Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended September 30, 2020
☐ TRANSACTION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transaction period from ________ to ________
Commission File
number 000-30262
KNOW LABS, INC.
(Exact name of registrant as specified in charter)
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Nevada
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90-0273142
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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500
Union Street, Suite 810, Seattle, Washington
USA
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98101
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(Address of principal executive offices)
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(Zip Code)
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206-903-1351
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(Registrant's telephone number, including area
code)
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N/A
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(Former name, address, and fiscal year, if changed since last
report)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act: ☐ Yes ☒ No
Securities
registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
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Large
accelerated filer
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☐
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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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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
As of March 31, 2020 (the last business day of our most recently
completed second fiscal quarter), based upon the last reported
trade on that date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates (for this purpose,
all outstanding and issued common stock minus stock held by the
officers, directors and known holders of 10% or more of the
Company’s common stock) was $13,419,023.
The number of shares of common stock, $.001 par value, issued and
outstanding as of December 27, 2020: 25,730,224
shares
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TABLE OF CONTENTS
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Page
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PART 1
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ITEM 1.
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Description of Business
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3
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ITEM 1A.
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Risk Factors
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7
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ITEM 1B
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Unresolved Staff Comments
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16
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ITEM 2.
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Properties
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16
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ITEM 3.
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Legal Proceedings
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17
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ITEM
4.
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Other
Information
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17
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PART II
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ITEM 5.
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Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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ITEM 6.
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Selected Financial Data
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22
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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22
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ITEM 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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27
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ITEM 8.
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Financial Statements and Supplementary Data
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27
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ITEM 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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27
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ITEM 9A.
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Controls and Procedures
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27
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ITEM 9B.
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Other Information
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28
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PART III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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29
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ITEM 11.
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Executive Compensation
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32
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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40
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ITEM 13.
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Certain Relationships and Related Transactions, and Director
Independence
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43
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ITEM 14.
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Principal Accounting Fees and Services
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45
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PART IV
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ITEM 15.
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Exhibits, Financial Statement Schedules
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47
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SIGNATURES
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78
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2
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion, in addition to the other information
contained in this report, should be considered carefully in
evaluating us and our prospects. This report (including without
limitation the following factors that may affect operating results)
contains forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended ("Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act") regarding us and our business, financial
condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are
intended to identify forward-looking statements but are not the
exclusive means of identifying forward-looking statements in this
report. Additionally, statements concerning future matters such as
revenue projections, projected profitability, growth strategies,
development of new products, enhancements or technologies, possible
changes in legislation and other statements regarding matters that
are not historical are forward-looking statements.
Forward-looking statements in this report reflect the good faith
judgment of our management and these statements are based on facts
and factors as we currently understand 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 in
“Risk Factors” and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well
as those discussed elsewhere in this report. Readers are urged not
to place undue reliance on these forward-looking statements,
which speak only as of the date of
this report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
BACKGROUND AND CAPITAL STRUCTURE
Know Labs, Inc. was incorporated under the laws of the State of
Nevada in 1998. Since 2007, we have been focused primarily
on research and development of proprietary technologies which can
be used to authenticate and diagnose a
wide variety of organic and non-organic substances and
materials. Our Common Stock trades on the OTCQB Exchange
under the symbol “KNWN.”
BUSINESS
We are focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these
our “Bio-RFID™” and “ChromaID™”
technologies.
Historically, we focused on the development of our proprietary
ChromaID technology. Using light from low-cost LEDs (light emitting
diodes) the ChromaID technology maps the color of substances,
fluids and materials. With our proprietary processes we can
authenticate and identify based upon the color that is present. The
color is both visible to us as humans but also outside of the
humanly visible color spectrum in the near infra-red and near
ultra-violet and beyond. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see,
and identify, and authenticate based upon the color that is
present. Our ChromaID scanner is capable of uniquely identifying
and authenticating almost any substance or liquid using light to
record, detect and identify its unique color signature. Today we
are focused upon extensions and new inventions that are derived
from and extend beyond our ChromaID technology. We call this new
technology “Bio-RFID.” The rapid advances made with our
Bio-RFID technology in our laboratory have caused us to move
quickly into the commercialization phase as we work to create
revenue generating products for the marketplace. Today, our sole
focus is on its Bio-RFID technology and its
commercialization.
On
April 30, 2020, we approved and ratified the incorporation of
Particle, Inc., a Nevada corporation. As of September 30, 2020 we
are the sole shareholder but have entered into Simple Agreements
for Future Equity to sell separate ownership in Particle. Particle
is now a direct, 100% owned subsidiary of the Company but our
future ownership could be diluted if Particle is successful in
raising equity from outside investors. Particle shall utilize the
same corporate offices as the Company and shall focus on the
development and commercialization of our extensive intellectual
property relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular
focus with its Bio-RFID technology and its initial application ,
the non-invasive measurement of blood glucose
3
On June 1, 2020, we approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with our
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain of our patents and trademarks, 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 September 30, 2020 Particle has not yet
executed a successful financing or generated any
sales.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. Operating as an independent subsidiary, TransTech was a
distributor of products for employee and personnel identification
and authentication. TransTech historically provided substantially
all of our revenues. The financial results from our TransTech
subsidiary had been diminishing as vendors of their products
increasingly moved to the Internet and direct sales to their
customers. TransTech closed on June 30, 2020.
The Know Labs Technology
We have internally and under contract with third parties developed
proprietary platform technologies to uniquely identify or
authenticate almost any material and substance. Our technology
utilizes electromagnetic energy along the electromagnetic spectrum
to perform analytics which allow the user to identify and
authenticate substances and materials depending upon the
user’s unique application and field of use. Our proprietary
platform technologies are called Bio-RFID and
ChromaID.
Our latest technology platform is called Bio-RFID. Working in our
lab over the past two years, we developed extensions and new
inventions derived in part from our ChromaID technology which we
refer to as Bio-RFID technology. We are rapidly advancing the
development of this technology. We have announced that our Bio-RFID
technology has successfully been able to non-invasively ascertain
blood glucose levels in humans. We have been building the internal
and external development team necessary to commercialize this
technology as well as make additional patent filings covering the
intellectual property created with these new inventions. The first
applications of our Bio-RFID technology will be in a product
marketed as a Glucose Monitor. It will provide the user with real
time information on their blood glucose levels. This product will
require US Food and Drug Administration approval prior to its
introduction to the market.
We have previously announced the results of laboratory-based
comparison testing between our Bio-RFID technology and the leading
continuous glucose monitors from Abbott Labs (Freestyle
Libre®) and DexCom (G5®). These results provide evidence
of a high degree of correlation between our Bio-RFID based
technology and the current industry leaders and their continuous
glucose monitors. Our technology is fundamentally differentiated
from these industry leaders as our technology completely
non-invasively monitors blood glucose levels.
We expect to begin the process of obtaining US Food and Drug
Administration (FDA) approval of our non-invasive blood glucose
monitoring device during calendar year 2021. We will be guided in
the FDA regulatory approval process by our Chief Medical Officer
and our Medical and Regulatory Advisory Board. 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. We may out license our ChromaID
technology for various fields of use or, over time, internally
develop applications based upon this technology.
Over time, we believe both Bio-RFID and ChromaID technologies may
build a significant body of data which can become a significant
asset of the Company, providing valuable information in numerous
fields of use including medical diagnostics and
beyond.
During the past year Know Labs has licensed certain of its
intellectual property to its newly formed subsidiary corporation,
Particle, Inc. Particle is focused upon research, development and
potential monetization of this intellectual property in field of
use outside the current focus of its parent Company.
Bio-RFID and ChromaID: Foundational Platform
Technologies
Our Bio-RFID and ChromaID technologies provide a platform upon
which a myriad of applications can be developed. As platform
technologies, they are analogous to a smartphone, upon which an
enormous number of previously unforeseen applications have been
developed. Bio-RFID and ChromaID technologies are
“enabling” technologies that bring the science of
electromagnetic energy to low-cost, real-world commercialization
opportunities across multiple industries. The technologies are
foundational and, as such, the basis upon which the Company
believes significant businesses can be built.
4
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 glucose in the
human body. By extension, there may be other molecular structures
which this same technology can identity in the human body which,
over time, the Company will focus upon. They may include the
monitoring of drug usage or the presence of illicit drugs. They may
also involve identifying hormones and various markers of
disease.
Similarly, the ChromaID technology can, for example, effectively
differentiate and identify different brands of clear vodkas that
appear identical to the human eye. By extension, this same
technology could identify pure water from water with contaminants
present. It could provide real time detection of liquid medicines
such as morphine that have been adulterated or compromised. It
could detect if jet fuel has water contamination present. It could
determine when it is time to change oil in a deep fat fryer. These
are but a few of the potential applications of the ChromaID
technology based upon extensions of its ability to identify
different liquids.
The cornerstone of a company with a foundational platform
technology is its intellectual property. We have pursued an active
intellectual property strategy and have been granted 14 patents. We
currently have a number of patents pending and continue, on a
regular basis the filing of new patents. We possess all right,
title and interest to the issued patents. Nine issued and pending
patents are licensed exclusively to us in perpetuity by our
strategic partner, Allied Inventors, a spin-off entity of
Intellectual Ventures, an intellectual property fund.
Our Patents and Intellectual Property
We believe that our 14 patents, patent applications, registered
trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets. Our issued
patents will expire at various times between 2027 and 2039. Pending
patents, if and when issued, may have expiration dates that extend
further in time. The duration of our trademark registrations varies
from country to country. However, trademarks are generally valid
and may be renewed indefinitely as long as they are in use and/or
their registrations are properly maintained.
The issued patents cover the fundamental aspects of the Know Labs
ChromaID and Bio-RFID technology, and a number of unique
applications. We will continue to expand our 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.
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.
5
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 flowing through
an IV drip in a hospital or water, for example.
On February 4, 2020, we were issued US Patent No. 10,548,503 B2,
entitled “Health Related Diagnostics Employing Spectroscopy
in Radio/Microwave Frequency Band”. The patent expires in
approximately May 2039. This patent pertains to the use of Bio-RFID
technology for medical diagnostics.
We continue to pursue a strategy to expand our unique intellectual
property assets.
Product Strategy
We are currently undertaking internal development work on potential
products for the consumer marketplace. We have announced the
development of our non-invasive glucose monitor and our desire to
obtain US Food and Drug Administration approval for the marketing
of this product to the diabetic and pre-diabetic population. We
have also announced the engagement of a manufacturing partner we
will work with to bring this product to market. We will make
further announcements regarding this product as development,
manufacturing and regulatory approval work progresses.
Currently we are focusing our efforts on productizing our Bio-RFID
technology as we move it out of our research laboratory and into
the marketplace.
Research and Development
Our current research and development efforts are primarily focused
on improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for this technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications for this platform technology. Our current internal
team along with outside consultants have significant experience
working with our technology and potential applications to the
technology to different fields of use. We engage third party
experts as required to supplement our internal team. We believe
that continued development of our technology is essential to our
future success. We incurred expenses of $2,033,726
and $1,257,872 for the years ended September 30, 2020
and 2019, respectively, on development
activities.
On
April 30, 2020, we approved and ratified the incorporation of
Particle. Particle is focused on the development and
commercialization of the Company’s extensive intellectual
property relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular
focus. Since incorporation, Particle
has engaged in research and development activities utilizing parent
Company intellectual property and extension
thereto.
Merger with RAAI Lighting, Inc.
On April 10, 2018, we entered into an Agreement and Plan of Merger
with 500 Union Corporation, a Delaware corporation and a wholly
owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, we acquired
all the outstanding shares of RAAI’s capital stock through a
merger of Merger Sub with and into RAAI (the “Merger”),
with RAAI surviving the Merger as a wholly owned subsidiary of the
Company.
6
EMPLOYEES
As of September 30, 2020, we
had six full-time employees. All personnel are located in our
Seattle, Washington offices. We also utilize consulting firms and
individual consultants to supplement our workforce as
necessary.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol
“KNWN.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
name change from Know Labs, Incorporated to Know Labs, Inc. and
symbol change from VSUL to KNWN was announced by FINRA declared
effective on the opening of trading as of May 25,
2018.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part I, Item
1A.
CORPORATE INFORMATION
We were incorporated under the laws of the State of Nevada on
October 8, 1998. Our executive offices are located at 500 Union
Street, Suite 810, Seattle, WA 98101. Our telephone number is (206)
903-1351 and its principal website address is located at
www.knowlabs.co. The information on our website is not incorporated
as a part of this Form 10-K.
ITEM 1A. RISK FACTORS
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
RISK FACTORS
There are certain inherent risks which will have an effect on the
Company’s development in the future and the most
significant risks and uncertainties known and identified by our
management are described below.
Risks
Related to Pandemics
The near-term effects of the recent COVID-19 coronavirus pandemic
are known, as they adversely affected our business. Longer term effects are not immediately known and
may adversely affect our business, results of operations, financial
condition, liquidity and cash flow.
Presently,
the impact of COVID-19 has had adverse effects on our business by
slowing down our ability to work with third parties outside of
Seattle on testing and validation. It is difficult to predict what
other adverse effects, if any, COVID-19 can have on our business,
or against the various aspects of same.
As of
the date of this Annual Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the
ability of people to move and travel and require non-essential
businesses and organizations to close. While some states have
lifted certain “shelter-in-place” restrictions and
travel bans, as they are removed there is no certainty that an
outbreak will not occur and additional restrictions imposed again
in response. Additionally, several states have lifted restrictions
only to reimpose such restrictions as the number of cases rise
again.
It is
unclear how such restrictions, which will contribute to a general
slowdown in the global economy, will affect our business, results
of operations, financial condition and our future strategic
plans.
Shelter-in-place
and essential-only travel regulations could negatively impact our
employees, partners, and customers. In addition, we still could
experience significant supply chain disruptions due to
interruptions in operations at any or all of our suppliers’
facilities or downline suppliers. If we experience significant
delays in receiving our products, we will experience delays in
fulfilling orders and ultimately receiving payment, which could
result in loss of sales and a loss of customers, and adversely
impact our financial condition and results of operations. The
current status of COVID-19 coronavirus closures and restrictions
could also negatively impact our ability to receive funding from
our existing capital sources as each business is and has been
affected uniquely.
If any
of our employees, consultant, customers, or visitors were to become
infected we could be forced to close our operations temporarily as
a preventative measure to prevent the risk of spread which could
delay our progress and interfere with our ability to meet
obligations.
7
In
addition, our headquarters are located in Seattle, Washington which
has been the subject of large COVID-19 outbreak resulting in
restrictions on individuals and businesses. It is unclear at this
time how these restrictions will be continued and/or amended as the
pandemic evolves. We are hopeful that COVID-19 closures will have
only a limited effect on our operations and revenues.
General securities
market uncertainties resulting from the COVID-19
pandemic.
Since
the outset of the pandemic the United States and worldwide national
securities markets have undergone unprecedented stress due to the
uncertainties of the pandemic and the resulting reactions and
outcomes of government, business and the general population. These
uncertainties have resulted in declines in all market sectors,
increases in volumes due to flight to safety and governmental
actions to support the markets. As a result, until the pandemic has
stabilized, the markets may not be available to us for purposes of
raising required capital. Should we not be able to obtain
financing when required, in the amounts necessary to execute on our
plans in full, or on terms which are economically feasible we may
be unable to sustain the necessary capital to pursue our strategic
plan and may have to reduce the planned future growth and/or scope
of our operations.
Risks Relating to the Company Generally
We may need additional financing to support our technology
development and ongoing operations, pay our debts and maintain
ownership of our intellectual properties.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through September
2021. We may need additional
financing to implement our business plan and to service our ongoing
operations, pay our current debts (described below) and maintain
ownership of our intellectual property. There can be no assurance
that we will be able to secure any needed funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing when it is
needed, we will need to restructure our operations and/or divest
all or a portion of our business. We, including our
wholly owned subsidiary Particle, are each seeking additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected. There can be no assurance that we
will be able to sell that number of shares, if
any.
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash flows from
operations, the audit report of our independent registered public
accountants on our consolidated financial statements for the year
ended September 30, 2020 contains an explanatory paragraph stating
that there is substantial doubt about our ability to continue as a
going concern. Factors identified in the report include our
historical net losses, negative working capital, and the need for
additional financing to implement our business plan and service our
debt repayments. If we are not able to attain profitability in the
near future our financial condition could deteriorate further,
which would have a material adverse impact on our business and
prospects and result in a significant or complete loss of your
investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured
creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of September 30,
2020, we owe approximately
$2,852,243 and if we do not
satisfy these obligations, the lenders may have the right to demand
payment in full or exercise other remedies.
Mr. Erickson, our current chairman, and/or entities with which he
is affiliated also have accrued compensation, travel and interest
of approximately $597,177 as
of September 30, 2020.
We owe
$2,255,066 under various convertible promissory notes as of
September 30, 2020 including $1,184,066 owed to entities controlled
by our chairman.
We may need additional financing, to service and/or repay these
debt obligations. If we raise additional capital through borrowing
or other debt financing, we may incur substantial interest expense.
If and when we raise more equity capital in the future, it will
result in substantial dilution to our current
stockholders.
8
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As of
September 30, 2020, we had an
accumulated deficit of $55,966,000 and net losses in the amount of $13,563,000
and $7,612,000 for the years ended
September 30, 2020 and 2019, respectively. During the
years ended September 30, 2020 and
2019, we incurred non-cash expenses of $9,366,000 and
$4,319,000.
There can be no assurance that we will achieve or maintain
profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID and Bio-RFID and Particle businesses have produced minimal
revenues and may not produce significant revenues in the near term,
or at all, which would harm our ability to continue our operations
or obtain additional financing and require us to reduce or
discontinue our operations. You must consider our business and
prospects in light of the risks and difficulties we will encounter
as business with an early-stage technology in a new and rapidly
evolving industry. We may not be able to successfully address these
risks and difficulties, which could significantly harm our
business, operating results and financial
condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID and Particle
technologies and related products to achieve or sustain
profitability.
We are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID and Particle technologies,
grant additional licenses and obtain royalties or develop other
revenue streams will have a material adverse effect on our
business, financial condition and results of
operations.
To date, we have generated minimal revenue from sales of our
ChromaID and Bio-RFID and Particle products. We believe that our
commercialization success is dependent upon our ability to
significantly increase the number of customers that are using our
products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available, and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
We are in the early stages of commercialization and our ChromaID
and Bio-RFID and Particle technologies and related products may
never achieve significant commercial market
acceptance.
Our success depends on our ability to develop and market products
that are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID and Particle technologies and related products are an
attractive alternative to existing electromagnetic and light-based
technologies. We will need to demonstrate that our products provide
accurate and cost-effective alternatives to existing
electromagnetic and light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, some potential customers may be
required to devote significant time and effort to testing and
validating our products. In addition, during the implementation
phase, some customers may be required to devote significant time
and effort to training their personnel on appropriate practices to
ensure accurate results from our technology and products. Any
failure of our technology or related products to meet customer
expectations could result in customers choosing to retain their
existing testing methods or to adopt systems other than
ours.
9
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30, 2020, our
management identified material weaknesses in our internal control
over financial reporting. If these weaknesses continue, investors
could lose confidence in the accuracy and completeness of our
financial reports and other disclosures.
In addition, our management has concluded that our disclosure
controls and procedures were not effective due to the lack of an
audit committee “financial expert.” These material
weaknesses, if not remediated, create an increased risk of
misstatement of the Company’s financial results, which, if
material, may require future restatement thereof. A failure to
implement improved internal controls, or difficulties encountered
in their implementation or execution, could cause future delays in
our reporting obligations, and could have a negative effect on us
and the trading price of our common
stock.
