 9 full-time employees. Our senior management and four 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 Visualant, Incorporated to Know Labs, Inc. and symbol change from VSUL to KNWN was announced by FINRA declared effective on the opening of trading as of May 25, 2018.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional financing, the sale of significant numbers of our shares and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part 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 and commercialization 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.
We are focused on the development and commercialization of proprietary technologies which are capable of uniquely identifying and measuring almost any material or analyte using electromagnetic energy to detect, record, identify and measure the unique “signature” of said materials or analytes. We call these our “Bio-RFID™” technology platform when pertaining to radio and microwave spectroscopy; and “ChromaID™” technology platform when pertaining to optical spectroscopy.
ChromaID is the first technology developed and patented by the Company. More recently, we have focused upon extensions and new patentable inventions that are derived from and extend beyond our ChromaID technology and intellectual property. We call this new technology platform “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, its commercialization and development of related patent assets.
On April 30, 2020 the Company incorporated a subsidiary corporation, Particle, Inc. for the purpose of research and development on non-core Company intellectual property. The first research activity, undertaken by a separate Particle team has been on standard 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 June 30, 2021 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. Preliminary study results from Texas Biomedical Research Institute indicate the Particle bulb’s ability to inactivate SARS-CoV-2, the virus that causes COVID-19. The Particle team is working on certification, labeling, product manufacturing and related go-to-market requirements; as well as business development activities related to interest from potential strategic and channel partners in both consumer and business applications.
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In 2010, we acquired TransTech Systems, Inc. as an adjunct to our business. 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. While it did provide our current revenues, it was not central to our current focus as a Company. Moreover, we wrote down any goodwill associated with its historic acquisition. TransTech ceased operation 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 June 30, |
|
|||||||||||||
|
|
2021 |
|
|
2020 |
|
|
$ Variance |
|
|
% Variance |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
|
|
0.0 | % |
Cost of sales |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 | % |
Gross profit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 | % |
Research and development expenses |
|
|
869 |
|
|
|
375 |
|
|
|
494 |
|
|
|
-131.7 | % |
Selling, general and administrative expenses |
|
|
994 |
|
|
|
634 |
|
|
|
360 |
|
|
|
-56.8 | % |
Operating loss |
|
|
(1,863 | ) |
|
|
(1,009 | ) |
|
|
(854 | ) |
|
|
-84.6 | % |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(5,228 | ) |
|
|
(1,189 | ) |
|
|
(4,039 | ) |
|
|
-339.7 | % |
Other income (expense) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 | % |
(Loss) on debt settlements |
|
|
- |
|
|
|
(707 | ) |
|
|
707 |
|
|
|
100.0 | % |
Total other income (expense) |
|
|
(5,228 | ) |
|
|
(1,896 | ) |
|
|
(3,332 | ) |
|
|
-175.7 | % |
(Loss) before income taxes |
|
|
(7,091 | ) |
|
|
(2,905 | ) |
|
|
(4,186 | ) |
|
|
-144.1 | % |
Income taxes - current (benefit) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 | % |
Net (loss) |
|
$ | (7,091 | ) |
|
$ | (2,905 | ) |
|
$ | (4,186 | ) |
|
|
-144.1 | % |
THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2020
Research and Development Expenses
Research and development expenses for the three months ended June 30, 2021 increased $494,000 to $869,000 as compared to $375,000 for the three months ended June 30, 2020. 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 June 30, 2021 increased $360,000 to $994,000 as compared to $634,000 for the three months ended June 30, 2020.
The increase primarily was due to (i) increased business development expenses of $251,000; (ii) increased stock based compensation of $70,000; (iii) increased Particle expenses of $94,000 (primarily payroll and stock based compensation); and (iv) increased other expenses of $15,000. As part of the selling, general and administrative expenses for the three months ended June 30, 2021 and 2020, we recorded $300,000 and $61,000, respectively, of investor relationship expenses and business development expenses.
Other (Expense), Net
Other expense, net for the three months ended June 30, 2021 was $5,228,000 as compared to other expense, net of $1,896,000 for the three months ended June 30, 2020. The other expense, net for the three months ended June 30, 2021 consisted of interest expense of $5,228,000 related to convertible notes payable and the amortization of the beneficial conversion feature. The increase interest expense is due to more issuances of convertible notes and warrants through June 30, 2021.
