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 |
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|
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- |
U.S. Patent No. 11,031,970: Non-invasive analyte sensor and system with decoupled and inefficient transmit and receive antennas |
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|
- |
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 |
|||||||||||