The Company’s TransTech subsidiary closed on June 30,
2020.
Transtech
was not able to successfully address their revenue which resulted
in their closure on June 30, 2020. The loss of the TransTech
subsidiary revenue will impact our top line revenues and our
operating results and may result in future expenses associated with
its closure.
The Company Particle, Inc. subsidiary was incorporated April 30,
2020 and has no operating history.
Particle,
Inc. was incorporated April 30, 2020 and to date has had activities
consisting primarily of research and development. On June 1, 2020, the Company approved and ratified
entry into an intercompany Patent License Agreement dated May 21,
2020 with its majority owned subsidiary, Particle. Pursuant to the
Agreement, Particle 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 September 30, 2020 the
operations of Particle have generated no sales and operations are
just commencing.
To date, we have generated no revenue from Particle. We may not
generate revenues in the near future while products are being
developed. We believe that Particle’s commercialization
success is dependent upon its ability to develop successful
products to take to market. In addition, once developed, demand for its
products may not materialize, or increase as quickly as planned,
and we may therefore be unable to increase our revenue levels as
expected. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We are dependent on key personnel.
Our success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace, including Ronald P. Erickson, our
Chairman and Phil Bosua, our Chief Executive Officer. We maintain
key person life insurance on our Chief Executive Officer, Phil
Bosua. Our success will depend on the performance of our officers,
our ability to retain and motivate our officers, our ability to
integrate new officers into our operations, and the ability of all
personnel to work together effectively as a team. Our
failure to retain and recruit officers and other key personnel
could have a material adverse effect on our business, financial
condition and results of operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
10
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions or demonstrate that we did not derive our invention from
another, we may have to participate in interference or derivation
proceedings in the USPTO or in court that could result in
substantial costs in legal fees and could substantially affect the
scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There can be no assurance that:
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any of our existing patents will continue to be held valid, if
challenged;
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patents will be issued for any of our pending
applications;
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any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
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our patents will be issued in the primary countries where our
products are sold in order to protect our rights
and potential commercial advantage;
or
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any of our products or technologies will not infringe on the
patents of other companies.
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If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining and maintaining a patent portfolio entails significant
expense and resources. Part of the expense includes periodic
maintenance fees, renewal fees, annuity fees, various other
governmental fees on patents and/or applications due in several
stages over the lifetime of patents and/or applications, as well as
the cost associated with complying with numerous procedural
provisions during the patent application process. We may or may not
choose to pursue or maintain protection for particular inventions.
In addition, there are situations in which failure to make certain
payments or noncompliance with certain requirements in the patent
process can result in abandonment or lapse of a patent or patent
application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. If we choose to forgo patent
protection or allow a patent application or patent to lapse
purposefully or inadvertently, our competitive position could
suffer.
Legal actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We may receive notices that claim we have infringed upon
the intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
If we are unable to secure a sales and marketing partner or
establish satisfactory sales and marketing capabilities at Know
Labs and Particle, we may not be able to successfully commercialize
our technology.
If we are not successful entering into appropriate collaboration
arrangements or recruiting sales and marketing personnel or in
building a sales and marketing infrastructure, we will have
difficulty successfully commercializing our technology, which would
adversely affect our business, operating results and financial
condition.
11
We may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure, we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize technology without
strategic partners or licensees include:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Our
technology may have a number of potential applications in fields of
use which will require prior governmental regulatory approval
before the technology can be introduced to the marketplace. For
example, we are exploring the use of our technology for certain
medical diagnostic applications, with an initial focus on the
monitoring of blood glucose.
There
is no assurance that we will be successful in developing glucose
monitoring medical applications for our
technology.
If we
were to be successful in developing glucose monitoring medical
applications of our technology, prior approval by the FDA and other
governmental regulatory bodies will be required before the
technology could be introduced into the
marketplace.
There
is no assurance that such regulatory approval would be obtained for
a glucose monitoring medical diagnostic or other applications
requiring such approval.
The FDA
can refuse to grant, delay, and limit or deny approval of an
application for approval of a glucose monitoring device for many
reasons.
We may
not obtain the necessary regulatory approvals or clearances to
market these glucose monitoring systems in the United States or
outside of the United States.
Any
delay in, or failure to receive or maintain, approval or clearance
for our products could prevent us from generating revenue from
these products or achieving profitability.
Cybersecurity risks and cyber incidents could result in the
compromise of confidential data or critical data systems and give
rise to potential harm to customers, remediation and other
expenses, expose us to liability under HIPAA, consumer protection
laws, or other common law theories, subject us to litigation and
federal and state governmental inquiries, damage our reputation,
and otherwise be disruptive to our business and
operations.
Cyber
incidents can result from deliberate attacks or unintentional
events. We collect and store on our network’s sensitive
information, including intellectual property, proprietary business
information and personally identifiable information of our
customers. The secure maintenance of this information and
technology is critical to our business operations. We have
implemented multiple layers of security measures to protect the
confidentiality, integrity and availability of this data and the
systems and devices that store and transmit such data. We utilize
current security technologies, and our defenses are monitored and
routinely tested internally and by external parties. Despite these
efforts, threats from malicious persons and groups, new
vulnerabilities and advanced new attacks against information
systems create risk of cybersecurity incidents. These incidents can
include, but are not limited to, gaining unauthorized access to
digital systems for purposes of misappropriating assets or
sensitive information, corrupting data, or causing operational
disruption. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change
frequently and may not immediately produce signs of intrusion, we
may be unable to anticipate these incidents or techniques, timely
discover them, or implement adequate preventative
measures.
These
threats can come from a variety of sources, ranging in
sophistication from an individual hacker to malfeasance by
employees, consultants or other service providers to
state-sponsored attacks. Cyber threats may be generic, or they may
be custom-crafted against our information systems. Over the past
several years, cyber-attacks have become more prevalent and much
harder to detect and defend against. Our network and storage
applications may be vulnerable to cyber-attack, malicious
intrusion, malfeasance, loss of data privacy or other significant
disruption and may be subject to unauthorized access by hackers,
employees, consultants or other service providers. In addition,
hardware, software or applications we develop or procure from third
parties may contain defects in design or manufacture or other
problems that could unexpectedly compromise information security.
Unauthorized parties may also attempt to gain access to our systems
or facilities through fraud, trickery or other forms of deceiving
our employees, contractors and temporary staff.
12
There
can be no assurance that we will not be subject to cybersecurity
incidents that bypass our security measures, impact the integrity,
availability or privacy of personal health information or other
data subject to privacy laws or disrupt our information systems,
devices or business, including our ability to deliver services to
our customers. As a result, cybersecurity, physical security and
the continued development and enhancement of our controls,
processes and practices designed to protect our enterprise,
information systems and data from attack, damage or unauthorized
access remain a priority for us. As cyber threats continue to
evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures
or to investigate and remediate any cybersecurity
vulnerabilities.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
We have made strategic acquisitions in the past and may do so in
the future, and if the acquired companies do not perform as
expected, this could adversely affect our operating results,
financial condition and existing business.
We may continue to expand our business through strategic
acquisitions. The success of any acquisition will depend on, among
other things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
13
Our management has concluded that our disclosure controls and
procedures were not effective due to the lack of an audit committee
“financial expert.” We expect to appoint an additional
independent director to serve as Audit Committee Chairman. This
director will be an “audit committee financial expert”
as defined by the SEC. However, we cannot assure you that we will
be able to fully comply with these laws, rules, and regulations
that address corporate governance, internal control reporting, and
similar matters in the future. Failure to comply with these laws,
rules and regulations could materially adversely affect our
reputation, financial condition, and the value of our
securities.
The exercise prices of certain warrants, convertible notes payable
and the Series C and D Preferred Shares may require further
adjustment.
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price of 8,108,356
outstanding shares of Series C and D Preferred Stock that adjust
below $0.25 per share pursuant to the documents governing such
instruments. In addition, the conversion price of Convertible Notes
Payable of $7,894,566 or
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and the
exercise price of additional outstanding warrants to purchase
12,588,286 shares of common stock would adjust below $0.25 per
share pursuant to the documents governing such instruments.
Warrants totaling 5,191,636 would adjust below $1.20 per share
pursuant to the documents governing such
instruments.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures, strategic relationships, addition or loss of
significant customers and contracts, capital expenditure
commitments and
litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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Investor and public relation activities;
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Announcements of technological innovations;
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New product introductions by us or our competitors;
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Competitive activities;
Low
liquidity; and
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Additions or departures of key personnel.
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These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Future issuance of additional shares of
common stock in Particle, Inc. could dilute the Company as majority
stockholders of Particle, Inc.
The Company is currently the 100% shareholder in Particle,
Inc. In July 2020, Particle
entered into Simple Agreements for Future Equity
(“SAFE”) with twenty two accredited investors pursuant
to which Particle received $785,000 in cash in exchange for the
providing the investor the right to receive shares of the Particle
stock. The Company expects to issue 620,000 shares of the Particle
stock that was initially valued at $0.80 per share. The SAFE
contained a number of conversion and redemption provisions,
including settlement upon liquidity or dissolution events. The
final price and share are not known until settlement upon liquidity
or dissolution events conditions are achieved. The Company’s
ownership interest in Particle will be diluted when the
SAFE’s are converted to common stock.
Additionally, as Particle develops, they may need to raise
additional capital to fund operations through the sale of equity or
debt securities, which may result in a dilution of the
Company’s position. The issuance of any additional securities
could, among other things, result in substantial dilution to the
percentage ownership of the Company.
Four individual
investors could have significant influence over matters submitted
to stockholders for approval.
As of September 30, 2020, four
individuals in the aggregate, assuming the exercise of all warrants
to purchase common stock, hold shares representing approximately
50.1% of our common stock on a fully-converted basis and could be
considered a control group for purposes of SEC rules. However, the
agreement with one of these individuals limits his ownership to
4.99% individually.
14
Beneficial ownership includes shares over which an individual or
entity has investment or voting power and includes shares that
could be issued upon the exercise of options and warrants within 60
days after the date of determination. If these persons were to
choose to act together, they would be able to significantly
influence all matters submitted to our stockholders for approval,
as well as our officers, directors, management and affairs. For
example, these persons, if they choose to act together, could
significantly influence the election of directors and approval of
any merger, consolidation or sale of all or substantially all of
our assets. This concentration of voting power could delay or
prevent an acquisition of us on terms that other stockholders may
desire.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
As of
September 30, 2020, we had 24,804,874 shares of common stock issued
and outstanding, held by 123 stockholders of record. The number of
stockholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock
entitles its holder to one vote on each matter submitted to the
stockholders for a vote, and no cumulative voting for directors is
permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by the
Company. As of September 30, 2020, there were options
outstanding for the purchase of 4,805,000 common shares (including
unearned stock option grants totaling 2,630,000 shares related to
performance targets), warrants for the purchase of 20,016,367
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) reserved and are issuable upon conversion
of convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share but are excluded from
the September 30, 2020 calculation of net loss per share because
their impact is antidilutive.
Significant shares of common stock are held by our principal
stockholders, other company insiders and other large stockholders.
As “affiliates” of Know Labs, as defined under
Securities and Exchange Commission Rule 144 under the Securities
Act of 1933, our principal stockholders, other of our insiders and
other large stockholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common
stockholders and may affect the market price of the common
stock.
Future issuance of additional shares of
common stock and/or preferred stock could dilute existing
stockholders. We have and may
issue preferred stock that could have rights that are preferential
to the rights of common stock that could discourage potentially
beneficial transactions to our common
stockholders.
Pursuant to our certificate of incorporation, we currently have
authorized 100,000,000 shares of common stock and 5,000,000 shares
of preferred stock. To the extent that common shares are available
for issuance, subject to compliance with applicable stock exchange
listing rules, our board of directors has the ability to issue
additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient.
The issuance of any additional securities could, among other
things, result in substantial dilution of the percentage ownership
of our stockholders at the time of issuance, result in substantial
dilution of our earnings per share and adversely affect the
prevailing market price for our common stock.
An issuance of additional shares of preferred stock could result in
a class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of
Directors’ authority to issue preferred stock could
discourage potential takeover attempts or could delay or prevent a
change in control through merger, tender offer, proxy contest or
otherwise by making these attempts more difficult or costly to
achieve. The issuance of preferred stock could impair
the voting, dividend and liquidation rights of common stockholders
without their approval.
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we
or Particle raise additional capital by issuing equity securities,
our existing stockholders’ percentage ownership will be
reduced and these stockholders may experience substantial dilution.
We may also issue equity securities that provide for rights,
preferences and privileges senior to those of our common stock. If
we raise additional funds by issuing debt securities, these debt
securities would have rights senior to those of our common stock
and the terms of the debt securities issued could impose
significant restrictions on our operations, including liens on our
assets. If we raise additional funds through collaborations and
licensing arrangements, we may be required to relinquish some
rights to our technologies or candidate products, or to grant
licenses on terms that are not favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid cash dividends on our capital stock.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business, and we do
not anticipate paying any cash dividends on our capital stock in
the foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
15
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our certificate of incorporation, as amended, our bylaws and Nevada
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock.
Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
We or our manufacturers may be unable to obtain or maintain
international regulatory clearances or approvals for our current or
future products, or our distributors may be unable to obtain
necessary qualifications, which could harm our
business.
Sales of the Know Labs products internationally are subject to
foreign regulatory requirements that vary widely from country to
country. In addition, the FDA regulates exports of medical devices
from the U.S. Complying with international regulatory requirements
can be an expensive and time-consuming process, and marketing
approval or clearance is not certain. The time required to obtain
clearances or approvals, if required by other countries, may be
longer than that required for FDA clearance or approvals, and
requirements for such clearances or approvals may significantly
differ from FDA requirements. We may rely on third-party
distributors to obtain regulatory clearances and approvals required
in other countries, and these distributors may be unable to obtain
or maintain such clearances or approvals. Our distributors may also
incur significant costs in attempting to obtain and in maintaining
foreign regulatory approvals or clearances, which could increase
the difficulty of attracting and retaining qualified distributors.
If our distributors experience delays in receiving necessary
qualifications, clearances or approvals to market our products
outside the U.S., or if they fail to receive those qualifications,
clearances or approvals, we may be unable to market our products or
enhancements in international markets effectively, or at
all.
Foreign governmental authorities that regulate the manufacture and
sale of medical devices have become increasingly stringent and, to
the extent we market and sell our products outside of the U.S., we
may be subject to rigorous international regulation in the future.
In these circumstances, we would be required to rely on our foreign
independent distributors to comply with the varying regulations,
and any failures on their part could result in restrictions on the
sale of our product in foreign countries.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments.
ITEM 2. PROPERTIES
Corporate Offices
On April 13, 2017, we leased our executive office located at 500
Union Street, Suite 810, Seattle, Washington, USA, 98101. We lease
943 square feet and the net monthly payment is $2,672. The monthly
payment increases approximately 3% each year and the lease expires
on May 31, 2022.
Lab Facilities and Executive Offices
On
February 1, 2019, we leased our lab facilities and executive
offices located at 915 E Pine Street, Suite 212, Seattle, WA 98122.
We lease 2,642 square feet and the net monthly payment is $8,256.
The monthly payment increases approximately 3% on July 1, 2019 and
annually thereafter. The lease expires on June 30, 2021 and can be
extended.
On June
26, 2020, we leased our temporary lab facilities located at 3131
Western Avenue, Suite A350, Seattle, WA 98121. We leased 5,707
square feet and the net monthly payment is $11,414. The lease
expires on June 30, 2021 and was terminated on August 31,
2020.
16
ITEM 3. LEGAL PROCEEDINGS
We may
from time to time become a party to various legal proceedings
arising in the ordinary course of our business. We are currently
not a party to any pending legal proceeding that is not ordinary
routine litigation incidental to our business.
ITEM 4. OTHER INFORMATION
This item is not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares of preferred stock, par value
$0.001 per share.
As of
September 30, 2020, we had 24,804,874 shares of common stock issued
and outstanding, held by 123 stockholders of record. The number of
stockholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock
entitles its holder to one vote on each matter submitted to the
stockholders for a vote, and no cumulative voting for directors is
permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by the
Company. As of September 30, 2020, there were options
outstanding for the purchase of 4,805,000 common shares (including
unearned stock option grants totaling 2,630,000 shares related to
performance targets), warrants for the purchase of 20,016,367
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) reserved and are issuable upon conversion
of convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share but are excluded from
the September 30, 2020 calculation of net loss per share because
their impact is antidilutive.
Voting Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred
stock with a par value of $0.001.
Series A Preferred Stock
There are 23,334 shares of Series A Preferred shares authorized.
Series A Preferred is entitled to the number of votes equal to the
number of whole shares of common stock into which the shares of
Series A Preferred held by such holder are then convertible as of
the applicable record date. The Series A Preferred was not be
redeemable without the consent of the holder.
On January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock. There are no
Series A Preferred Stock outstanding as of January 29,
2019.
On December 14, 2020, the Company cancelled the Certificate of
Designations for the Series A Preferred Stock.
Series C and D Convertible Preferred Stock and
Warrants
On
August 5, 2016, we 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 September 30, 2020 and September 30, 2019 there are 1,785,715 Series
C Preferred shares outstanding.
As of September 30, 2020 and
2019, we have 1,016,014 of Series D Preferred Stock outstanding
with Clayton A. Struve, an accredited investor. On August 14, 2017, the price of the
Series D Stock were adjusted to
$0.25 per share pursuant to the
documents governing such instruments.
The
Series D Preferred Stock is convertible into shares of common stock
at a price of $0.25 per share or by multiplying the number of
Series D Preferred Stock shares by the stated value and dividing by
the conversion price then in effect, subject to certain diluted
events, and has the right to vote the number of shares of common
stock the Series D Preferred Stock would be issuable on conversion,
subject to a 4.99% blocker. The
Preferred Series D has an annual yield of 8% The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% if and when dividends are
declared.
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Series F Preferred Stock
On August 1, 2018, we 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 September 30, 2020 and 2019, there are no Series F
shares outstanding.
Securities Subject to Price Adjustments
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price of 8,108,356
outstanding shares of Series C and D Preferred Stock that adjust
below $0.25 per share pursuant to the documents governing such
instruments. In addition, the conversion price of Convertible Notes
Payable of $7,894,566 or
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and the
exercise price of additional outstanding warrants to purchase
12,588,286 shares of common stock would adjust below $0.25 per
share pursuant to the documents governing such instruments.
Warrants totaling 5,191,636 would adjust below $1.20 per share
pursuant to the documents governing such
instruments.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
Stock Incentive Plan
On
January 23, 2019, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 2,200,000 to 2,500,000 to
common shares. On May 22, 2019, the Compensation Committee
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 2,500,000 to 3,000,000 to common
shares.