The other expense, net for the three months ended June 30, 2020 included (i) interest expense of $1,189,000 and (ii) loss on debt settlement of $707,000. On July 1, 2020, we entered into a Settlement Agreement and General Mutual Release with a shareholder of the Company. On July 6, 2020, the shareholder paid $125,000 to us and we issued 500,000 shares of common stock. We accrued for the loss on debt settlement of $825,000 as of June 30, 2020. This loss was reduced by a gain on settlement of certain TransTech liabilities of approximately $118,000.
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Net Loss
Net loss for the three months ended June 30, 2021 was $7,091,000 as compared to $2,905,000 for the three months ended June 30, 2020. The net loss for the three months ended June 30, 2021 included non-cash expenses of $5,176,000. The non-cash items include (i) depreciation and amortization of $37,000; (ii) stock based compensation- stock options of $268,000; and (iii) amortization of debt discount as interest expense of $4,873,000; offset by (iv) other of $2,000.
On March 15, 2021, we closed private placement for gross proceeds of $14,209,000 in exchange for issuing Subordinated Convertible Notes and 3,552,250 Warrants in a private placement to accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes will be automatically converted to our Common Stock at $2.00 per share on the one year anniversary starting on March 15, 2022.
The Convertible Notes had an original principal amount of $14,209,000 and bear annual interest of 8%. Both the principal amount and the interest are payable on a payment-in-kind basis in shares of our Common Stock.
The net loss for the three months ended June 30, 2020 included non-cash items of $1,278,000. The non-cash items include (i) depreciation and amortization of $43,000; (ii) stock based compensation of $136,000; (iii) issuance of capital stock for services and expenses of $19,000; (iv) amortization of debt discount as interest expense of $1,082,000; offset by (v) other of $2,000.
We expect losses to continue as we commercialize our ChromaID™ and Bio-RFID™ technology.
|
|
Nine Months Ended June 30, |
|
|||||||||||||
|
|
2021 |
|
|
2020 |
|
|
$ Variance |
|
|
% Variance |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
$ | - |
|
|
$ | 122 |
|
|
$ | (122 | ) |
|
|
-100.0 | % |
Cost of sales |
|
|
- |
|
|
|
70 |
|
|
|
(70 | ) |
|
|
100.0 | % |
Gross profit |
|
|
- |
|
|
|
52 |
|
|
|
(52 | ) |
|
|
-100.0 | % |
Research and development expenses |
|
|
3,094 |
|
|
|
1,313 |
|
|
|
1,781 |
|
|
|
-135.6 | % |
Selling, general and administrative expenses |
|
|
4,934 |
|
|
|
3,178 |
|
|
|
1,756 |
|
|
|
-55.3 | % |
Operating loss |
|
|
(8,028 | ) |
|
|
(4,439 | ) |
|
|
(3,589 | ) |
|
|
-80.9 | % |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(9,736 | ) |
|
|
(4,170 | ) |
|
|
(5,566 | ) |
|
|
-133.5 | % |
Other income (expense) |
|
|
- |
|
|
|
65 |
|
|
|
(65 | ) |
|
|
-100.0 | % |
(Loss) on debt settlements |
|
|
- |
|
|
|
(707 | ) |
|
|
707 |
|
|
|
100.0 | % |
Total other income (expense) |
|
|
(9,736 | ) |
|
|
(4,812 | ) |
|
|
(4,924 | ) |
|
|
-102.3 | % |
(Loss) before income taxes |
|
|
(17,764 | ) |
|
|
(9,251 | ) |
|
|
(8,513 | ) |
|
|
-92.0 | % |
Income taxes - current (benefit) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.0 | % |
Net (loss) |
|
$ | (17,764 | ) |
|
$ | (9,251 | ) |
|
$ | (8,513 | ) |
|
|
-92.0 | % |
NINE MONTHS ENDED JUNE 30, 2021 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2020
Sales
Revenue for the nine months ended June 30, 2021 decreased $122,000 to $0 as compared to $122,000 for the nine months ended June 30, 2020. TransTech closed June 30, 2020.
Cost of Sales
Cost of sales for the nine months ended June 30, 2021 decreased $70,000 to $0 as compared to $70,000 for the nine months ended June 30, 2020. TransTech closed June 30, 2020.
Research and Development Expenses
Research and development expenses for the nine months ended June 30, 2021 increased $1,781,000 to $3,094,000 as compared to $1,313,000 for the nine months ended June 30, 2020. 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 nine months ended June 30, 2021 increased $1,756,000 to $4,934,000 as compared to $3,178,000 for the nine months ended June 30, 2020.
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The increase primarily was due to (i) increased business development expenses of $194,000; (ii) increased stock based compensation of $1,057,000; (iii) increased Particle expenses of $472,000 (primarily payroll and stock based compensation); and (iv) increased other expenses of $33,000. As part of the selling, general and administrative expenses for the three months ended June 30, 2021 and 2020, we recorded $300,000 and $61,000, respectively, of investor relationship expenses and business development expenses. As part of the selling, general and administrative expenses for the nine months ended June 30, 2021 and 2020, we recorded $424,000 and $144,000, respectively, of investor relation expenses and business development expenses.
Other (Expense), Net
Other expense, net for the nine months ended June 30, 2021 was $9,736,000 as compared to other expense, net of $4,812,000 for the nine months ended June 30, 2020. The other expense, net for the nine months ended June 30, 2021 included interest expense of $9,736,000 related to convertible notes payable and the amortization of the beneficial conversion feature.
The other expense for the nine months ended June 30, 2020 included (i) interest expense of $4,170,000 and (ii) loss on debt settlement of $707,000, offset by (iii) other income of $65,000. On July 1, 2020, we entered into a Settlement Agreement and General Mutual Release with a shareholder of the Company. On July 6, 2020, the shareholder paid $125,000 to us and we issued 500,000 shares of common stock. We accrued for the loss on debt settlement of $825,000 as of June 30, 2020. This loss was reduced by a gain on settlement of certain TransTech liabilities of approximately $118,000.
Net Loss
Net loss for the nine months ended June 30, 2021 was $17,764,000 as compared to $9,251,000 for the nine months ended June 30, 2020. The net loss for the nine months ended June 30, 2021 included non-cash expenses of $12,203,000. The non-cash items include (i) depreciation and amortization of $166,000; (ii) issuance for capital stock for services and expenses of $203,000; (iii) stock based compensation- warrants of $2,194,000; (iv) stock based compensation- stock options of $571,000; (v) amortization of debt discount as interest expense of $9,071,000; and offset by (vi) other of $2,000.
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 nine months ended June 30, 2020 included non-cash items of non-cash expenses of $6,613,000. The non-cash items include (i) depreciation and amortization of $164,000; ii) issuance of capital stock for services and expenses of $1,045,000; (iii) stock based compensation of $701,000; (iv) amortization of debt discount as interest expense of $3,874,000; (v) loss on debt settlement of $825,000; and (vi) other of $4,000.
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 $13,870,000 and net working capital of approximately $11,088,000 (net of convertible notes payable and right of use asset and liabilities) as of June 30, 2021. We have experienced net losses since inception and we expect losses to continue as we commercialize our ChromaID™ technology. As of June 30, 2021, we had an accumulated deficit of $73,730,000 and net losses in the amount of $17,764,000, $13,563,000, and $7,612,000 for the nine months ended June 30, 2021 and the years ended 2020 and 2019, respectively. During the nine months ended June 30, 2021, the Company incurred non-cash expenses of $12,203,424.
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.
On March 15, 2021, we closed private placement for gross proceeds of $14,209,000 in exchange for issuing Subordinated Convertible Notes and 3,552,250 Warrants in a private placement to accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes will be automatically converted to our Common Stock at $2.00 per share on the one year anniversary starting on March 15, 2022.
The Convertible Notes had an original principal amount of $14,209,000 and bear annual interest of 8%. Both the principal amount and the interest are payable on a payment-in-kind basis in shares of our Common Stock.
We believe that our cash on hand will be sufficient to fund our operations through December 31, 2023.
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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 $17,417,000.