Anti-Takeover Provisions
Nevada Revised Statutes
Acquisition of Controlling Interest
Statutes. Nevada's "acquisition of
controlling interest" statutes contain provisions governing the
acquisition of a controlling interest in certain Nevada
corporations. These "control share" laws provide generally that any
person who acquires a "controlling interest" in certain Nevada
corporations may be denied certain voting rights, unless a majority
of the disinterested stockholders of the corporation elects to
restore such voting rights. These statutes provide that a person
acquires a "controlling interest" whenever a person acquires shares
of a subject corporation that, but for the application of these
provisions of the Nevada Revised Statutes, would enable that person
to exercise (1) one-fifth or more, but less than one-third,
(2) one-third or more, but less than a majority or (3) a
majority or more, of all of the voting power of the corporation in
the election of directors. Once an acquirer crosses one of these
thresholds, shares which it acquired in the transaction taking it
over the threshold and within the 90 days immediately
preceding the date when the acquiring person acquired or offered to
acquire a controlling interest become "control shares" to which the
voting restrictions described above apply. Our articles of
incorporation and bylaws currently contain no provisions relating
to these statutes, and unless our articles of incorporation or
bylaws in effect on the tenth day after the acquisition of a
controlling interest were to provide otherwise, these laws would
apply to us if we were to (i) have 200 or more stockholders of
record (at least 100 of which have addresses in the State of Nevada
appearing on our stock ledger) and (ii) do business in the
State of Nevada directly or through an affiliated corporation. As
of September 30, 2018 we have less than 200 record stockholders. If
these laws were to apply to us, they might discourage companies or
persons interested in acquiring a significant interest in or
control of the company, regardless of whether such acquisition may
be in the interest of our stockholders.
Combinations with Interested Stockholders
Statutes. Nevada's "combinations with
interested stockholders" statutes prohibit certain business
"combinations" between certain Nevada corporations and any person
deemed to be an "interested stockholder" for two years after the
such person first becomes an "interested stockholder" unless
(i) the corporation's board of directors approves the
combination (or the transaction by which such person becomes an
"interested stockholder") in advance, or (ii) the combination
is approved by the board of directors and sixty percent of the
corporation's voting power not beneficially owned by the interested
stockholder, its affiliates and associates. Furthermore, in the
absence of prior approval certain restrictions may apply even after
such two-year period. For purposes of these statutes, an
"interested stockholder" is any person who is (x) the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the outstanding voting shares of the
corporation, or (y) an affiliate or associate of the
corporation and at any time within the two previous years was the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the then outstanding shares of the corporation.
The definition of the term "combination" is sufficiently broad to
cover most significant transactions between the corporation and an
"interested stockholder". Subject to certain timing requirements
set forth in the statutes, a corporation may elect not to be
governed by these statutes. We have not included any such provision
in our articles of incorporation.
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The
effect of these statutes may be to potentially discourage parties
interested in taking control of us from doing so if it cannot
obtain the approval of our Board of Directors.
Articles of Incorporation and Bylaws Provisions
Our
articles of incorporation, as amended and restated, and our bylaws,
as amended and restated, contain provisions that could have the
effect of discouraging potential acquisition proposals or tender
offers or delaying or preventing a change in control, including
changes a stockholder might consider favorable. In particular, our
articles of incorporation and bylaws, among other
things:
●
permit our Board of Directors to alter our bylaws without
stockholder approval;
●
provide that vacancies on our Board of Directors may be filled by a
majority of directors in office, although less than a
quorum;
●
authorize the issuance of preferred stock, which can be created and
issued by our Board of Directors without prior stockholder
approval, with rights senior to our common stock, which may render
more difficult or discourage an attempt to obtain control of us by
means of a merger, tender offer, proxy contest or otherwise;
and
●
establish advance notice procedures with respect to stockholder
proposals relating to the nomination of candidates for election as
directors and other business to be brought before stockholder
meetings, which notice must contain information specified in our
bylaws.
However,
these provisions could have the effect of discouraging others from
making tender offers for our shares that could result from actual
or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Market Price of and Dividends on Common Equity and Related
Stockholder Matters
Our common stock trades on the OTCQB Exchange under the symbol
“KNWN.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
name change from Know Labs, Incorporated to Know Labs, Inc. and
symbol change from VSUL to KNWN was announced by FINRA declared
effective on the opening of trading as of May 25,
2018.
Trades
in our common stock may be subject to Rule 15g-9 of the Exchange
Act, which imposes requirements on broker/dealers who sell
securities subject to the rule to persons other than established
customers and accredited investors. For transactions covered by the
rule, broker/dealers must make a special suitability determination
for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.
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Period Ended
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High
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Low
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Year Ending September 30, 2021
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Through
December 27, 2020
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$2.95
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$1.10
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|
|
|
|
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Year Ending September 30, 2020
|
|
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September
30, 2020
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$3.45
|
$1.71
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June
30, 2020
|
$2.65
|
$0.81
|
|
March
31, 2020
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$2.90
|
$0.90
|
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December
31, 2019
|
$1.95
|
$0.92
|
|
|
|
|
|
Year Ending September 30, 2019
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|
|
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September
30, 2019
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$1.70
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$1.20
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June
30, 2019
|
$2.00
|
$1.26
|
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March
31, 2019
|
$2.97
|
$0.90
|
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December
31, 2018
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$4.44
|
$0.85
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As of
December 27, 2020, the high and low sales price of our common stock
was $1.98 per share and $2.07 per share, respectively. As of
December 27, 2020, we had 25,730,224 shares of common stock issued
and outstanding, held by 123 stockholders of record. This number
does not include approximately 2,300 beneficial owners whose shares
are held in the names of various security brokers, dealers and
registered clearing agencies.
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Transfer Agent
Our transfer agent is American Stock Transfer & Trust Company
located at 6201 15th Avenue, Brooklyn, New York 11219, and their
telephone number is (800) 937-5449.
Dividend Policy
We have
not previously declared or paid any cash dividends on our common
stock and do not anticipate or contemplate paying dividends on our
common stock in the foreseeable future. We currently intend to use
all of our available funds to finance the growth and development of
our business. We can give no assurances that we will ever have
excess funds available to pay dividends.
Recent Sales of Unregistered Securities
During the three months ended September 30, 2020, we had the
following sales of unregistered sales of equity
securities:
We issued 321,329 shares of
common stock at an average exercise price of $0.945 per share
related to the exercise of warrants.
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 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 which represents the difference
between the fair market value of the stock and $125,000 paid by the
shareholder.
Equity Compensation Information
The following table provides information as of September 30, 2020
related to the equity compensation plan in effect at that
time.
|
|
(a)
|
(b)
|
(c)
|
|
|
|
|
Number of securities
|
|
|
|
|
remaining available
|
|
|
Number of securities
|
Weighted-average
|
for future issuance
|
|
|
to be issued upon
|
exercise price of
|
under equity compensation
|
|
|
exercise of outstanding
|
outstanding options,
|
plan (excluding securities
|
|
Plan Category
|
options, warrants and rights
|
warrants and rights
|
reflected in column (a))
|
|
Equity
compensation plan
|
|
|
|
|
approved
by shareholders
|
78,333
|
$1.161
|
78,333
|
|
Equity
compensation plans
|
|
|
|
|
not
approved by shareholders
|
4,726,667
|
1.161
|
(4,805,000)
|
|
Total
|
4,805,000
|
$1.161
|
(4,726,667)
|
As of
September 30, 2020, there were options outstanding for the purchase
of 4,805,000 common shares (including unearned stock option grants
totaling 2,630,000 shares related to performance
targets).
21
ITEM 6. SELECTED FINANCIAL
DATA
Summary Financial Information
In the following table, we provide you with our selected
consolidated historical financial and other data. We have prepared
the consolidated selected financial information using our
consolidated financial statements for the years ended September 30,
2020 and 2019. When you read this selected consolidated historical
financial and other data, it is important that you read along with
it the historical financial statements and related notes in our
consolidated financial statements included in this report, as well
as Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(dollars in thousands)
|
|
Years Ended
September 30,
|
||||
|
|
2020
|
2019
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
|
|
STATEMENT OF
OPERATIONS DATA:
|
|
|
|
|
|
|
Net
revenue
|
$122
|
$1,805
|
$4,874
|
$6,024
|
$6,291
|
|
Cost of goods
sold
|
70
|
1,378
|
3,966
|
5,036
|
5,274
|
|
Gross
profit
|
52
|
427
|
908
|
988
|
1,017
|
|
Research and
development expenses
|
2,034
|
1,258
|
79
|
326
|
363
|
|
General and
administrative expenses
|
4,844
|
4,182
|
3,088
|
3,355
|
2,984
|
|
Impairment of
goodwill
|
-
|
-
|
984
|
-
|
-
|
|
Operating
loss
|
(6,826)
|
(5,013)
|
(3,243)
|
(2,693)
|
(2,330)
|
|
Other income
(expense)
|
(6,737)
|
(2,599)
|
(658)
|
947
|
(271)
|
|
Net
loss
|
(13,563)
|
(7,612)
|
(3,901)
|
(1,746)
|
(2,601)
|
|
Income tax
expense
|
-
|
-
|
-
|
-
|
30
|
|
Net
loss
|
$(13,563)
|
$(7,612)
|
$(3,901)
|
$(1,746)
|
$(2,631)
|
|
Net loss per
share
|
$(0.62)
|
$(0.42)
|
$(1.01)
|
$(1.22)
|
$(2.33)
|
|
Weighted average
number of shares
|
21,791,058
|
18,053,848
|
3,844,840
|
1,428,763
|
1,131,622
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing at the end of this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus, including
information with respect to our plans and strategy for our business
and related financing, includes forward-looking statements that
involve risks and uncertainties. You should read the "Risk Factors"
section of this prospectus for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements
contained in the following discussion and analysis.
We are focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these
our “Bio-RFID™” and “ChromaID™”
technologies.
Historically, we have focused on the development of our proprietary
ChromaID technology. Using light from low-cost LEDs (light emitting
diodes) the ChromaID technology maps the color of substances,
fluids and materials. With our proprietary processes we can
authenticate and identify based upon the color that is present. The
color is both visible to us as humans but also outside of the
humanly visible color spectrum in the near infra-red and near
ultra-violet and beyond. Our ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID we can see,
and identify, and authenticate based upon the color that is
present. Our ChromaID scanner is capable of uniquely identifying
and authenticating almost any substance or liquid using light to
record, detect and identify its unique color signature. Today we
are focused upon extensions and new inventions that are derived
from and extend beyond our ChromaID technology. We call this new
technology “Bio-RFID.” The rapid advances made with our
Bio-RFID technology in our laboratory have caused us to move
quickly into the commercialization phase of our Company as we work
to create revenue generating products for the marketplace. Today,
the sole focus of the Company is on its Bio-RFID technology and its
commercialization.
22
On
April 30, 2020, we approved and ratified the incorporation of
Particle, Inc., a Nevada corporation. As of September 30, 2020 we
are the sole shareholder but have entered into Simple Agreements
for Future Equity to sell separate ownership in Particle. Particle
is now a direct, 100% owned subsidiary of the Company but our
future ownership could be diluted if Particle is successful in
raising equity from outside investors. Particle shall utilize the
same corporate offices as the Company and shall focus on the
development and commercialization of our extensive intellectual
property relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular
focus with its Bio-RFID technology and its initial application, the
non-invasive measurement of blood glucose
On June 1, 2020, we approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with our
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain of our patents and trademarks, 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 September 30, 2020 Particle has not yet
executed a successful financing or generated any
sales.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. Operating as an independent subsidiary, TransTech was a
distributor of products for employee and personnel identification
and authentication. TransTech historically provided substantially
all of the Company’s revenues. The financial results from our
TransTech subsidiary had been diminishing as vendors of their
products increasingly moved to the Internet and direct sales to
their customers. TransTech closed on June 30,
2020.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from year-to-year.
(dollars in thousands)
|
|
Years Ended
December 31,
|
|||
|
|
2020
|
2019
|
$
Variance
|
%
Variance
|
|
|
|
|
|
|
|
Revenue
|
$122
|
$1,805
|
$(1,683)
|
-93.2%
|
|
Cost of
sales
|
70
|
1,378
|
(1,308)
|
94.9%
|
|
Gross
profit
|
52
|
427
|
(375)
|
-87.8%
|
|
Research and
development expenses
|
2,034
|
1,258
|
776
|
-61.7%
|
|
Selling, general
and administrative expenses
|
4,844
|
4,182
|
662
|
-15.8%
|
|
Operating
loss
|
(6,826)
|
(5,013)
|
(1,813)
|
-10.3%
|
|
Other (expense)
income:
|
|
|
|
|
|
Interest
expense
|
(6,094)
|
(2,945)
|
(3,149)
|
-106.9%
|
|
Other income
(expense)
|
65
|
(10)
|
75
|
750.0%
|
|
(Loss) gain on debt
settlements
|
(708)
|
356
|
(1,064)
|
-298.9%
|
|
Total other income
(expense)
|
(6,737)
|
(2,599)
|
(4,138)
|
-159.2%
|
|
(Loss) before
income taxes
|
(13,563)
|
(7,612)
|
(5,951)
|
-78.2%
|
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
|
Net
(loss)
|
$(13,563)
|
$(7,612)
|
$(5,951)
|
-78.2%
|
YEAR ENDED SEPTEMBER 30, 2019 COMPARED TO THE YEAR ENDED SEPTEMBER
30, 2018
Sales
Revenue for the year ended September 30, 2020 decreased
$1,683,000 to $122,000
as compared to $1,805,000
for the year ended September 30, 2019.
The decrease was due to lower sales resulting from the planned
closure of TransTech. We completely shut down TransTech on
June 30, 2020.
23
Cost of Sales
Cost of sales for the year ended September 30, 2020 decreased
$1,308,000 to $70,000
as compared to $1,378,000
for the year ended September 30, 2019.
The decrease was due to lower sales by TransTech. We shut
down TransTech on June 30, 2020.
Research and Development Expenses
Research and development expenses for the year ended September 30,
2020 increased $776,000 to
$2,034,000 as compared to
$1,258,000 for the year ended
September 30, 2019. The increase was due to the hiring of
additional personnel, the use of consultant and expenditures related to the development of
our Bio-RFID™ and Particle technologies, including
working toward FDA approval.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended
September 30, 2020 increased $662,000 to $4,844,000 as compared to $4,182,000 for the year ended September 30,
2019.
The increase primarily was due to: (i) increased stock based
compensation of $560,000; and (ii) increased Particle expenses of
$514,061 (primarily payroll, consulting, product development and
marketing); and offset by (iii) decreased TransTech expenses of
$415,000 (primarily salaries
and rent). As part of the selling, general and administrative
expenses for the year ended September 30, 2020, we recorded $176,000 of investor relation expenses and business
development expenses.
Other (Expense), Net
Other
expense, net for the year ended September 30, 2020 was $6,737,000
as compared to other expense, net of $2,599,000 for the year ended
September 30, 2019. The other expense for the year ended September
30, 2020 included (i) interest expense of $6,094,000 and (ii) loss
on debt settlement of $708,000, offset by (iii) other income of
$65,000. The interest expense related
to convertible notes payable and the amortization of the beneficial
conversion feature and value of warrants issued. During the
year ended September 30, 2020, we closed a private placement and
received gross proceeds of $5,639,500 in exchange for issuing
Subordinated Convertible Notes and Warrants in a private placement
to accredited investors, pursuant to a series of substantially
identical Securities Purchase Agreements, Common Stock Warrants,
and related documents. The gain on
debt settlements related to the settlement of old accounts
payable. 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 $117,000.
The other expense for the year ended September 30, 2019 included
(i) interest expense of $2,945,000; (ii) other income of $10,000;
and offset by (iii) gain on debt settlements of $356,000. The
interest expense related to convertible notes payable and the
amortization of the beneficial conversion feature and the value of
warrants issued. During the year ended September 30, 2019,
we closed a private placement and received gross proceeds of
$4,242,490 in exchange for issuing Subordinated Convertible Notes
and Warrants in a private placement to 54 accredited investors,
pursuant to a series of substantially identical Securities Purchase
Agreements, Common Stock Warrants, and related documents.
The gain on debt settlements related
to the settlement of old accounts payable.
Net Loss
Net loss for the year ended September 30, 2020 was $13,563,000 as compared to $7,612,000 for the year ended September 30, 2019. The net
loss for the year ended September 30, 2020 included
non-cash expenses of
$9,366,000. The non-cash items
include (iv) depreciation and amortization of
$243,000; (v) issuance of
capital stock for services and expenses of
$1,045,000; (vi) stock based
compensation of $1,702,000;
(vi) amortization of debt discount as interest expense of
$5,663,000; (vii) loss on debt
settlement of $825,000; and (viii) other of $5,000, offset by (ix)
gain on debt settlement of $117,000.
The net loss for the year ended September 30, 2019 included
non-cash items of (i) depreciation and
amortization of $259,000; (ii) stock based compensation of
$1,260,000; (iii) issuance of capital stock for services and
expenses of $349,000; (iv) amortization of debt discount of
$2,771,000; and (v) other of $34,000; and (vi) offset by
non-cash gain on accounts payable of $356,000.
We expect losses to continue as we commercialize our
ChromaID™ and Bio-RFID™ technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. Significant factors in the
management of liquidity are funds generated by operations, levels
of accounts receivable and accounts payable and capital
expenditures.
24
We had cash of approximately $4,298,000 and net working capital of approximately
$1,801,000 (net of convertible
notes payable and right of use asset and liabilities) as of
September 30, 2020. We have
experienced net losses since inception and we expect losses to
continue as we commercialize our ChromaID™ technology. We
have experienced net losses since inception. As of September
30, 2020, we had an accumulated
deficit of $54,966,000 and net
losses in the amount of $13,563,000 and $7,612,000 for the years ended September 30,
2020 and 2019, respectively. During the years ended September 30, 2020 and 2019, we
incurred non-cash expenses of $9,366,000 and $4,319,000,
respectively. We believe that our
cash on hand will be sufficient to fund our operations through
September 30, 2021.
During
the year ended September 30, 2020, we closed additional rounds of a
debt offering and received gross proceeds of $5,639,500 in exchange
for issuing Subordinated Convertible Notes and Warrants in a
private placement to accredited investors, pursuant to a series of
substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents. The Convertible Notes are
initially convertible into 5,639,500 shares of Common Stock,
subject to certain adjustments, and the Warrants are initially
exercisable for 2,819,750 shares of Common Stock at an exercise
price of $1.20 per share of Common Stock, also subject to certain
adjustments. In connection with the debt offering, the placement
agent for the Convertible Notes and the Warrants received a cash
fee of $411,950 and warrants to purchase 615,675 shares of the
Company’s common stock, all based on 6.3-8%% of gross
proceeds to the Company.
During
July 2020, Particle closed funding of $785,000 for Simple
Agreements for Future Equity (SAFE) and received gross proceeds of
$733,585 in a private placement to accredited investors. In
connection with the private placement, the placement agent for the
private placement received a cash fee of $47,100. Particle is
currently trying to raise equity capital which upon meeting certain
thresholds would automatically convert the SAFE instruments to
comment stock.
We may need additional financing to implement our business plan and
to service our ongoing operations and pay our current debts. There
can be no assurance that we will be able to secure any needed
funding, or that if such funding is available, the terms or
conditions would be acceptable to us. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, or eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected.
We have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale of common stock and the
exercise of warrants.
The proceeds of warrants which are not expected to be cashless
could generate potential proceeds of up to $8,519,000.
Operating Activities
Net cash used in operating activities for the years ended September
30, 2020 was
$3,914,000. This amount was
primarily related to (i) a net loss of
$13,563,000; offset by (ii)
working capital changes of $283,000; and (iii) non-cash
expenses of $9,366,000. The
non-cash items include (iv) depreciation and amortization of
$243,000; (v) issuance of
capital stock for services and expenses of
$1,045,000; (vi) stock based
compensation of $1,702,000;
(vi) amortization of debt discount as interest expense of
$5,663,000; (vii) loss on debt
settlement of $825,000; and (viii) other of $5,000, offset by (ix)
gain on debt settlement of $117,000.
Investing Activities
Net cash used in investing activities for the years ended September
30, 2020 and 2019 was
$70,000 and $80,000,
respectively. This amount was
primarily related to the investment in equipment for research and
development.
Financing Activities
Net cash provided by financing activities for the years ended
September 30, 2020 and 2019 was
$6,381,000 and
$4,150,000. These amounts was
primarily related to (i) issuance of convertible notes payable of
$5,640,000; (ii) issuance of common stock for warrant exercises of
$8,000; (iii) proceeds from notes payable of $226,000; (iv)
proceeds for Simple Agreements for Future Equity of $785,000; and
proceeds from issuance of shares related to debt settlement of
$125,000; offset by (v) payments of issuance costs from convertible
notes payable of $480,000.
25
Our contractual cash obligations as of September 30, 2020
are summarized in the table
below:
|
|
|
Less
Than
|
|
|
Greater
Than
|
|
Contractual Cash
Obligations (1)
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
|
Operating
leases
|
$137,521
|
$113,553
|
$23,968
|
$-
|
$-
|
|
Convertible notes
payable
|
7,894,566
|
7,894,566
|
-
|
-
|
-
|
|
|
$8,032,087
|
$8,008,119
|
$23,968
|
$-
|
$-
|
(1)
Convertible notes
payable includes $5,639,500 that converts into common stock at the
maturity date during 2020 and 2021 and $2,255,066 under various
convertible promissory notes as of September 30, 2020 including
$1,184,066 owed to entities controlled by our chairman. We expect
to incur capital expenditures related to the development of the
“Bio-RFID™” and
“ChromaID™” technologies. None of the
expenditures are contractual obligations as of September 30,
2020.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of
judgment. On an ongoing basis, we evaluate our estimates and
judgments based on historical experience and various other factors
that are believed to be reasonable under the
circumstances.
Actual results may differ from these estimates under different
assumptions or conditions. We believe that of our significant
accounting policies (see summary of significant accounting policies
more fully described in Note 2 to the financial statements set
forth in this report), the following policies involve a higher
degree of judgment and/or complexity:
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).
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, we evaluate all of our
financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. We then determines if embedded derivative must be
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, we use 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.
Stock Based Compensation – We have 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 our common stock at the fair market value at the
time of grant. Stock-based compensation cost to employees is
measured by us 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, we recognize 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.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We have no investments in any market risk sensitive instruments
either held for trading purposes or entered into for other than
trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Reference is made to our consolidated financial statements
beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of
September 30, 2020 that our disclosure controls and procedures were
not effective at the reasonable assurance level due to the material
weaknesses in our internal controls over financial reporting
discussed immediately below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do not employ a full time Chief Financial
Officer. Our Chairman serves as interim Chief Financial Officer. We
utilize a consultant to assist with our financial reporting. During
2021, we expect to strengthen the finance staff and improve
internal controls over documentation.
Audit Committee: While we have
an audit committee, we lack a financial expert. During 2021, the
Board expects to appoint an Audit Committee Chairman who is an
“audit committee financial expert” as defined by the
Securities and Exchange Commission (“SEC”) and as
adopted under the Sarbanes-Oxley Act of 2002.
(b) Management's Report on Internal Control Over Financial
Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
27
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of September
30, 2020. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in the
2013 Internal Control-Integrated
Framework. Based on
its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as
of September 30, 2020.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate. A control system, no matter how well designed and
operated can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be
met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
c) Changes in Internal Control over Financial
Reporting
During
the three months ended September 30, 2020, there were no changes in
our internal controls over financial reporting during this fiscal
quarter that materially affected, or is reasonably likely to have a
materially affect, on our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
There were no disclosures of any information required to be filed
on Form 8-K during the three months ended September 30, 2020 that
were not filed.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
|
The
following table sets forth certain information about our current
directors and executive officers:
|
|
Name
|
Age
|
Director/ Executive Officer
|
|
Directors-
|
|
|
|
Ronald
P. Erickson
|
76
|
Chairman
and Interim Chief Financial Officer (1)
|
|
Phillip
A. Bosua
|
46
|
Chief
Executive Officer and Director
|
|
Jon
Pepper
|
69
|
Director
(2)
|
|
Ichiro
Takesako
|
61
|
Director
|
|
William
A. Owens
|
80
|
Director
(3)
|
|
(1)
Chairman of the Nominating and Corporate Governance
Committee.
|
|
(2)
Chairman of the Audit Committee.
|
(3)
Chairman of the Compensation Committee.
Directors appoints our executive officers. Each director
hold office until their successors are duly appointed or until
their earlier resignation or removal. Each officer serves, at the pleasure of the Board
of Directors.
Background and Business Experience
Ronald P. Erickson has been a
director and officer of Know Labs since April 2003. He was
appointed as our CEO and President in November 2009 and as Chairman
of the Board in February 2015. Previously, Mr. Erickson was our
President and Chief Executive Officer from September 2003 through
August 2004 and was Chairman of the Board from August 2004 until
May 2011. Mr. Erickson stepped down as Chief Executive Officer
on April 10, 2018.
A senior executive with more than 30 years of experience in the
high technology, telecommunications, micro-computer, and digital
media industries, Mr. Erickson was the founder of Know Labs. He is
formerly Chairman, CEO and Co-Founder of Blue Frog Media, a mobile
media and entertainment company; Chairman and CEO of eCharge
Corporation, an Internet-based transaction procession
company, Chairman, CEO and Co-founder of GlobalTel
Resources, a provider of telecommunications services; Chairman,
Interim President and CEO of Egghead Software, Inc. a software
reseller where he was an original investor; Chairman and CEO of
NBI, Inc.; and Co-founder of MicroRim, Inc. the database software
developer. Earlier, Mr. Erickson practiced law in Seattle and
worked in public policy in Washington, DC and New York, NY.
Additionally, Mr. Erickson has been an angel investor and board
member of a number of public and private technology
companies. In addition to his business activities, Mr.
Erickson is Chairman of the Board of Trustees of Central Washington
University where he received his BA degree. He also holds a MA from
the University of Wyoming and a JD from the University of
California, Davis. He is licensed to practice law in the State of
Washington.
Mr. Erickson is our founder and was appointed as a director because
of his extensive experience in developing technology
companies.
Phillip A. Bosua was appointed a director and Chief
Executive Officer of the Company on April 10, 2018. Previously, Mr.
Bosua served as our Chief Product Officer since August 2017 and we
entered into a Consulting Agreement on July 7, 2017. From September
2012 to February 2015, he was the founder and Chief Executive
Officer of LIFX Inc. (where he developed and marketed an innovative
“smart” light bulb) and from August 2015 until February
2016 was Vice President Consumer Products at Soraa (which markets
specialty LED light bulbs). From February 2016 to July 2017, Mr.
Bosua was the founder and CEO of RAAI, Inc. (where he continued the
development of his smart lighting technology). From May 2008
to February 2013 he was the Founder and CEO of LimeMouse Apps, a
leading developer of applications for the Apple App
Store.
Mr. Bosua was appointed as a director because of his extensive
experience in developing technology companies.
Ichiro Takesako has served as a
director since December 28, 2012. Mr. Takesako has held executive
positions with Sumitomo Precision Products Co., Ltd or Sumitomo
since 1983. Mr. Takesako graduated from Waseda University, Tokyo,
Japan where he majored in Social Science and graduated with a
Degree of Bachelor of Social Science.
29
In the past few years, Mr. Takesako has held the following
executive position in Sumitomo and its affiliates:
|
June 2008:
|
appointed
as General Manager of Sales and Marketing Department of Micro
Technology Division
|
|
April 2009:
|
appointed
as General Manager of Overseas Business Department of Micro
Technology Division, in charge
of M&A activity of certain business segment and assets of Aviza
Technology, Inc.
|
|
July 2010:
|
appointed
as Executive Director of SPP Process Technology Systems, 100% owned
subsidiary of Sumitomo
Precision Products then, stationed in Newport,
Wales
|
|
August 2011:
|
appointed
as General Manager, Corporate Strategic Planning
Group
|
|
January 2013:
|
appointed as Chief Executive Officer of M2M Technologies, Inc., a
company invested by Sumitomo
Precision products
|
|
April 2013:
|
appointed
as General Manager of Business Development Department, in parallel
of CEO of M2M Technologies, Inc.
|
|
April 2014:
|
relieved
from General Manager of Business Development Department and is
responsible for M2M Technologies
Inc. as its CEO
|
|
April 2017:
|
appointed
as President and Chief Executive Officer of At Signal Inc., an
internet data company
|
Mr. Takesako was appointed as a Director based on his previous
position with Sumitomo and Sumitomo's previous significant
partnership with the Company.
Jon Pepper has served as an
independent director since April 2006. Mr. Pepper founded Pepcom in
1980, a company that become the industry leader at producing
press-only technology showcase events around the country and
internationally. He sold his stake in the corporation and retired
as a partner at the end of 2018. Prior to that, Mr. Pepper started
the DigitalFocus newsletter, a ground-breaking newsletter on
digital imaging that was distributed to leading influencers
worldwide. Mr. Pepper has been closely involved with the high
technology revolution since the beginning of the personal computer
era. He was formerly a well-regarded journalist and columnist; his
work on technology subjects appeared in The New York
Times, Fortune, PC Magazine, Men's
Journal, Working
Woman, PC Week, Popular Science
and many other well-known
publications. Pepper was educated at Union College in Schenectady,
New York and the Royal Academy of Fine Arts in Copenhagen. He
continues to be active in non-profit work and boards, and last year
founded Mulberry Tree Films, a non-profit that supports independent
high-quality documentary films.
Mr. Pepper was appointed as a director because of his marketing
skills with technology companies.
William A. Owens has served as an independent director since
May 24, 2018. Admiral William A. Owens is currently the co- founder
and executive chairman of Red Bison Advisory Group, a company which
identifies opportunities with proven enterprises in China, the
Middle East, and the United States and creates dynamic partnerships
focusing on natural resources (oil, gas and fertilizer plants),
real estate, and information and communication technology. Most
recently, he was the chairman of the board of CenturyLink Telecom,
the third largest telecommunications company in the United States
and was on the advisory board of SAP USA. Owens serves on the board
of directors at Wipro Technologies and Know Labs Inc. Owens is on
the advisory board of the following private companies: Carillon
Technologies, Platform Science, Prism, Sarcos, Sierra Nevada
Corporation and Vodi. Owens is on the board of trustees at EastWest
Institute, Seattle University, and an advisor to the Post COVID-19
Debt Initiative (PCDI). He is also a member of the Council of
Foreign Relations.
From
2007 to 2015, Owens was the Chairman and Senior Partner of AEA
Investors Asia, a private equity firm located in Hong Kong, and
Vice Chairman of the NYSE for Asia. Owens also served as the
Chairman of Eastern Airlines. He has served on over 20 public
boards including Daimler, British American Tobacco, Telstra, Nortel
Networks, and Polycom. Owens was the CEO/Chairman of Teledesic LLC,
a Bill Gates/Craig McCaw company bringing worldwide broadband
through an extensive satellite network and prior, was the
President, COO/Vice Chairman of Science Applications International
Corporation (SAIC). Owens has also served on the boards of the
non-for-profit organizations; Fred Hutchinson Cancer Research
Center, Carnegie Corporation of New York, Brookings Institution,
and RAND Corporation.
Owens
is a four-star US Navy veteran. He was Vice Chairman of the Joint
Chiefs of Staff, the second-ranking United States military officer
with responsibility for reorganizing and restructuring the armed
forces in the post- Cold War era. He is widely recognized for
bringing commercial high-grade technology into the Department of
Defense for military applications. Owens was the architect of the
Revolution in Military Affairs (RMA), an advanced systems
technology approach to military operations, the most significant
change in the system of requirements, budgets and technology for
the four-armed forces since World War II. Owens, served as
Commander of the U.S. Sixth Fleet from 1990 to 1992, which included
Operation Desert Storm. Owens also served as the deputy chief of
Naval Operations for Resources. Owens was senior military assistant
to two Secretaries of Defense (Cheney and Carlucci) and served in
the Office of Program Appraisal for the Secretary of the Navy. He
began his military career as a nuclear submariner. He served on
four strategic nuclear-powered submarines and three nuclear attack
submarines, including tours as Commanding Officer aboard the USS
Sam Houston, Michigan, and USS City of Corpus Christi. Owens spent
a total of 2000 days submerged aboard submarines, including duty in
Vietnam.
Owens
is a 1962 honor graduate of the United States Naval Academy with a
bachelor’s degree in mathematics, bachelor’s and
master’s degrees in politics, philosophy and economics from
Oxford University, and a master’s degree in management from
George Washington University. He has written more than 50 articles
on national security and authored the book “High Seas.”
His book, “Lifting the Fog of War,” was published in
April 2000 with a revision published in Mandarin in
2009.
30
Owens
has received numerous recognitions and awards: the
“Légion d’Honneur” by France, and the
highest awards given to foreigners by the countries of Indonesia
and Sweden. He was named as one of The 50 Most Powerful People in
Networking by Network World, one of the 100 Best Board Members in
the United States for 2011 and again in 2016 awarded by NACD,
awarded the David Sarnoff Award for Technology Innovation and the
Intrepid Salute Award in recognition of his business achievements
and support of important philanthropic activities. Owens is active
in philanthropy to foster Chinese – American relations
including dialogues between the most senior retired officers in the
United States and Chinese militaries and similar dialogues between
very senior economists. He is one of North Dakota’s
Roughriders recipients, the award given annually to some of the
most prominent North Dakotans.
Family Relationships
There are no family relationships among our directors and executive
officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past
ten years:
|
|
●
|
Had any petition under the federal bankruptcy laws or any state
insolvency law filed by or against, or had a receiver, fiscal
agent, or similar officer appointed by a court for the business or
property of such person, or any partnership in which he was a
general partner at or within two years before the time of such
filing, or any corporation or business association of which he was
an executive officer at or within two years before the time of such
filing;
|
|
|
●
|
Been convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
|
|
|
|
|
|
●
|
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
|
|
|
◦
|
Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
|
|
|
|
|
|
|
◦
|
Engaging in any type of business practice; or
|
|
|
|
|
|
|
◦
|
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
|
|
|
●
|
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limiting for more
than 60 days the right of such person to engage in any activity
described in (i) above, or to be associated with persons engaged in
any such activity;
|
|
|
|
|
|
|
●
|
Been found by a court of competent jurisdiction in a civil action
or by the SEC to have violated any federal or state securities law,
where the judgment in such civil action or finding by the SEC has
not been subsequently reversed, suspended, or vacated;
or
|
|
|
|
|
|
|
●
|
Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, where the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
|
31
Board Committees
The Board has three standing committees to facilitate and assist
the Board in the execution of its responsibilities. The committees
are currently the Audit Committee, the Nominating and Corporate
Governance Committee, and the Compensation Committee. The
Committees were formed in July 2010. The Audit and Compensation
Committees are comprised solely of non-employee, independent
directors. The Nominating and Corporate Governance Committee has
two management directors, Ronald P. Erickson as Chairman and
Phillip A. Bosua as a member. Charters for each committee are
available on our website at www.knowlabs.co. The discussion below
describes current membership for each of the standing Board
committees.
|
|
|
|
|
Nominations
and
|
|
Audit
|
|
Compensation
|
|
Corporate
Governance
|
|
Jon
Pepper (Chairman)
|
|
William
A. Owens (Chairman)
|
|
Ron
Erickson (Chairman)
|
|
William
A. Owens
|
|
Jon
Pepper
|
|
Phillip
A. Bosua
|
|
Ichiro
Takesako
|
|
Ichiro
Takesako
|
|
William
A. Owens
|
|
|
|
|
|
Jon
Pepper
|
Compensation Committee Interlocks and Insider
Participation
No member of the Compensation Committee during the fiscal year
ended September 30, 2020 served as an officer, former officer, or
employee of the Company or participated in a related party
transaction that would be required to be disclosed in this
prospectus. Further, during this period, no executive officer of
the Company served as:
|
|
●
|
a member of the Compensation Committee or equivalent of any other
entity, one of whose executive officers served as one of our
directors or was an immediate family member of a director, or
served on our Compensation Committee; or
|
|
|
|
|
|
|
●
|
a director of any other entity, one of whose executive officers or
their immediate family member served on our Compensation
Committee.
|
Code of Ethics
We have
adopted conduct and ethics standards titled the code of ethics,
which is available at www.knowlabs.co. These standards were adopted
by our Board of Directors to promote transparency and integrity.
The standards apply to our Board of Directors, executives and
employees. Waivers of the requirements of our code of ethics or
associated polices with respect to members of our Board of
Directors or executive officers are subject to approval of the full
board.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material
elements of compensation awarded to, earned by or paid to each of
our executive officers named in the Compensation Table under
“Remuneration of Executive Officers” (the “Named
Executive Officers”) who served during the year ended
September 30, 2020. This compensation discussion primarily focuses
on the information contained in the following tables and related
footnotes and narrative for the last completed fiscal year. We also
describe compensation actions taken after the last completed fiscal
year to the extent that it enhances the understanding of our
executive compensation disclosure. The principles and guidelines
discussed herein would also apply to any additional executive
officers that the Company may hire in the future.
The Compensation Committee of the Board has responsibility for
overseeing, reviewing and approving executive compensation and
benefit programs in accordance with the Compensation
Committee’s charter. Starting 2020, the Committee has
obtained advice from third parties regarding peer group
compensation and other attributes of executive compensation. The
members of the Compensation Committee are William A. Owens, Jon
Pepper and Ichiro Takesako.
Compensation Philosophy and Objectives
The major compensation objectives for the Company’s executive
officers are as follows:
|
|
|
|
|
|
●
|
to attract and retain highly qualified individuals capable of
making significant contributions to our long-term
success;
|
|
|
|
|
|
|
●
|
to motivate and reward named executive officers whose knowledge,
skills, and performance are critical to our success;
|
|
|
|
|
|
|
●
|
to closely align the interests of our named executive officers and
other key employees with those of its shareholders;
and
|
|
|
|
|
|
|
●
|
to utilize incentive based compensation to reinforce performance
objectives and reward superior performance.
|
32
Role of Chief Executive Officer in Compensation
Decisions
The Board approves all compensation for the chief executive
officer. The Compensation Committee makes recommendations on the
compensation for the chief executive officer and approves all
compensation decisions, including equity awards, for our executive
officers. Our chief executive officer makes recommendations
regarding the base salary and non-equity compensation of other
executive officers that are approved by the Compensation Committee
in its discretion.
Setting Executive Compensation
The Compensation Committee believes that compensation for the
Company’s executive officers must be managed to what we can
afford and in a way that allows for us to meet our goals for
overall performance. During the
years ended September 30, 2020 and 2019, the Compensation Committee
and the Board compensated Ronald P. Erickson, its Chairman of the
Board and Interim Financial Officer, with an annual salary of
$180,000 from October 1, 2018 to March 4, 2019, from March
5, 2019 to May 1, 2020, the annual compensation was $195,000, and
from May 5, 2020 to September 30, 2020, the annual compensation was
$215,000. The Compensation Committee
and the Board of Particle Inc. compensated Ronald P. Erickson with
an annual salary of $120,000 from June 1, 2020.