Operating Activities
Net cash used in operating activities for the nine months ended June 30, 2021 was $5,145,000. This amount was primarily related to (i) a net loss of $17,764,000; offset by (ii) working capital changes of $416,000; and (iii) non-cash expenses of $12,203,000. The non-cash items include (iv) depreciation and amortization of $166,000; (v) issuance for capital stock for services and expenses of $203,000; (vi) stock based compensation- warrants of $2,194,000; (vii) stock based compensation- stock options of $571,000; (viii) amortization of debt discount as interest expense of $9,071,000; and offset by (ix) other of $2,000.
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 exercisable on a cash or non-cash basis 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 nine months ended June 30, 2021 and 2020 was $48,000 and $13,000, respectively. This amount was primarily related to the investment in equipment for research and development.
Financing Activities
Net cash provided by financing activities for the nine months ended June 30, 2021 and 2020 was $14,764,000 and $5,441,000, respectively. This amount was primarily related to (i) issuance of Simple Agreements for future Equity of $340,000; (ii) $14,209,000 related to proceeds from convertible notes payable; (iii) proceeds from notes payable- PPP of $206,000; and (iv) proceed from the issuance of common stock for the exercise of warrants of $653,000; and offset by (v) payment of issuance costs from notes payable of $727,000.
On March 15, 2021, we closed private placement for gross proceeds of $14,209,000 in exchange for issuing Subordinated Convertible Notes and 3,552,250 Warrants in a private placement to accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes will be automatically converted to our Common Stock at $2.00 per share on the one year anniversary starting on March 15, 2022.
The Convertible Notes had an original principal amount of $14,209,000 and bear annual interest of 8%. Both the principal amount and the interest are payable on a payment-in-kind basis in shares of our Common Stock
Our contractual cash obligations as of June 30, 2021 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 |
|
$ | 32,846 |
|
|
$ | 32,846 |
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
Convertible notes payable (1) |
|
|
16,464,066 |
|
|
|
16,464,066 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Simple Agreements for Future Equity (SAFE) (1) |
|
|
1,125,000 |
|
|
|
1,125,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ | 17,621,912 |
|
|
$ | 17,621,912 |
|
|
$ | - |
|
|
$ | - |
|
|
$ | - |
|
(1) |
Convertible notes payable includes $16,464,066 that converts into common stock at the maturity date during 2021 and 2022. Through June 30, 2021, $1,125,000 has been raised through the sale of SAFE instruments. We expect to issue 1,406,250 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 June 30, 2021. |
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.
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ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of June 30, 2021 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.
(b) Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control-Integrated Framework. Based on its evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.
c) Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2021, 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 material effect on our internal control over financial reporting.
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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.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency caused by a new strain of the coronavirus (“COVID-19”) and advised of the risks to the international community as the virus spread globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. 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 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. Lastly, as vaccinations become readily available we cannot predict what restrictions may be imposed in the event of a vaccine mandate for travel to and from particular destinations.
It is unclear how such restrictions, which will contribute to a general slowdown in the global economy, and it is difficult to isolate the impact of the pandemic on our business, results of operations, financial condition and our future strategic plans. Further, while many businesses have survived the past year, and some thrived, as COVID-19 becomes more controlled, we cannot predict how the global economy will respond to the return to normalcy, or whether it will continue to sustain steadily.
In addition, the Company is uncertain of the full effect the pandemic will have on it for the longer term since the scope and duration of the pandemic is unknown, and evolving factors such as the level and timing of the distribution of efficacious vaccines across the world and the extent of any resurgences of the virus or emergence of new variants of the virus, such as the Delta variant, will impact the stability of economic recovery and growth. The extent to which the operations of the Company, and the operations of its customers and supply chain, may be adversely impacted by the COVID-19 pandemic will depend largely on these future developments. The Corporation may experience long-term disruptions to its operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the pandemic; and closures of businesses or manufacturing facilities critical to its business or supply chains. The Corporation is actively monitoring, and will continue to actively monitor, the pandemic and the potential impact on its operations, financial condition, liquidity, suppliers, industry and workforce.
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.
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Risks Relating to the Company Generally
We need additional financing to support our technology development and ongoing operations, pay our debts and maintain ownership of our intellectual properties.