During the years ended September 30, 2020 and 2019, the
Compensation Committee and the Board compensated Phillip A. Bosua,
its Chief Executive Officer, with an annual salary of $225,000 from
October 1, 2018 to March 4, 2019, from March 5, 2019 to May
1, 2020, the annual compensation was $240,000, and from May 5, 2020
to September 30, 2020, the annual compensation was $260,000. The
Compensation Committee and the Board
of Particle, Inc. compensated Phillip A. Bosua with an annual
salary of $120,000 from June 1, 2020.
This compensation reflected the financial condition of the Company.
Other Named Executive Officers were paid by us during 2020 and
2019. The Compensation Committee starting using a peer group of
publicly-traded and privately-held companies in structuring the
compensation packages starting late 2020.
Executive Compensation Components for the Year Ended September 30,
2020
The Compensation Committee did not use a formula for allocating
compensation among the elements of total compensation during the
year that ended on September 30, 2020. The Compensation Committee
believes that in order to attract and retain highly effective
people it must maintain a flexible compensation structure. For the
year that ended September 30, 2020, the principal components of
compensation for named executive officers was base salary and stock
and other equity awards.
Base Salary
Base salary is intended to ensure that our employees are fairly and
equitably compensated. Generally, base salary is used to
appropriately recognize and reward the experience and skills that
employees bring to the Company and provides motivation for career
development and enhancement. Base salary ensures that all employees
continue to receive a basic level of compensation that reflects any
acquired skills which are competently demonstrated and are
consistently used at work.
Base salaries for the Company’s named executive officers are
initially established based on their prior experience, the scope of
their responsibilities and the applicable competitive market
compensation paid by other companies for similar positions. Mr.
Erickson
Performance-Based Incentive Compensation
The Compensation Committee believes incentive compensation
reinforces performance objectives, rewards superior performance and
is consistent with the enhancement of stockholder value. All of the
Company’s Named Executive Officers are eligible to receive
performance-based incentive compensation. The Compensation
Committee did not recommend or approve payment of any
performance-based incentive compensation to the Named Executive
Officers during the year ended September 30, 2020 based on our
financial condition.
Ownership Guidelines
The Compensation Committee does not require our executive officers
to hold a minimum number of our shares. However, to directly align
the interests of executive officers with the interests of the
stockholders, the Compensation Committee encourages each executive
officer to maintain an ownership interest in the
Company.
Stock Option Program
Stock options are an integral part of our executive compensation
program. They are intended to encourage ownership and retention of
the Company’s common stock by named executive officers and
employees, as well as non-employee members of the Board. Through
stock options, the objective of aligning employees’ long-term
interest with those of stockholders may be met by providing
employees with the opportunity to build a meaningful stake in the
Company.
33
The Stock Option Program assists us by:
-
enhancing the link between the creation of stockholder value and
long-term executive incentive compensation;
-
providing an opportunity for increased equity ownership by
executive officers; and
-
maintaining competitive levels of total compensation.
Stock option award levels are determined by the Compensation
Committee and vary among participants’ positions within the
Company. Newly hired executive officers or promoted executive
officers are generally awarded stock options, at the discretion of
the Compensation Committee, at the next regularly scheduled
Compensation Committee meeting on or following their hire or
promotion date. In addition, such executives are eligible to
receive additional stock options on a discretionary basis after
performance criteria are achieved.
Options are awarded at the closing price of our common stock on the
date of the grant or last trading day prior to the date of the
grant. The Compensation Committee’s policy is not to grant
options with an exercise price that is less than the closing price
of our common stock on the grant date.
Generally, the majority of the options granted by the Compensation
Committee vest quarterly over four year term. Vesting and exercise
rights cease upon termination of employment and/or service, except
in the case of death (subject to a one year limitation), disability
or retirement. Stock options vest immediately upon termination of
employment without cause or an involuntary termination following a
change of control. Prior to the exercise of an option, the holder
has no rights as a stockholder with respect to the shares subject
to such option, including voting rights and the right to receive
dividends or dividend equivalents.
The Named Executive Officers received stock grants and option
awards during the year ended September 30, 2020, as disclosed
under the header Executive Compensation below.
Retirement and Other Benefits
We have no other retirement, savings, long-term stock award or
other type of plans for the Named Executive Officers.
Perquisites and Other Personal Benefits
During the year ended September 30, 2020, we provided the Named
Executive Officers with medical insurance. No other personal
benefits were provided to these individuals. The committee expects
to review the levels of perquisites and other personal benefits
provided to Named Executive Officers annually.
Employment Agreement with Phillip A. Bosua, Chief Executive
Officer
Phillip A. Bosua was appointed our Chief Executive Officer on April
10, 2018. Previously, Mr. Bosua served as the Company’s Chief
Product Officer since August 2017. The Company entered into a
Consulting Agreement with Mr. Bosua’s company, Blaze Clinical
on July 7, 2017. From September 2012 to February 2015, Mr. Bosua
was the founder and Chief Executive Officer of LIFX Inc. (where he
developed and marketed an innovative “smart” light
bulb) and from August 2015 until February 2016 was Vice President
Consumer Products at Soraa (which markets specialty LED light
bulbs). From February 2016 to July 2017, Mr. Bosua was the founder
and CEO of RAAI, Inc. (where he continued the development of his
smart lighting technology). From May 2008 to February 2013 he was
the Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, we entered into an Employment Agreement with Mr.
Bosua reflecting his appointment as Chief Executive Officer. The
Employment Agreement is for an initial term of 12 months (subject
to earlier termination) and will be automatically extended for
additional 12-month terms unless either party notifies the other
party of its intention to terminate the Employment Agreement
with at least ninety (90) days prior to the end of the Initial Term
or renewal term. Mr. Bosua was paid a
base salary of $225,000 per year, received 500,000 shares of common
stock valued at $0.33 per share and may be entitled to bonuses and
equity awards at the discretion of the Board or a committee of the
Board. The Employment Agreement provides for severance pay equal to
12 months of base salary if Mr. Bosua is terminated without
“cause” or voluntarily terminates his employment for
“good reason.” From October 1, 2018 to March 4, 2019, the
annual compensation was $225,000, from March 5, 2019 to May 1, 2020, the
annual compensation was $240,000, and from May 5, 2020 to September
30, 2020, the annual compensation was $260,000. The Compensation Committee and the Board of Particle,
Inc. compensated Phillip A. Bosua with an annual salary of $120,000
from June 1, 2020.
Mr.
Bosua will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements.
34
If the Company terminates Mr. Bosua’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Bosua terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Bosua will be entitled to receive (i)
his Base Salary amount for one year; and (ii) medical benefits for
eighteen months.
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
On April 10, 2018, we entered into an Amended Employment Agreement
for Ronald P. Erickson which amends the Employment Agreement dated
July 1, 2017. The Agreement expires March 21, 2019.
automatically be extended for additional one (1) year periods
unless either Party delivers written notice of such Party’s
intention to terminate this Agreement at least ninety (90) days
prior to the end of the Initial Term or renewal term.
Mr.
Erickson’s annual compensation was $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus. From October
1, 2018 to March 4, 2019, the annual compensation was
$180,000, from March 5, 2019 to
May 1, 2020, the annual compensation was $195,000, and from May 5,
2020 to September 30, 2020, the annual compensation was $215,000.
The Compensation Committee and the
Board of Particle, Inc. compensated Ronald P. Erickson with an
annual salary of $120,000 from June 1, 2020.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements.
If the Company terminates Mr. Erickson’s employment at any
time prior to the expiration of the Term without Cause, as defined
in the Employment Agreement, or if Mr. Erickson terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
Tax and Accounting Implications
Deductibility of Executive Compensation
Subject to certain exceptions, Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") generally denies a
deduction to any publicly held corporation for compensation paid to
its chief executive officer and its three other highest paid
executive officers (other than the principal financial officer) to
the extent that any such individual's compensation exceeds $1
million. “Performance-based compensation” (as defined
for purposes of Section 162(m)) is not taken into account for
purposes of calculating the $1 million compensation limit, provided
certain disclosure, shareholder approval and other requirements are
met. We periodically review the potential consequences of Section
162(m) and may structure the performance-based portion of our
executive compensation to comply with certain exceptions to Section
162(m). However, we may authorize compensation payments that do not
comply with the exceptions to Section 162(m) when we believe that
such payments are appropriate and in the best interests of the
stockholders, after taking into consideration changing business
conditions or the officer's performance.
Accounting for Stock-Based Compensation
Accounting for stock-based payments including its Stock Option
Program is done in accordance with the requirements of ASC 718,
“Compensation-Stock Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, composed entirely of independent
directors in accordance with the applicable laws and regulations,
sets and administers policies that govern the Company's executive
compensation programs, and incentive and stock programs. The
Compensation Committee of the Company has reviewed and discussed
the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management and based on such review and
discussions, the Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in this
Proxy Statement.
THE COMPENSATION COMMITTEE
William A. Owens, Chairman
35
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the fiscal years ended
September 30, 2020 and 2019:
Summary Compensation Table
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
Stock
|
Option
|
Other
|
|
|
|
|
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
|
|
Name
|
|
Principal
Position
|
($)
|
($)
|
($)
(3)
|
($)
|
($)
|
($)
|
|
|
Salary-
|
|
|
|
|
|
|
|
|
|
|
Ronald P. Erickson
(1)
|
|
Chairman of the
Board and Interim Chief Financial Officer
|
9/30/20
|
$243,333
|
$-
|
$190,000
|
$394,000
|
$-
|
$827,333
|
|
|
9/30/19
|
$188,750
|
$-
|
$102,000
|
$-
|
$-
|
$290,750
|
||
|
|
|
|
|
|
|
|
|
||
|
Phillip A. Bosua
(2)
|
|
Chief Executive
Officer
|
9/30/20
|
$288,333
|
$-
|
$285,000
|
$394,000
|
$-
|
$967,333
|
|
|
9/30/19
|
$233,750
|
$-
|
$-
|
$-
|
$-
|
$233,750
|
(1) Mr. Erickson’s annual compensation from October 1, 2018
to March 4, 2019 was $180,000, from March 5, 2019 to May 1,
2020, the annual compensation was $195,000, and from May 5, 2020 to
September 30, 2020, the annual compensation was $215,000. The
Compensation Committee and the Board
of Particle, Inc. compensated Ronald P. Erickson with an annual
salary of $120,000 from June 1, 2020. The 100,000 shares of
restricted common stock issued on January 2, 2019 to Mr. Erickson
were valued at the grant date market value of $1.02 per
share. The 100,000 shares
of restricted common stock issued on January 1, 2020 to Mr.
Erickson were valued at the grant date market value of $1.90 per
share. The stock grant was authorized at $0.17 per share.
Mr. Erickson received a vested
stock option grant from Particle for 500,000 Particle shares valued
at $0.788 per share or $394,000.
(2) Mr. Bosua’s annual compensation from
October 1, 2018 to March 4, 2019 was
$225,000, the annual compensation was $225,000, from March 5, 2019 to May 1, 2020, the
annual compensation was $240,000, and from May 5, 2020 to September
30, 2020, the annual compensation was $260,000. The Compensation Committee and the Board of Particle,
Inc. compensated Phillip A. Bosua with an annual salary of $120,000
from June 1, 2020. The 150,000 shares of restricted common stock
issued on January 1, 2020 to Mr. Bosua were valued at the grant
date market value of $1.90 per share. Mr. Bosua received a
vested stock option grant from Particle for 500,000 Particle
shares valued at $0.788 per share or $394,000.
(3) These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
36
Grants
of Stock Based Awards in Fiscal Year Then Ended September 30,
2020
The Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers during the
year ended September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
|
Option
Awards;
|
|
|
|
|
|
|
Estimated
Future Payouts Under
|
Estimated
Future Payouts Under
|
Stock
Awards;
|
Number
of
|
|
|
||||
|
|
|
|
Non-Equity
Incentive Plan
|
Equity
Incentive Plan
|
Number
of
|
Securities
|
Exercise
or
|
Grant
Date
|
||||
|
|
|
|
Awards
|
Awards
|
Shares
of
|
Underlying
|
Base Price
of
|
Fair Value
of
|
||||
|
|
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Stock or
Units
|
Options
|
Option
Awards
|
Stock
and
|
|
Name
|
|
Date
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($/Sh)
(3)
|
Option
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald P. Erickson
(1)
|
|
11/4/19
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
-
|
1,200,000
|
$1.100
|
$-
|
|
|
|
7/2/20
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
-
|
1,500,000
|
$0.100
|
0.788
|
|
Phillip A. Bosua
(2)
|
|
11/4/19
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
-
|
1,200,000
|
$1.100
|
$-
|
|
|
|
7/2/20
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
-
|
1,500,000
|
$0.100
|
0.788
|
(1)
On November 4, 2019, the Company granted a stock
option grant to Ronald P. Erickson for 1,200,000 shares with an
exercise price of $1.10 per share. The performance grant expires
November 4, 2024 and vests upon uplisting to the NASDAQ or NYSE
exchanges. On July 2, 2020, Particle approved stock option
grants for 1,500,000 shares at $0.10 per share to Ronald P.
Erickson. The stock option grants vest (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved. Mr. Erickson
received a vested stock option grant from Particle for
500,000 Particle shares valued at $0.788 per share or $394,000. The
remaining 1,000,000 Particle options are milestone based and
expense will be recognized when the milestone is met or likely to
be met.
(2)
On November 4, 2019, the Company granted a stock
option grant to Philip A. Bosua for 1,200,000 shares with an
exercise price of $1.10 per share. The performance grant expires
November 4, 2024 and vests upon FDA approval of the UBAND blood
glucose monitor. On July 2, 2020, Particle approved stock
option grants for 1,500,000 shares at $0.10 per share to Phillip A.
Bosua. The stock option grants vest (i) 33.3% upon issuance; (ii)
33.3% after the first sale; and (iii) 33.4% after one million in
sales are achieved. Mr. Bosua received
a vested stock option grant from Particle for 500,000
Particle shares valued at $0.788 per share or $394,000. The remaining 1,000,000 Particle
options are milestone based and expense will be recognized when the
milestone is met or likely to be met.
(3)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance
with
FASB ASC Topic 718.
37
Outstanding Equity Awards as of Fiscal Year Then Ended September
30, 2020
Our Named Executive Officers have the following outstanding equity
awards as of September 30, 2020.
|
|
Option
Awards
|
|||
|
|
Number
of
|
Number
of
|
|
|
|
|
Securities
|
Securities
|
|
|
|
|
Underlying
|
Underlying
|
|
|
|
|
Unexercised
|
Unexercised
|
Option
|
|
|
|
Options
|
Options
|
Exercise
|
Option
|
|
|
Exercisable
|
Unexerciseable
|
Price
|
Expiration
|
|
Name
|
(#)
|
(#)
|
($)
(3)
|
Date
|
|
|
|
|
|
|
|
Ronald P. Erickson
(1)
|
-
|
1,200,000
|
$1.10
|
11/4/24
|
|
|
500,000
|
1,000,000
|
$0.10
|
7/2/25
|
|
Phillip A. Bosua
(2)
|
-
|
1,200,000
|
$1.10
|
11/4/24
|
|
|
500,000
|
1,000,000
|
$0.10
|
7/2/25
|
(1)
On November 4, 2019, the Company granted a stock
option grant to Ronald P. Erickson for 1,200,000 shares with an
exercise price of $1.10 per share. The performance grant expires
November 4, 2024 and vests upon uplisting to the NASDAQ or NYSE
exchanges. On July 2, 2020, Particle approved stock option
grants for 1,500,000 shares at $0.10 per share to Ronald P.
Erickson. The stock option grants vest (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved. Mr. Erickson
received a vested stock option grant from Particle for
500,000 Particle shares valued at $0.788 per share or $394,000. The
remaining 1,000,000 Particle options are milestone based and
expense will be recognized when the milestone is met or likely to
be met.
(2)
On November 4, 2019, the Company granted a stock
option grant to Philip A. Bosua for 1,200,000 shares with an
exercise price of $1.10 per share. The performance grant expires
November 4, 2024 and vests upon FDA approval of the UBAND blood
glucose monitor. On July 2, 2020, Particle approved stock
option grants for 1,500,000 shares at $0.10 per share to Phillip A.
Bosua. The stock option grants vest (i) 33.3% upon issuance; (ii)
33.3% after the first sale; and (iii) 33.4% after one million in
sales are achieved. Mr. Bosua received
a vested stock option grant from Particle for 500,000
Particle shares valued at $0.788 per share or $394,000. The remaining 1,000,000 Particle
options are milestone based and expense will be recognized when the
milestone is met or likely to be met.
(3)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance
with
FASB ASC Topic 718.
Option Exercises and Stock Vested
Our Named Executive Officers did not have any option exercises
during the year ended September 30, 2020.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
Employment Agreements
We have an employment agreement with each of Ronald P. Erickson and
Phillip A. Bosua, which are summarized in tabular format
below.
Potential Payments upon Termination or Change in
Control
38
We have the following potential
payments upon termination or change in control with Ronald P.
Erickson:
|
|
|
Early
|
Not For
Good
|
Change
in
|
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
|
Separation
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
|
Compensation:
|
|
|
|
|
|
|
Base salary
(1)
|
$-
|
$-
|
$215,000
|
$215,000
|
$-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Stock
options
|
$-
|
$-
|
$2,202,000
|
$2,202,000
|
$-
|
|
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
|
Health and welfare
benefits (3)
|
$-
|
$-
|
$26,388
|
$26,388
|
$-
|
|
Accrued vacation
pay
|
$-
|
$-
|
$72,769
|
$72,769
|
$-
|
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$2,516,157
|
$2,516,157
|
$-
|
(1)
Reflects a salary
for twelve months.
(2)
Reflects
the vesting of stock option grants.
(3)
Reflects
the cost of medical benefits for eighteen months.
We have the following potential payments upon termination or change
in control with Phillip A. Bosua:
|
|
|
Early
|
Not For
Good
|
Change
in
|
|
|
Executive
|
For
Cause
|
or
Normal
|
Cause
|
Control
|
Disability
|
|
Payments
Upon
|
Termination
|
Retirement
|
Termination
|
Termination
|
or
Death
|
|
Separation
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
on
9/30/2020
|
|
Compensation:
|
|
|
|
|
|
|
Base salary
(1)
|
$-
|
$-
|
$260,000
|
$260,000
|
$-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Stock
options
|
$-
|
$-
|
$2,202,000
|
$2,202,000
|
$-
|
|
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
|
Health and welfare
benefits (3)
|
$-
|
$-
|
$22,572
|
$22,572
|
$-
|
|
Accrued vacation
pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$2,484,572
|
$2,484,572
|
$-
|
(1)
Reflects a salary
for twelve months.
(2)
Reflects
the vesting of stock option grants.
(3)
Reflects
the cost of medical benefits for eighteen months.
39
We do
not have any potential payments upon
termination or change in control with our other Named Executive
Officers.
DIRECTOR COMPENSATION
We primarily use stock options grants to incentive compensation to
attract and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. During the year ended September 30, 2020, Ronald P. Erickson
and Phillip A. Bosua did not receive any compensation for his
service as a director. The compensation disclosed in the
Summary Compensation Table on page 36 represents the total
compensation for Mr. Erickson and Mr. Bosua.
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in
cash. The only compensation generally has been in the
form of stock awards. There is no formal stock compensation plan
for independent non-employee directors. Our non-employee directors
received the following compensation during the year ended September
30, 2020.
|
|
Stock
|
Option
|
Other
|
|
|
Name
|
Awards
|
Awards
(4)
|
Compensation
|
Total
|
|
Jon Pepper
(1)
|
$76,000
|
$52,815
|
$-
|
$128,815
|
|
Ichiro Takesako
(2)
|
76,000
|
52,815
|
-
|
128,815
|
|
William A. Owens
(3)
|
76,000
|
-
|
-
|
76,000
|
|
|
|
|
|
|
|
Total
|
$228,000
|
$105,630
|
$-
|
$333,630
|
(1)
The
stock award for 40,000 shares was issued on January 1, 2020 to Jon
Pepper and was valued at $1.90 per share. The stock option grant
for 52,500 shares of common stock was issued on November 4, 2019 to
Mr. Pepper and was valued at the black scholes value of $1.006 per
share.
(2)
The
stock award for 40,000 shares was issued on January 1, 2020 to
Ichiro Takesako and was valued at $1.90 per share. The stock option
grant for 52,500 shares of common stock was issued on November 4,
2019 to Mr. Takesako and was valued at the black scholes value of
$1.006 per share.
(3)
The
stock award for 40,000 shares was issued to William A. Owens on
January 1, 2020 and was valued at $1.90 per share.
(4)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
ownership of our common stock as of September 30, 2020
by:
|
|
●
|
each director and nominee for director;
|
|
|
|
|
|
|
●
|
each person known by us to own beneficially 5% or more of our
common stock;
|
|
|
|
|
|
|
●
|
each executive officer named in the summary compensation table
elsewhere in this report;
and
|
|
|
|
|
|
|
●
|
all of our current directors and executive officers as a
group.
|
The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares voting
power,” which includes the power to vote or to direct the
voting of such security, or has or shares “investment
power,” which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the
right to acquire beneficial ownership within 60 days. Under these
rules more than one person may be deemed a beneficial owner of the
same securities and a person may be deemed to be a beneficial owner
of securities as to which such person has no economic
interest.
40
Unless otherwise indicated below, each beneficial owner named in
the table has sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable. The address for each person shown in the table is
c/o Know Labs, Inc. 500 Union Street, Suite 810, Seattle
Washington, unless otherwise indicated.
|
|
Shares
Beneficially Owned
|
|
|
|
Amount
|
Percentage
|
|
Directors and
Officers-
|
|
|
|
Ronald P. Erickson
(1)
|
8,089,015
|
25.7%
|
|
Phillip A. Bosua
(2)
|
3,567,500
|
14.1%
|
|
Jon Pepper
(3)
|
278,000
|
1.1%
|
|
Ichiro Takesako
(4)
|
190,000
|
*
|
|
William A. Owens
(5)
|
690,000
|
2.8%
|
|
Total Directors and
Officers (5 in total)
|
12,814,515
|
51.7%
|
* Less than 1%.
(1) Reflects 1,458,085 shares of shares of common stock
beneficially owned by Ronald P. Erickson or entities controlled by
Mr. Erickson and warrants to purchase 1,894,666 shares of our
common stock that are exercisable within 60 days, and also includes
4,736,264 shares of our common stock related to convertible debt
that are exercisable within 60 days. The address of Mr. Erickson is
500 Union Street, Suite 810, Seattle, WA 98101.
(2) Reflects 1,458,085 shares of shares of common stock
beneficially owned by Ronald P. Erickson or entities controlled by
Mr. Erickson and warrants to purchase 1,894,666 shares of our
common stock that are exercisable within 60 days, and also includes
4,736,264 shares of our common stock related to convertible debt
that are exercisable within 60 days. The address of Mr. Erickson is
500 Union Street, Suite 810, Seattle, WA 98101.
(3) Reflects 278,000 shares of shares of common stock beneficially
owned by Jon Pepper.
(4) Reflects 190,000 shares of shares of common stock beneficially
owned Ichiro Takesako.
(5) Reflects 490,000 shares of shares of common stock beneficially
owned by William A. Owens and warrants to purchase 200,000 shares
of our common stock that are exercisable within 60
days.
41
|
|
Shares
Beneficially Owned
|
|
|
|
Amount
|
Percentage
|
|
Greater Than 5%
Ownership
|
|
|
|
|
|
|
|
Clayton A. Struve
(1)
|
20,758,075
|
46.7%
|
|
|
Blocker at
4.99%
|
|
|
|
|
|
|
Ronald P. Erickson
(2)
|
8,089,015
|
25.7%
|
|
|
|
|
|
Phillip
A. Bosua (3)
|
3,567,500
|
14.1%
|
|
|
|
|
|
Dale Broadrick
(4)
|
2,726,036
|
10.5%
|
(1) Reflects 1,080,000 shares
beneficially owned by Clayton A. Struve. This total also includes
7,285,719 warrants to purchase shares of our common stock,
8,108,356 shares related to the conversion of preferred stock into
our common stock and 5,284,000 shares related to the conversion of
debt into our common stock. The 6,785,719 of warrants and all of
the preferred stock and convertible debt are currently priced at $0.25 per share, subject
to adjustment. Warrants of 500,000 shares related to the offering
are currently priced at $1.20 per share, subject to
adjustment. Mr. Struve is subject to a 4.99% blocker.
The address of Mr. Struve is
175 West Jackson Blvd., Suite 440, Chicago, IL 60604.
(2) Reflects 1,458,085 shares
of shares of common stock beneficially owned by Ronald P. Erickson
or entities controlled by Mr. Erickson and warrants to purchase
1,894,666 shares of our common stock that are exercisable within 60
days, and also includes 4,736,264 shares of our common stock
related to convertible debt that are exercisable within 60 days.
The address of Mr. Erickson is 500 Union Street, Suite 810,
Seattle, WA 98101.
(3) Reflects 3,005,000 shares of shares of common stock
beneficially owned by Phillip A. Bosua and vested stock option
grants to purchase 562,500 shares of our common stock that are
exercisable within 60 days. The address of Mr. Bosua is 500 Union
Street, Suite 810, Seattle, WA 98101.
(4) Reflects the shares beneficially owned by Dale
Broadrick. This total includes 1,613,018 shares and a total of
1,113,018 warrants to purchase shares of our common stock that are
exercisable within 60 days. The address of Dale Broadrick is 3003
Brick Church Pike, Nashville, Tennessee.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Director Independence
For purposes of determining director independence, we have applied
the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on
which shares of common stock are quoted does not have any director
independence requirements. The NASDAQ definition of
“Independent Director” means a person other than an
Executive Officer or employee of the Company or any other
individual having a relationship which, in the opinion of the
Company’s Board of Directors, would interfere with the
exercise of independent judgment in carrying out the
responsibilities of a director.
According to the NASDAQ definition, Mr. Pepper, Mr. Takesako and
Mr. Owens are each independent directors. All current directors are
or may become in the future shareholders of the
Company
Policies and Procedures for Related Person
Transactions
We have
operated under a Code of Conduct and Ethics since December 28,
2012. Our Code of Conduct and Ethics requires all employees,
officers and directors, without exception, to avoid the engagement
in activities or relationships that conflict, or would be perceived
to conflict, with our interests.
Prior
to the adoption of our related person transaction policy, there was
a legitimate business reason for all the related person
transactions described above and we believe that, where applicable,
the terms of the transactions are no less favorable to us than
could be obtained from an unrelated person.
Our
Audit Committee reviews all relationships and transactions in which
we and our directors and executive officers or their immediate
family members are participants to determine whether such persons
have a direct or indirect material interest.
As
required under SEC rules, transactions that are determined to be
directly or indirectly material to us or a related person are
disclosed.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since
October 1, 2018, we have engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities and affiliates, or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Other than the following transactions, none of the directors or
executive officers of the Company, nor any person who owned of
record or was known to own beneficially more than 5% of the
Company’s outstanding shares of its Common Stock, nor any
associate or affiliate of such persons or companies, has any
material interest, direct or indirect, in any transaction that has
occurred during the past fiscal year, or in any proposed
transaction, which has materially affected or will affect the
Company.
With regard to any future related party transaction, we plan to
fully disclose any and all related party transactions in the
following manner:
|
|
●
|
Disclosing
such transactions in reports where required;
|
|
|
●
|
Disclosing
in any and all filings with the SEC, where required;
|
|
|
●
|
Obtaining
disinterested director’s consent; and
|
|
|
●
|
Obtaining
shareholder consent where required.
|
Transactions with Clayton Struve
Convertible Promissory Notes with Clayton A. Struve
We owe Clayton A. Struve $1,071,000 under convertible promissory or
OID notes. We recorded accrued interest of $71,562 and $62,171 as
of September 30, 2020 and 2019,
respectively. On May 8, 2019, we signed Amendment 2 to the
convertible promissory or OID notes, extending the due dates to
September 30, 2019. On November 26, 2019, we signed Amendments to
the convertible promissory or OID notes, extending the due dates to
March 31, 2020. On May 11, 2020, we signed Amendments to the
convertible promissory or OID notes, extending the due dates to
September 30, 2020. On December 23, 2020, we signed Amendments to
the convertible promissory or OID notes, extending the due dates to
March 31, 2021.
43
Series C and D Preferred Stock and Warrants
On
August 5, 2016, we 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 September 30, 2020 and 2019 there are 1,785,715 Series C Preferred
shares outstanding.
As of September 30, 2020 and 2019, we have 1,106,014 of
Series D Preferred Stock outstanding with Clayton A. Struve, an
accredited investor. On August 14,
2017, the price of the Series D
Stock were adjusted to $0.25 per share pursuant to the documents governing such
instruments.
The
Series D Preferred Stock is convertible into shares of common stock
at a price of $0.25 per share or by multiplying the number of
Series D Preferred Stock shares by the stated value and dividing by
the conversion price then in effect, subject to certain diluted
events, and has the right to vote the number of shares of common
stock the Series D Preferred Stock would be issuable on conversion,
subject to a 4.99% blocker. The
Preferred Series D has an annual yield of 8% The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% if and when dividends are
declared.
Debt Offering
Mr.
Struve invested $1,000,000 in the Debt Offering which closed in May
2019. On March 18, 2020, Mr. Struve received 1,080,000 shares of
common stock related to the automatic conversion of the $1,000,000
invested in the Debt Offering.
Related Party Transactions with Ronald P. Erickson
On
March 16, 2018, we entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, we signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, we signed
Amendment 2 to the convertible promissory or OID notes, extending
the due dates to March 31, 2020. On May 11, 2020, we signed
Amendment 3 to the convertible promissory or OID notes, extending
the due dates to September 30, 2020. On December 8, 2020, we signed
Amendment 4 to the convertible promissory or OID notes, extending
the due dates to March 31, 2021.
On January 2, 2019, Mr. Erickson was issued 100,000 shares of
restricted common stock at the grant date market value of $1.02 per
share.
On October 4, 2019, Ronald P. Erickson voluntarily cancelled a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On November 4, 2019, we granted a stock option grant to Ronald P.
Erickson for 1,200,000 shares with an exercise price of $1.10 per
share. The performance grant expires November 4, 2024 and vests
upon uplisting to the NASDAQ or NYSE exchanges.
On January 1, 2020, we issued 100,000 shares of restricted common
stock to Ronald P. Erickson. The shares were issued in accordance
with the 2011 Stock Incentive Plan and were valued at $1.90 per
share, the market price of our common stock, or
$190,000.
On June 1, 2020, Mr. Erickson received a salary of $10,000 per
month for work on Particle, Inc.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $597,177
and $487,932 as of September 30, 2020 and 2019,
respectively.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Ronald P. Erickson. The stock option grant
vests (i) 33.3% upon issuance; (ii) 33.3% after the first sale; and
(iii) 33.4% after one million in sales are achieved.
44
Related Party Transaction with Phillip A. Bosua
On October 4, 2019, Philip A. Bosua voluntarily cancelled a stock
option grant for 1,000,000 shares with an exercise price of $3.03
per share. The grants was related to performance and was not
vested.
On November 4, 2019, we granted a stock option grant to Philip A.
Bosua for 1,200,000 shares with an exercise price of $1.10 per
share. The performance grant expires November 4, 2024 and vests
upon FDA approval of the UBAND blood glucose monitor.
On January 1, 2020, we issued 150,000 shares of restricted common
stock to Phillip A. Bosua. The
shares were issued in accordance with the 2011 Stock Incentive Plan
and were valued at $1.90 per share, the market price of our common
stock, or $285,000.
On June 1, 2020, Mr. Bosua received a salary of $10,000 per month
for work on Particle, Inc.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Philip A.
Bosua. The stock option grant vests (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved.
Stock Issuances and Cancellations to Named Executive Officers and
Directors
During the year ended September 30, 2019, two directors voluntarily
forfeited stock option grants for 100,000 shares of common stock at
$3.03 per share.
On November 4, 2019, we granted stock option grants to two
directors totaling 105,000 shares with an exercise price of $1.10
per share. The stock option grants expire in five years. The stock
option grants vested immediately.
On January 1, 2020, we issued 120,000 shares of restricted common
stock to three directors. The
shares were issued in accordance with the 2011 Stock Incentive Plan
and were valued at $1.90 per share, the market price of the
Company’s common stock, or $228,000.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and
procedures for audit, audit-related and tax services that can be
performed by the independent auditors without specific
authorization from the Audit Committee subject to certain
restrictions. The policy sets out the specific services
pre-approved by the Audit Committee and the applicable limitations,
while ensuring the independence of the independent auditors to
audit the Company's financial statements is not impaired. The
pre-approval policy does not include a delegation to management of
the Audit Committee’s responsibilities under the Exchange
Act. During the year ended September 30, 2020, the Audit Committee
pre-approved all audit and permissible non-audit services provided
by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting
Firm
The Audit Committee engaged BPM LLP to perform an annual audit of
our financial statements for the fiscal year ended September 30,
2020. BPM did not perform any services prior to September 30, 2019.
Previously the Audit Committee engaged SD Mayer and Associates, LLP
to perform an annual audit of our financial statements for the
fiscal years ended September 30, 2018; SD Mayer was dismissed on
October 3, 2019. The following is the breakdown of aggregate fees
paid for the last two fiscal years. The audit fees listed below are
those billed in the respective fiscal year but generally relate to
the prior fiscal year:
45
|
|
Year
Ended
|
Year
Ended
|
|
|
September 30,
2020
|
September 30,
2019
|
|
Audit
fees
|
$178,325
|
$53,620
|
|
Audit related
fees
|
48,150
|
26,000
|
|
Tax
fees
|
14,150
|
7,500
|
|
All other
fees
|
14,615
|
7,800
|
|
|
|
|
|
|
$255,240
|
$94,920
|
-
“Audit Fees” are fees paid for professional services
for the audit of our financial statements.
-
“Audit-Related fees” are fees paid for professional
services not included in the first two categories, specifically,
PCAOB interim quarterly, SEC filings and consents, and accounting
consultations on matters addressed during the audit or interim
reviews, and review work related to quarterly filings.
-
“Tax Fees” are fees primarily for tax compliance in
connection with filing US income tax returns.
-
“All other fees” related to the reviews of Registration
Statements on Form S-1.
SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as
of September 30, 2020 our executive officers, directors and 10%
holders complied with all filing requirements except as
follows:
Jon
Pepper filed a Form 4 on January 23, 2020 that was required to be
filed on January 3, 2020.
Ichiro
Takesako filed a Form 4 on January 23, 2020 that was required to be
filed on January 3, 2020.
William
A. Owens filed a Form 4 on January 23, 2020 that was required to be
filed on January 3, 2020.
Phillip
A. Bosua filed a Form 4 on January 23, 2020 that was required to be
filed on January 3, 2020.
Ronald
P. Erickson filed a Form 4 on January 23, 2020 that was required to
be filed on January 3, 2020.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS:
The company’s financial statements, as indicated by the Index
to Consolidated Financial Statements set forth below, begin on page
F-1. Financial statement schedules have been omitted because they
are not applicable or the required information is included in the
financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Title of Document
|
|
Page
|
|
Report
of BPM LLP
|
|
F-1
|
|
Consolidated Balance Sheets as of September 30, 2020 and
2019
|
|
F-2
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended September
30, 2020 and 2019
|
|
F-3
|
|
|
|
|
|
Consolidated Statements of Changes in Stockholders' (Deficit) for
the years ended September 30, 2020 and 2019
|
|
F-4
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended September
30, 2020 and 2019
|
|
F-5
|
|
|
|
|
|
Notes to the Consolidated Financial Statements
|
|
F-6
|
47
|
(b)
|
Exhibits
|
The exhibits required to be filed herewith by Item 601 of
Regulation S-K, as described in the following index of exhibits,
are attached hereto unless otherwise indicated as being
incorporated by reference, as follows:
|
Exhibit
No.
|
Description
|
|
Restatement
of the Articles of Incorporation dated September 13, 2013
(incorporated by reference to the Company’s Current Report on
Form 8-K/A2, filed September 17, 2013)
|
|
|
|
|
|
Amended
and Restated Bylaws (incorporated by reference to the
Company’s Form 8-K, filed August 17, 2012)
|
|
|
|
|
|
Certificate
of Amendment to the Restatement of the Articles of Incorporation
dated June 11, 2015 (incorporated by reference to the
Company’s Current Report on Form 8-K, filed June 17,
2015)
|
|
|
|
|
|
Certificate
of Designations, Preferences and Rights of Series C Convertible
Preferred Stock (incorporated by reference to the Company’s
Current Report on Form 8-K, filed August 11, 2016)
|
|
|
|
|
|
Form
of Series C Convertible Preferred Stock 2016 (incorporated by
reference to the Company’s Registration Statement on Form
S-1, filed September 1, 2016)
|
|
|
|
|
|
Certificate
of Correction and Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock (incorporated by
reference to the Company’s Amended Current Report on Form
8-K/A, filed January 9, 2017)
|
|
|
|
|
|
Certificate
of Designations, Preferences and Rights of Series D Convertible
Preferred Stock (incorporated by reference to the Company’s
Current Report on Form 8-K, filed on February 10,
2017)
|
|
|
|
|
|
Amended
and Restated Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock. (incorporated by reference to
the Company’s Current Report on Form 8-K, filed May 5,
2017)
|
|
|
|
|
|
Second
Amended and Restated Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred Stock (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
July 19, 2018)
|
|
|
|
|
|
Articles
of Merger (incorporated by reference to the Company’s Current
Report on Form 8-K, filed May 3, 2018)
|
|
|
|
|
|
Second
Amended and Restated Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred Stock (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
July 20, 2018)
|
|
|
|
|
|
Certificate
of Designation of Series F Preferred Stock (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
August 3, 2018)
|
|
|
|
|
|
2011
Stock Incentive Plan (incorporated by reference to the
Company’s Definitive Proxy Statement on Schedule 14A, filed
January 11, 2013)
|
|
|
|
|
|
Form of
Preferred Stock and Warrant Purchase Agreement by and between
Visualant, Incorporated and Clayton A. Struve (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
May 5, 2017)
|
|
|
|
|
|
Securities Purchase Agreement dated August 14, 2017 by and between
Visualant, Incorporated and accredited investor (incorporated by
reference to the Company’s Current Report on Form
8-K, filed August 18,
2017)
|
48
|
Senior
Secured Convertible Redeemable Debenture dated December 12, 2017 by
and between Visualant, Incorporated and accredited investor.
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed December 22, 2017)
|
|
|
|
|
|
Senior
Secured Convertible Redeemable Debenture dated February 28, 2018 by
and between Visualant, Incorporated and accredited investor.