We are currently operating at a loss. We believe that our cash on hand will be sufficient to fund our operations through December 31, 2023. 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 June 30, 2021, we owe approximately $2,706,591 and if we do not satisfy these obligations, the lenders may have the right to demand payment in full or exercise other remedies.
Mr. Erickson and/or entities with which he is affiliated also have accounts payable and accrued liabilities $451,525 and $597,177 of as of June 30, 2021 and September 30, 2020, respectively, related to accrued compensation, accrued interest and expenses.
We owe $2,255,066 under various convertible promissory notes as of June 30, 2021 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 June 30, 2021, we had an accumulated deficit of $73,730,000 and net losses in the amount of $17,764,000, $13,563,000, and $7,612,000 for the nine months ended June 30, 2021 and the years ended September 30, 2020 and 2019, respectively. During the nine months ended June 30, 2021, we incurred non-cash expenses of $12,203,000.
There can be no assurance that we will achieve or maintain profitability. If we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Failure to become and remain profitable would impair our ability to sustain operations and adversely affect the price of our common stock and our ability to raise capital. Our operating expenses may increase as we spend resources on growing our business, and if our revenue does not correspondingly increase, our operating results and financial condition will suffer. Our ChromaID and Bio-RFID 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.
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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.
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,
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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.
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 has impacted our top line revenues and our operating results and may result in future expenses associated with its closure. Is this still accurate?
The Company Particle, Inc. subsidiary was incorporated April 30, 2020 and has limited 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 June 30, 2021 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.
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. 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.
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Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
We rely on a combination of patent, trademark, and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. Obtaining and maintaining a strong patent position is important to our business. Patent law relating to the scope of claims in the technology fields in which we operate is complex and uncertain, so we cannot be assured that we will be able to obtain or maintain patent rights, or that the patent rights we may obtain will be valuable, provide an effective barrier to competitors or otherwise provide competitive advantages. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, or demonstrate that we did not derive our invention from another, we may have to participate in interference or derivation proceedings in the USPTO or in court that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will prevail over those filed by others. Also, our intellectual property rights may be subject to other challenges by third parties. Patents we obtain could be challenged in litigation or in administrative proceedings such as ex parte reexam, inter parties review, or post grant review in the United States or opposition proceedings in Europe or other jurisdictions.
There can be no assurance that:
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any of our existing patents will continue to be held valid, if challenged; |
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patents will be issued for any of our pending applications; |
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any claims allowed from existing or pending patents will have sufficient scope or strength to protect us; |
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our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or |
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any of our products or technologies will not infringe on the patents of other companies. |
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. |
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.
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.
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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.
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. |
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.
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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 $19,133,500 or 21,049,264 common shares (9,020,264 common shares at $0.25 per share, 4,924,500 common shares at $1.00 per share and 7,104,500 at $2.00) and the exercise price of additional outstanding warrants to purchase 10,584,381 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Warrants totaling 4,599,707 would adjust below $1.20 per share pursuant to the documents governing such instruments. Warrants totaling 4,044,340 would adjust below $2.40 per share pursuant to the documents governing such instruments.
Risks Relating to Our Stock
The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments and litigation; |
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Issuance of convertible or equity securities and related warrants for general or merger and acquisition purposes; |
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Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes; |
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Sale of a significant number of shares of our common stock by stockholders; |
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General market and economic conditions; |
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Quarterly variations in our operating results; |
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Investor and public relation activities; |
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Announcements of technological innovations; |
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New product introductions by us or our competitors; |
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Competitive activities; |
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Low liquidity; and |
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Additions or departures of key personnel. |
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition and results of operations.
Future issuance of additional shares of common stock in Particle, Inc. could dilute the Company as majority stockholders of Particle, Inc.
We are currently the 100% shareholder in Particle, Inc. 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. Through June 30, 2021, $1,125,000 has been raised through the sale of SAFE instruments. We expect to issue 1,406,250 shares of the Particle stock that was initially valued at $0.80 per share. The SAFE contained a number of conversion and redemption provisions, including settlement upon liquidity or dissolution events. The final price and share are not known until settlement upon liquidity or dissolution events conditions are achieved. Our ownership interest in Particle will be diluted when the SAFE’s are converted to common stock. We are negotiating with the investors to convert the $1,125,000 into equity in Know Labs.