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 7, 2018)
|
|
|
|
|
|
Note
and Account Payable Conversion Agreement dated January 31, 2018 by
and between Visualant, Incorporated and J3E2A2Z LP (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
March 21, 2018)
|
|
|
|
|
|
Employment
Agreement dated April 10, 2018 by and between Visualant,
Incorporated and Phillip A. Bosua. (incorporated by reference to
the Company’s Annual Report on Form 10-K, filed December 21,
2018)
|
|
|
|
|
|
Amended
Employment Agreement dated April 10, 2018 by and between Visualant,
Incorporated and Ronald P. Erickson. (incorporated by reference to
the Company’s Annual Report on Form 10-K, filed December 21,
2018)
|
|
|
|
|
|
Agreement
and Plan of Merger, dated as of April 10, 2018, by and among
Visualant, Incorporated, 500 Union Corporation, and RAAI Lighting,
Inc. (incorporated by reference to the Company’s Annual
Report on Form 10-K, filed December 21, 2018)
|
|
|
|
|
|
Certificate
of Merger, dated as of April 10, 2018, by 500 Union Corporation
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed April 17, 2018)
|
|
|
|
|
|
Form of
Securities Purchase Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K, filed March 6,
2019)
|
|
|
|
|
|
Form of
Subscription Agreement, Subordinated Convertible Note, Common Stock
Purchase Warrant, Subordination and Registration Rights Agreement
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 6, 2019)
|
|
|
|
|
|
Amendment 3 dated May 12, 2020 to Convertible Redeemable Promissory
Note dated January 31, 2018 by and between Know Labs, Inc. and
J3E2A2Z LP. (incorporated by reference to the Company’s
Current Report on Form 8-K, filed May 13, 2020)
|
|
|
|
|
|
Amendment 3 dated May 12, 2020 to Convertible Redeemable Promissory
Note dated January 31, 2018 by and between Know Labs, Inc. and
J3E2A2Z LP. (incorporated by reference to the Company’s
Current Report on Form 8-K, filed May 13, 2020)
|
|
|
|
|
|
|
|
|
Amendment 3 dated May 11, 2020 to Senior Secured Convertible
Redeemable Note dated August 14, 2017 by and between Know Labs, Inc. and
Clayton A. Struve. (incorporated by reference to the
Company’s Current Report on Form 8-K, filed May 15,
2020)
|
|
|
|
|
|
Amendment 3 dated May 11, 2020 to Senior Secured Convertible
Redeemable Note dated December 12, 2017 by and between Know Labs, Inc.
and Clayton A. Struve. (incorporated by reference to the
Company’s Current Report on Form 8-K, filed May 15,
2020)
|
49
|
Amendment 2 dated May 11, 2020 to Senior Secured Convertible
Redeemable Note dated February 28, 2018 by and between Know Labs, Inc.
and Clayton A. Struve. (incorporated by reference to the
Company’s Current Report on Form 8-K, filed May 15,
2020)
|
|
|
|
|
|
Code of Ethics dated November 2018 (incorporated by reference to the Company’s
Current Report on Form 8-K, filed November 27,
2018)
|
|
|
|
|
|
Letter dated October 4, 2019 from SD Mayer and
Associates, LLP. (incorporated by reference to the
Company’s Current Report on Form 8-K, filed October 8,
2019)
|
|
|
|
|
|
Subsidiaries
of the Registrant. Filed
herewith.
|
|
|
|
|
|
Audit
Committee Charter dated November 2018 (incorporated by reference to
the Company’s Current Report on Form 8-K, filed November 27,
2018)
|
|
|
|
|
|
Compensation
Committee Charter dated November 2018 (incorporated by reference to
the Company’s Current Report on Form 8-K, filed November 27,
2018)
|
|
|
|
|
|
Nominations
and Corporate Governance Committee Charter dated November 2018
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed November 27, 2018)
|
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
Document
101.LAB* XBRL Taxonomy Extension Labels Linkbase
Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase
Document
*Filed Herewith. Pursuant to Regulation S-T, this interactive data
file is deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, is deemed not filed for purposes of Section 18 of
the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
50
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders of
Know
Labs, Inc. and subsidiaries
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Know Labs,
Inc. and subsidiaries (the Company) as of September 30, 2020 and
2019, and the related consolidated statements of operations,
stockholders’ deficit, and cash flows for each of the two
years in the period ended September 30, 2020 and the related notes
(collectively referred to as the consolidated financial
statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company as of September 30, 2020 and 2019, and the results of
its operations and its cash flows for each of the two years in the
period ended September 30, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained a net loss from operations
and has an accumulated deficit since inception. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in this
regard are also described in Note 2. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ BPM
LLP
BPM LLP
We served as the Company’s auditor since October
2019
Walnut Creek, California
December 29, 2020
51
|
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
September
30,
2020
|
September
30,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash and cash
equivalents
|
$4,298,179
|
$1,900,836
|
|
Accounts
receivable, net of allowance of $0 and $40,000,
respectively
|
-
|
63,049
|
|
Prepaid
expenses
|
-
|
6,435
|
|
Inventories,
net
|
-
|
7,103
|
|
Total current
assets
|
4,298,179
|
1,977,423
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
128,671
|
130,472
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
Intangible
assets
|
101,114
|
274,446
|
|
Other
assets
|
25,180
|
13,766
|
|
Operating lease
right of use asset
|
129,003
|
243,526
|
|
|
|
|
|
TOTAL
ASSETS
|
$4,682,147
|
$2,639,633
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable -
trade
|
$487,810
|
$810,943
|
|
Accounts payable -
related parties
|
5,687
|
7,048
|
|
Accrued
expenses
|
401,178
|
460,055
|
|
Accrued expenses -
related parties
|
591,600
|
458,500
|
|
Convertible notes
payable
|
3,967,578
|
3,954,241
|
|
Note
payable
|
226,170
|
-
|
|
Simple Agreements
for Future Equity
|
785,000
|
-
|
|
Current portion of
operating lease right of use liability
|
108,779
|
124,523
|
|
Total current
liabilities
|
6,573,802
|
5,815,310
|
|
|
|
|
|
NON-CURRENT
LIABILITIES:
|
|
|
|
Operating lease
right of use liability, net of current portion
|
23,256
|
121,613
|
|
Total non-current
liabilities
|
23,256
|
121,613
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 14)
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
|
|
|
|
outstanding at
9/30/2020 and 9/30/2019 respectively
|
-
|
-
|
|
Series C
Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
|
|
|
|
1,785,715 shares
issued and outstanding at 9/30/2020 and 9/30/2019,
respectively
|
1,790
|
1,790
|
|
Series D
Convertible Preferred stock - $0.001 par value, 1,016,014 shares
authorized,
|
|
|
|
1,016,004 shares
issued and outstanding at 9/30/2020 and 9/30/2019,
respectively
|
1,015
|
1,015
|
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 24,804,874 and
18,366,178
|
|
|
|
shares issued and
outstanding at 9/30/2020 and 9/30/2019, respectively
|
24,807
|
18,366
|
|
Additional paid in
capital
|
54,023,758
|
39,085,179
|
|
Accumulated
deficit
|
(55,966,281)
|
(42,403,640)
|
|
Total stockholders'
equity (deficit)
|
(1,914,911)
|
(3,297,290)
|
|
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$4,682,147
|
$2,639,633
|
The accompanying notes are an integral part of these consolidated
financial statements.
52
|
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
Years
Ended,
|
|
|
|
September
30,
2020
|
September
30,
2019
|
|
|
|
|
|
REVENUE
|
$121,939
|
$1,804,960
|
|
COST OF
SALES
|
69,726
|
1,378,413
|
|
GROSS
PROFIT
|
52,213
|
426,547
|
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
2,033,726
|
1,257,872
|
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
4,844,415
|
4,181,687
|
|
OPERATING
LOSS
|
(6,825,928)
|
(5,013,012)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
Interest
expense
|
(6,094,682)
|
(2,945,312)
|
|
Other
income
|
65,769
|
(9,561)
|
|
(Loss) gain on debt
settlements
|
(707,800)
|
355,569
|
|
Total other
(expense), net
|
(6,736,713)
|
(2,599,304)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(13,562,641)
|
(7,612,316)
|
|
|
|
|
|
Income tax
expense
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$(13,562,641)
|
$(7,612,316)
|
|
|
|
|
|
Basic and diluted
loss per share
|
$(0.62)
|
$(0.42)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
21,791,058
|
18,053,848
|
The accompanying notes are an integral part of these consolidated
financial statements.
53
|
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
(DEFICIT)
|
|
|
Series A
Convertible
|
Series C
Convertible
|
Series D
Convertible
|
|
|
Additional
|
|
Total
|
|||
|
|
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Stockholders'
|
||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
Balance as of October 1,
2018
|
20,000
|
$11
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
17,531,522
|
$17,531
|
$32,163,386
|
$(34,791,324)
|
$(2,607,591)
|
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,141,674
|
-
|
1,141,674
|
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
245,000
|
245
|
348,655
|
-
|
348,900
|
|
Conversion of Series A Preferred
Stock
|
(20,000)
|
(11)
|
-
|
-
|
-
|
-
|
80,000
|
80
|
(69)
|
-
|
-
|
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,857,960
|
-
|
2,857,960
|
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,384,530
|
-
|
1,384,530
|
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,072,095
|
-
|
1,072,095
|
|
Stock based compensation- warrant
issuances
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
117,458
|
-
|
117,458
|
|
Issuance of common stock for
warrant exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
509,656
|
510
|
(510)
|
-
|
(0)
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,612,316)
|
(7,612,316)
|
|
Balance as of September 30,
2019
|
-
|
-
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
18,366,178
|
18,366
|
39,085,179
|
(42,403,640)
|
(3,297,290)
|
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,702,085
|
-
|
1,702,085
|
|
Stock option
exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
73,191
|
73
|
(73)
|
-
|
-
|
|
Conversion of debt offering and
accrued interest (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
4,581,917
|
4,585
|
4,591,952
|
-
|
4,596,537
|
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,766,074
|
-
|
3,766,074
|
|
Issuance of warrants to debt
holders (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,824,998
|
-
|
1,824,998
|
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
975,326
|
-
|
975,326
|
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
550,000
|
550
|
1,044,450
|
-
|
1,045,000
|
|
Issuance of common stock for
exercise of warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
733,588
|
733
|
84,267
|
-
|
85,000
|
|
Issuance of shares related to
Settlement and Mutual Release and Subscription
Agreements
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
500
|
949,500
|
-
|
950,000
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,562,641)
|
(13,562,641)
|
|
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
24,804,874
|
$24,807
|
$54,023,758
|
$(55,966,281)
|
$(1,914,911)
|
The accompanying notes are an integral part of these consolidated
financial statements.
54
|
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Years
Ended,
|
|
|
|
September
30,
2020
|
September
30,
2019
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(13,562,641)
|
$(7,612,316)
|
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
|
operating
activities
|
|
|
|
Depreciation and
amortization
|
242,987
|
259,347
|
|
Issuance of capital
stock for services and expenses
|
1,045,000
|
348,900
|
|
Stock based
compensation- warrants
|
-
|
117,458
|
|
Stock based
compensation- stock option grants
|
1,702,085
|
1,141,674
|
|
Amortization of
debt discount
|
5,662,690
|
2,771,270
|
|
Right of use,
net
|
422
|
2,610
|
|
Loss on sale of
assets
|
4,663
|
32,777
|
|
(Gain) on debt
settlement
|
(117,200)
|
(355,000)
|
|
Loss related to
issuance of shares for debt settlement
|
825,000
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
63,049
|
257,489
|
|
Prepaid
expenses
|
6,435
|
13,705
|
|
Inventory
|
7,103
|
196,479
|
|
Other
assets
|
(11,414)
|
(6,596)
|
|
Accounts payable -
trade and accrued expenses
|
218,018
|
(215,873)
|
|
Deferred
revenue
|
-
|
(55,959)
|
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(3,913,803)
|
(3,104,035)
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Purchase of
research and development equipment
|
(70,134)
|
(79,932)
|
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(70,134)
|
(79,932)
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Proceeds from notes
payable
|
226,170
|
-
|
|
Repayments on line
of credit
|
-
|
(92,094)
|
|
Proceeds from
convertible notes payable
|
5,639,500
|
4,242,490
|
|
Proceeds from
Simple Agreements for Future Equity
|
785,000
|
-
|
|
Payments for
issuance costs from notes payable
|
(479,965)
|
-
|
|
Proceeds from
issuance of common stock for warrant exercise
|
85,575
|
-
|
|
Proeeds from
issuance of shares related to debt settlement
|
125,000
|
-
|
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
6,381,280
|
4,150,396
|
|
|
|
|
|
NET INCREASE IN
CASH AND CASH EQUIVALENTS
|
2,397,343
|
966,429
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
1,900,836
|
934,407
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$4,298,179
|
$1,900,836
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Interest
paid
|
$-
|
$22,521
|
|
Taxes
paid
|
$1,922
|
$-
|
|
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
Beneficial
conversion feature
|
$3,766,074
|
$2,857,960
|
|
Issuance of
warrants to debt holders
|
$1,824,998
|
$1,384,530
|
|
Issuance of
warrants for services related to debt offering
|
$975,326
|
$1,072,095
|
|
Cashless warrant
exercise (fair value)
|
$111,554
|
$127,414
|
|
Cashless stock
options exercise (fair value)
|
$18,298
|
$-
|
|
Conversion of debt
offering
|
$4,245,448
|
$-
|
|
Conversion of
accrued interest
|
$351,089
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
55
KNOW LABS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
1.
|
ORGANIZATION
|
Know Labs, Inc. (the “Company”) was incorporated under
the laws of the State of Nevada in 1998. The Company has
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
The Company is focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. The Company
call these our “Bio-RFID™” and
“ChromaID™” technologies.
Historically, the Company focused on the development of our
proprietary ChromaID technology. Using light from low-cost LEDs
(light emitting diodes) the ChromaID technology maps the color of
substances, fluids and materials. With the Company’s
proprietary processes we can authenticate and identify based upon
the color that is present. The color is both visible to the Company
as humans but also outside of the humanly visible color spectrum in
the near infra-red and near ultra-violet and beyond. The
Company’s ChromaID scanner sees what we like to call
“Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID the Company
can see, and identify, and authenticate based upon the color that
is present. The Company’s ChromaID scanner is capable of
uniquely identifying and authenticating almost any substance or
liquid using light to record, detect and identify its unique color
signature. Today the Company is focused upon extensions and new
inventions that are derived from and extend beyond the
Company’s ChromaID technology. The Company calls this new
technology “Bio-RFID.” The rapid advances made with the
Company’s Bio-RFID technology in our laboratory have caused
us to move quickly into the commercialization phase as the Company
works to create revenue generating products for the marketplace.
Today, the sole focus of the Company is on its Bio-RFID technology
and its commercialization.
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle, Inc., a Nevada corporation. The Company is the sole
shareholder as of the date of incorporation. Particle is now a
direct, majority owned subsidiary of the Company. Particle shall
utilize the same corporate offices as the Company and shall focus
on the development and commercialization of our extensive
intellectual property relating to electromagnetic energy outside of
the medical diagnostic arena which remains the parent
company’s singular focus with its Bio-RFID technology and its
initial application , the non-invasive measurement of blood
glucose
On June 1, 2020, the Company approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with our
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain of our patents and trademarks, 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.
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct
to our business. Operating as an independent subsidiary, TransTech
was a distributor of products for employee and personnel
identification and authentication. TransTech historically provided
substantially all of the Company’s revenues. The financial
results from our TransTech subsidiary had been diminishing as
vendors of their products increasingly moved to the Internet and
direct sales to their customers. TransTech closed on June
30, 2020.
|
2.
|
GOING CONCERN
|
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $13,562,641 and $7,612,316 for the
years ended September 30, 2020 and 2019, respectively. Net cash
used in operating activities was $3,913,803 and $3,104,035 for the
years ended September 30, 2020 and 2019, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of September 30, 2020, the
Company’s accumulated deficit was $55,966,281. The
Company has limited capital resources. These conditions raise
substantial doubt about our ability to continue as a going concern.
The audit report prepared by the Company’s independent
registered public accounting firm relating to our consolidated
financial statements for the year ended September 30, 2020 includes
an explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company believes that its cash on hand will be sufficient to fund
our operations until September 30, 2021. The Company may need additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities and our
operations and financial condition may be materially adversely
affected.
56
|
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 September 30, 2020 is not material and thus no non-controlling
interest is recognized.
Cash and Cash Equivalents – The Company classifies highly liquid
temporary investments with an original maturity of three months or
less when purchased as cash equivalents. The Company maintains cash
balances at various financial institutions. Balances at US banks
are insured by the Federal Deposit Insurance Corporation up to
$250,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk for
cash on deposit. At September 30,
2020, the Company had uninsured
deposits in the amount of $4,048,719.
Accounts Receivable and Revenue – The Company
recognizes revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. For
TransTech, the Company extends thirty day terms to some customers.
Accounts receivable were reviewed periodically for
collectability.
TransTech Systems Inc. sold products directly to customers. the
products were typically sold pursuant to purchase orders placed by
our customers, and our terms and conditions of sale did not require
customer acceptance. We accounted for a contract with a customer
when there is a legally enforceable contract, which could be the
customer’s purchase order, the rights of the parties are
identified, the contract has commercial terms, and collectability
of the contract consideration is probable. The majority of our
contracts had a single performance obligation to transfer products
and are short term in nature, usually less than one year. Our
revenue was measured based on the consideration specified in the
contract with each customer in exchange for transferring products
that is generally based upon a negotiated, formula, list or fixed
price. Revenue is recognized when control of the promised goods is
transferred to our customer, which is either upon shipment from our
dock, receipt at the customer’s dock, or removal from
consignment inventory at the customer’s location, in an
amount that reflects the consideration we expected to be entitled
to receive in exchange for those goods. The Company shut
down TransTech on June 30, 2020.
Allowance for Doubtful Accounts - We maintain an allowance for uncollectible
accounts receivable. It is our practice to regularly review and
revise, when deemed necessary, our estimates of uncollectible
accounts receivable, which are based primarily on actual historical
return rates. We record estimated uncollectible accounts receivable
as selling, general and administrative expense. As of September 30,
2020 and 2019, there was a reserve for sales returns of $0 and
$40,000, respectively, which is minimal based upon our historical
experience. The Company shut down TransTech on June 30,
2020.
Inventories – Inventories
consisted primarily of printers and consumable supplies, including
ribbons and cards, badge accessories, capture devices, and access
control components held for resale and are stated at the lower of
cost or market on the first-in, first-out (“FIFO”)
method. Inventories are considered available for resale
when drop shipped and invoiced directly to a customer from a
vendor, or when physically received by TransTech. The
Company records a provision for excess and obsolete inventory
whenever an impairment has been identified. There is a $0 and
$28,000 reserve for impaired inventory as of September 30, 2020 and
2019, respectively.
Equipment – Equipment
consists of machinery, leasehold improvements, furniture and
fixtures and software, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 2-10 years, except for
leasehold improvements which are depreciated over 5
years.
Long-Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
57
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
$2,033,726 and
$1,257,872 for the years
ended September 30, 2020 and
2019, respectively, on development activities.
Advertising – Advertising
costs are charged to selling, general and administrative expenses
as incurred. Advertising and marketing costs for the years ended
September 30, 2020 and 2019 were $230,844 and $0,
respectively.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
|
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
|
|
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
|
Level 3 - Inputs to the valuation methodology are unobservable
and significant to the fair value measurement.
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 September 30, 2020 and 2019 are based upon the
short-term nature of the assets and liabilities.
The
Company has a money market account which is considered a level 1
asset. The balance as of September 30, 2020 and 2019 was $4,252,959
and $1,901,278, respectively.