Additionally, as Particle develops, they may need to raise additional capital to fund operations through the sale of equity or debt securities, which may result in a dilution of our position. The issuance of any additional securities could, among other things, result in substantial dilution to the percentage ownership of the Company.
The sale of a significant number of our shares of common stock could depress the price of our common stock.
As of June 30, 2021, we had 33,719,669 shares of common stock issued and outstanding, held by 160 stockholders of record. The number of stockholders, including beneficial owners holding shares through nominee names, is approximately 2,300. Each share of common stock entitles its holder to one vote on each matter submitted to the stockholders for a vote, and no cumulative voting for directors is permitted. Stockholders do not have any preemptive rights to acquire additional securities issued by the Company As of June 30, 2021, there were options outstanding for the purchase of 14,650,120 common shares (including unearned stock option grants totaling 11,775,745 shares related to performance targets), warrants for the purchase of 23,169,587 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 16,124,764 common shares (9,020,264 common shares at the current price of $0.25 per share and 7,104,500 common shares at the current price of $2.00 per share) reserved and are issuable upon conversion of convertible debentures of $16,464,066. All of which could potentially dilute future earnings per share but are excluded from the June 30, 2021 calculation of net loss per share because their impact is antidilutive.
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Significant shares of common stock are held by our principal stockholders, other company insiders and other large stockholders. As “affiliates” of Know Labs, as defined under Securities and Exchange Commission Rule 144 under the Securities Act of 1933, our principal stockholders, other of our insiders and other large stockholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible preferred stock could result in further dilution to common stockholders and may affect the market price of the common stock.
Future issuance of additional shares of common stock and/or preferred stock could dilute existing stockholders. We have and may issue preferred stock that could have rights that are preferential to the rights of common stock that could discourage potentially beneficial transactions to our common stockholders.
Pursuant to our certificate of incorporation, we currently have authorized 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. To the extent that common shares are available for issuance, subject to compliance with applicable stock exchange listing rules, our board of directors has the ability to issue additional shares of common stock in the future for such consideration as the board of directors may consider sufficient. The issuance of any additional securities could, among other things, result in substantial dilution of the percentage ownership of our stockholders at the time of issuance, result in substantial dilution of our earnings per share and adversely affect the prevailing market price for our common stock.
An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our Board of Directors’ authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve. The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.
Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If we or Particle raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced and these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate products, or to grant licenses on terms that are not favorable to us.
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
Our certificate of incorporation, as amended, our bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
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We or our manufacturers may be unable to obtain or maintain international regulatory clearances or approvals for our current or future products, or our distributors may be unable to obtain necessary qualifications, which could harm our business.
Sales of the Know Labs products internationally are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the U.S. Complying with international regulatory requirements can be an expensive and time-consuming process, and marketing approval or clearance is not certain. The time required to obtain clearances or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may rely on third-party distributors to obtain regulatory clearances and approvals required in other countries, and these distributors may be unable to obtain or maintain such clearances or approvals. Our distributors may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or clearances, which could increase the difficulty of attracting and retaining qualified distributors. If our distributors experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the U.S., or if they fail to receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements in international markets effectively, or at all.
Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products outside of the U.S., we may be subject to rigorous international regulation in the future. In these circumstances, we would be required to rely on our foreign independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our product in foreign countries.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2021, we had the following unregistered sales of equity securities:
We issued 5,318,460 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.
We issued 126,867 shares of common stock at an average price of $0.473 per share related to the exercise of warrants.
We issued 16,875 shares related to the exercise of stock option grants at $1.38 per share.
ITEM 6. EXHIBITS
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:
(a) Exhibits
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:
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101.INS* |
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XBRL Instance Document |
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101.SCH* |
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XBRL Taxonomy Extension Schema Document |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB* |
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XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW LABS, INC.
(Registrant)
Date: August 16, 2021 |
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/s/ Phillip A Bosua |
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Phillip A. Bosua |
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Chief Executive Officer, and Director |
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(Principal Executive Officer) |
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Date: August 16, 2021 |
By: |
/s/ Ronald P. Erickson |
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Ronald P. Erickson |
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Interim Chief Financial Officer, and Treasurer |
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(Principal Financial and Accounting Officer) |
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