The
following table represents a roll-forward of the fair value of the
Simple Agreement for Future Equity (“SAFE”) for which
fair value is determined by Level 3 inputs:
|
Balance
as of October 1, 2019
|
$-
|
|
Proceeds
from issuance of SAFE
|
785,000
|
|
Fair
value adjustment
|
-
|
|
Balance
as of September 30, 2020
|
$785,000
|
Fair
value of the SAFE on issuance was determined to be equal to the
proceeds received (see Note 11). 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 September 30, 2020 and
2019.
58
Stock Based Compensation - The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities. We will evaluate our contracts
based upon the earliest issuance date. In the event partial
reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
Net Loss per Share –
Under the provisions of ASC 260, “Earnings Per Share,”
basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. As of
September 30, 2020, there were options outstanding for the purchase
of 4,805,000 common shares (including unearned stock option grants
totaling 2,630,000 shares related to performance targets), warrants
for the purchase of 20,016,367 common shares, and
8,108,356 shares of the Company’s common stock issuable
upon the conversion of Series C and Series D Convertible Preferred
Stock. In addition, the Company currently has 14,659,764 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 5,639,500 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $7,894,566. All of which could potentially dilute future
earnings per share but excluded from the September 30, 2020
calculation of net loss per share because their impact is
antidilutive.
As of
September 30, 2019, there were options outstanding for the purchase
of 4,532,668 common shares (including unearned stock option grants
totaling 2,410,000 and excluding certain stock option grants for a
cancelled kickstarter program), warrants for the purchase of
17,747,090 common shares, and 8,108,356 shares of the
Company’s common stock issuable upon the conversion of Series
C and Series D Convertible Preferred Stock. In addition, the
Company currently has 13,262,779 common shares (9,020,264 common
shares at the current price of $0.25 per share and 4,242,490 common
shares at the current price of $1.00 per share) that are issuable
upon conversion of convertible debentures of $6,497,581. Issuance
of more shares could potentially dilute future earnings per share
but are excluded from the September 30, 2019 calculation of net
loss per share because their impact is antidilutive.
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 years
ended September 30, 2020 and 2019 and comprehensive loss for those
periods.
Dividend Policy – The
Company has never paid any cash dividends and intends, for the
foreseeable future, to retain any future earnings for the
development of our business. Our future dividend policy will be
determined by the board of directors on the basis of various
factors, including our results of operations, financial condition,
capital requirements and investment
opportunities.
Use of Estimates – The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic
842), which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. The new standard
establishes a right-of-use (“ROU”) model that requires
a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months.
Leases are now classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the statement of operations.
The
Company adopted the new standard on October 1, 2019 using the
modified retrospective method and the transition relief guidance
provided by the FASB in ASU
2018-11, Leases (Topic 842): Targeted Improvements.
Consequently, the Company did not update financial information or
provide disclosures required under the new standard for dates and
periods prior to October 1, 2019. The Company elected the package
of practical expedients and did not reassess prior conclusions on
whether contracts are or contain a lease, lease classification, and
initial direct costs. In addition, the Company adopted the lessee
practical expedient to combine lease and non-lease components for
all asset classes and elected to not recognize ROU assets and lease
liabilities for leases with a term of 12 months or
less.
In
August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40).
The amendment is meant to simplify the accounting for convertible
instruments by removing certain separation models in subtopic
470-20 for convertible instruments. The amendment also
changed the method used to calculate dilutes EPS for convertible
instruments and for instruments that may be settled in cash. The
amendment is effective
for years beginning after December 15, 2021, including interim
periods for those fiscal years. We are currently evaluating the
impact of adoption this standard on the Company’s consolidated financial statements
and related disclosures.
59
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. ACCOUNTS RECEIVABLE
Accounts receivable were $0 and $63,049, net of allowance, as of
September 30, 2020 and 2019, respectively. The Company has a total
allowance for bad debt in the amount of $0 and $40,000 as of
September 30, 2020 and 2019, respectively. The decrease
is due to the shutdown of TransTech on June 30, 2020.
5. INVENTORIES
Inventories were $0 and $7,103 as of September 30, 2020 and 2019,
respectively. Inventories consisted primarily of printers and
consumable supplies, including ribbons and cards, badge
accessories, capture devices, and access control components held
for resale related to our TransTech business which shut down on
June 30, 2020. There was a $0 and $28,000 reserve for impaired
inventory as of September 30, 2020 and 2019,
respectively.
6. FIXED ASSETS
Property and equipment as of September 30, 2020 and 2019 was
comprised of the following:
|
|
Estimated
|
|
|
|
|
Useful Lives
|
September 30, 2020
|
September 30, 2019
|
|
Machinery
and equipment
|
2-10
years
|
$355,271
|
$412,238
|
|
Leasehold
improvements
|
2-3
years
|
3,612
|
3,612
|
|
Furniture
and fixtures
|
2-3
years
|
26,855
|
58,051
|
|
Software
and websites
|
3-
7 years
|
-
|
35,830
|
|
Less:
accumulated depreciation
|
|
(257,067)
|
(379,259)
|
|
|
$128,671
|
$130,472
|
|
Total depreciation expense was $69,655 and $86,016 for the year ended September 30, 2020
and 2019, respectively. All equipment
is used for selling, general and administrative purposes and
accordingly all depreciation is classified in selling, general and
administrative expenses.
The
Company retired assets at TransTech with a net book value of $4,358
as of June 30, 2020. TransTech was shut down on June 30,
2020.
7. INTANGIBLE ASSETS
Intangible assets as of September 30, 2020 and 2019 consisted of
the following:
|
|
Estimated
|
September 30,
|
September 30,
|
|
|
Useful Lives
|
2020
|
2019
|
|
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
|
Less:
accumulated amortization
|
|
(418,886)
|
(245,554)
|
|
Intangible
assets, net
|
|
$101,114
|
$274,446
|
60
Total amortization expense was $173,332 and $173,331 for the years
ended September 30, 2020 and 2019, respectively.
Merger with RAAI Lighting, Inc.
On April 10, 2018, the Company entered into an Agreement and Plan
of Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
The fair value of the intellectual property associated with the
assets acquired was $520,000 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
8. ACCOUNTS PAYABLE
Accounts payable were $487,810 and $810,943 as of September
30, 2020 and 2019, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases and technology
development, external audit, legal and other expenses incurred by
the Company.
9. LEASES
The
Company has entered into operating leases for office and
development facilities. These leases have terms which range from
two to three years and include options to renew. These operating
leases are listed as separate line items on the Company's September
30, 2020 and September 30, 2019 Consolidated Balance Sheets and
represent the Company’s right to use the underlying asset for
the lease term. The Company’s obligation to make lease
payments are also listed as separate line items on the Company's
September 30, 2020 and 2019 Consolidated Balance Sheets. Based on
the present value of the lease payments for the remaining lease
term of the Company's existing leases, the Company recognized
right-of-use assets and lease liabilities for operating leases of
approximately $250,000 on October 1, 2018. Operating lease
right-of-use assets and liabilities commencing after October 1,
2018 are recognized at commencement date based on the present value
of lease payments over the lease term. During the year ended
September 30, 2020 and 2019, the Company had one lease expire and
recognized the rent payments as an expense in the current period.
As of September 30, 2020 and 2019, total right-of-use assets and
operating lease liabilities for remaining long term lease was
approximately $132,000 and $246,000, respectively. In the year
ended September 30, 2020 and 2019, the Company recognized
approximately $136,718 and $133,996, respectively in total lease
costs for the leases.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the year ended September 30, 2020
was as follows:
Cash paid for ROU
operating lease liability $136,738
Weighted-average
remaining lease term 1.3 years
Weighted-average
discount rate 7%
The
minimum future lease payments as of September 30, 2020 are as
follows:
|
Year
|
$
|
|
2021
|
$113,553
|
|
2022
|
23,968
|
|
Imputed
interest
|
(5,486)
|
|
Total
lease liability
|
$132,035
|
10. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of September 30, 2020 and 2019
consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve $1,071,000 under convertible
promissory or OID notes. The Company recorded accrued interest of
$71,562 and $62,171 as of September 30, 2020 and 2019, respectively. On May 8, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to September 30, 2019. On November
26, 2019, the Company signed Amendments to the convertible
promissory or OID notes, extending the due dates to June 30, 2020.
Mr. Struve also invested $1,000,000 in the May 2019 Debt Offering.
On May 11, 2020, the Company signed Amendments to the convertible
promissory or OID notes, extending the due dates to September 30,
2020. On December 23, 2020, the Company signed Amendments to the
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
61
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On
March 16, 2018, the Company entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020. On May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 2020. On December
8, 2020, the Company signed Amendment 4 to the convertible
promissory or OID notes, extending the due dates to March 31,
2021.
Convertible Debt Offering which Closed May 28, 2019
On May
28, 2019, the Company closed additional rounds of a debt offering
and received gross proceeds of $4,242,515 in exchange for issuing
Subordinated Convertible Notes (the “Convertible
Notes”) and Warrants (the “Warrants”) in a
private placement to 54 accredited investors, pursuant to a series
of substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents. The Convertible Notes will
be automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
The
Convertible Notes had an original principal amount of $4,242,515
and bear annual interest of 8%. Both the principal amount and the
interest are payable on a payment-in-kind basis in shares of Common
Stock of the Company (the “Common Stock”).
The
Warrants were granted on a 1:0.5 basis (one-half Warrant for each
full share of Common Stock into which the Convertible Notes are
convertible). The Warrants have a five-year term and an exercise
price equal to 120% of the per share conversion price of the
Qualified Financing or other mandatory conversion.
The
Convertible Notes are initially convertible into 4,242,515 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 2,121,258 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $361,401
and warrants to purchase 542,102 shares of the Company’s
common stock, all based on 8-10% of gross proceeds to the Company.
The placement agent has also received a $25,000 advisory fee. The
warrants issued for these services had a fair value of $1,072,095
at the date of issuance. The fair value of the warrants was
recorded as debt discount (with an offset to APIC) and will be
amortized over the one-year term of the Convertible Notes. The
$361,401 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
As part
of the Purchase Agreement, the Company entered into a Registration
Rights Agreement, which grants the investors “demand”
and “piggyback” registration rights to register the
shares of Common Stock issuable upon the conversion of the
Convertible Notes and the exercise of the Warrants with the
Securities and Exchange Commission for resale or other disposition.
In addition, the Convertible Notes are subordinated to certain
senior debt of the Company pursuant to a Subordination Agreement
executed by the investors.
The
Convertible Notes and Warrants were issued in transactions that
were not registered under the Securities Act of 1933, as amended
(the “Act”) in reliance upon applicable exemptions from
registration under Section 4(a)(2) of the Act and/or Rule 506 of
SEC Regulation D under the Act.
In
accordance to ASC 470-20-30, Debt with Conversion and Other
Options, the guidance therein applies to both convertible debt and
other similar instruments, including convertible preferred shares.
The guidance states that “the allocation of proceeds shall be
based on the relative fair values of the two instruments at time of
issuance. When warrants are issued in conjunction with a debt
instrument as consideration in purchase transactions, the amounts
attributable to each class of instrument issued shall be determined
separately, based on values at the time of issuance. The debt
discount or premium shall be determined by comparing the value
attributed to the debt instrument with the face amount
thereof.
In
conjunction with the issuance of Convertible Notes and the
Warrants, the Company recorded a debt discount of $2,857,960
associated with a beneficial conversion feature on the debt, which
is being accreted using the effective interest method over the
one-year term of the Convertible Notes. Intrinsic value of the
beneficial conversion feature was calculated at the commitment date
as the difference between the conversion price and the fair value
of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible. In accordance to ASC 470-20-30, if the intrinsic value
of the beneficial conversion feature is greater than the proceeds
allocated to the convertible instrument, the amount of the discount
assigned to the beneficial conversion feature shall be limited to
the amount of the proceeds allocated to the convertible
instrument.
62
The
Warrants were indexed to our own stock and no down round provision
was identified. The Warrants were not subject to ASC 718.
Therefore, the Company concluded that based upon the conversion
features, the Warrants should not be accounted for as derivative
liabilities. The fair value of the Warrants was $1,384,530 and was
recorded as Debt Discount (with an offset to APIC) on the date of
issuance and amortized over the one-year term of the
notes.
During the year ended September 30, 2020, the Company issued
4,581,917 shares of common
stock related to the automatic conversion of Convertible
Notes and interest from a private placement to accredited investors
in 2019. The Convertible Notes and interested were automatically
converted to Common Stock at $1.00 per share on the one year
anniversary starting on February 15, 2020.
Convertible Debt Offering during the year ended September 30,
2020
During
the year ended September 30, 2020, the Company closed additional
rounds of a debt offering and received gross proceeds of $5,639,500
in exchange for issuing Subordinated Convertible Notes and Warrants
in a private placement to accredited investors, pursuant to a
series of substantially identical Securities Purchase Agreements,
Common Stock Warrants, and related documents.
The
Convertible Notes are initially convertible into 5,639,500 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 2,819,750 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
The
fair value of the Warrants issued to debt holders was $1,824,998 on
the date of issuance and will be amortized over the one-year term
of the Convertible Notes.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $529,965
and warrants to purchase 615,675 shares of the Company’s
common stock, all based on 6.3-8%% of gross proceeds to the
Company. The warrants issued for these services had a fair value of
$1,016,797 at the date of issuance. The fair value of the warrants
was recorded as debt discount (with an offset to APIC) and will be
amortized over the one-year term of the Convertible Notes. The
$529,965 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
The
Company recorded a debt discount of $3,766,074 associated with a
beneficial conversion feature on the debt, which is being accreted
using the effective interest method over the one-year term of the
Convertible Notes.
During
the year ended September 30, 2020, amortization related to the 2019
and 2020 debt offerings of $5,662,690 of the beneficial conversion
feature, warrants issued to debt holders and placement agent was
recognized as interest expense in the consolidated statements of
operations.
Convertible
notes payable as of September 30, 2020 and 2019 are summarized
below:
|
|
September 30,
2020
|
September 30,
2019
|
|
Convertible
note- Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
|
Convertible
note- Ronald P. Erickson and affiliates
|
1,184,066
|
1,184,066
|
|
2019
Convertible notes
|
4,242,490
|
4,242,515
|
|
Q1
2020 Convertible notes
|
520,000
|
-
|
|
Q2
2020 Convertible notes
|
195,000
|
-
|
|
Q3
2020 Convertible notes
|
4,924,500
|
-
|
|
Bousted
fee refund (originally booked as contra debt)
|
50,000
|
-
|
|
Less
conversions of 2019 notes
|
(4,242,490)
|
-
|
|
Less
debt discount - BCF
|
(2,127,894)
|
(1,273,692)
|
|
Less
debt discount - warrants
|
(1,025,512)
|
(616,719)
|
|
Less
debt discount - warrants issued for services
|
(823,582)
|
(652,919)
|
|
|
$3,967,578
|
$3,954,251
|
63
Note Payable
On April 30, 2020, the Company received $226,170 under the
Paycheck Protection Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES
Act), Pub. Law 116-136, 134 Stat. 281 (2020). During the year ended
September 30, 2020, the Company recorded interest expense of $960.
The Company is utilizing the funds in accordance with the legal
requirements and expects this loan to be forgiven. Until the loan
is legally forgiven, the loan balance will outstanding. The Company
expects to start the application for the loan forgiveness during
the three months ended December 31, 2020.
|
11.
|
SIMPLE AGREEMENTS FOR FUTURE EQUITY
|
In July 2020, Particle entered into Simple Agreements for Future
Equity (“SAFE”) with twenty two accredited investors
pursuant to which Particle received $785,000 in cash in exchange
for the providing the investor the right to receive shares of the
Particle stock. The Company expects to issue 981,250 shares of the
Particle stock that was initially valued at $0.80 per share. The
Company paid $47,100 in broker fees which were expensed as business
development expenses. The SAFE contained a number of conversion and
redemption provisions, including settlement upon liquidity or dissolution events.
The final price and shares are not known until settlement upon
liquidity or dissolution events conditions are achieved. The
Company elected the fair value option of accounting for the
SAFE.
12. EQUITY
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
As of
September 30, 2020, the Company had 24,804,874 shares of common
stock issued and outstanding, held by 123 stockholders of record.
The number of stockholders, including beneficial owners holding
shares through nominee names, is approximately 2,300. Each share of
common stock entitles its holder to one vote on each matter
submitted to the stockholders for a vote, and no cumulative voting
for directors is permitted. Stockholders do not have any
preemptive rights to acquire additional securities issued by the
Company. As of September 30, 2020, there were options
outstanding for the purchase of 4,805,000 common shares (including
unearned stock option grants totaling 2,630,000 shares related to
performance targets), warrants for the purchase of 20,016,367
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and are issuable upon conversion of
convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share.
Voting Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of
preferred stock with a par value of $0.001.
Series A Preferred Stock
There are 23,334 shares of Series A Preferred shares authorized.
Series A Preferred is entitled to the number of votes equal to the
number of whole shares of common stock into which the shares of
Series A Preferred held by such holder are then convertible as of
the applicable record date. The Series A Preferred was not be
redeemable without the consent of the holder.
On January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock. There are no
Series A Preferred Stock outstanding as of January 29,
2019.
On December 14, 2020, the Company cancelled the Certificate of
Designations for the Series A Preferred Stock.
64
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 September 30, 2020
and September 30, 2019 there are
1,785,715 Series C Preferred shares
outstanding.
As of September 30, 2020, and
September 30, 2019, the Company has 1,016,014 of Series D Preferred Stock outstanding
with Clayton A. Struve, an accredited investor. On August 14, 2017, the price of the
Series D Stock were adjusted to
$0.25 per share pursuant to the
documents governing such instruments.
The
Series D Preferred Stock is convertible into shares of common stock
at a price of $0.25 per share or by multiplying the number of
Series D Preferred Stock shares by the stated value and dividing by
the conversion price then in effect, subject to certain diluted
events, and has the right to vote the number of shares of common
stock the Series D Preferred Stock would be issuable on conversion,
subject to a 4.99% blocker. The
Preferred Series D has an annual yield of 8% The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% if and when dividends are
declared.
Series F Preferred Stock
On August 1, 2018, the Company filed with the State of Nevada a
Certificate of Designation establishing the Designations,
Preferences, Limitations and Relative Rights of Series F Preferred
Stock. The Designation authorized 500 shares of Series F Preferred
Stock. The Series F Preferred Stock shall only be issued to the
current Board of Directors on the date of the Designation’s
filing and is not convertible into common stock. As set forth in
the Designation, the Series F Preferred Stock has no rights to
dividends or liquidation preference and carries rights to vote
100,000 shares of common stock per share of Series F upon a Trigger
Event, as defined in the Designation. A Trigger Event includes
certain unsolicited bids, tender offers, proxy contests, and
significant share purchases, all as described in the Designation.
Unless and until a Trigger Event, the Series F shall have no right
to vote. The Series F Preferred Stock shall remain issued and
outstanding until the date which is 731 days after the issuance of
Series F Preferred Stock (“Explosion Date”), unless a
Trigger Event occurs, in which case the Explosion Date shall be
extended by 183 days. As of September 30, 2020 and September 30,
2019, there are no Series F shares outstanding.
Securities Subject to Price Adjustments
In the
future, if the Company sells its common stock at a price below
$0.25 per share, the exercise price of
8,108,356 outstanding shares of Series C and D Preferred Stock that
adjust below $0.25 per share pursuant to the documents governing
such instruments. In addition, the conversion price of Convertible
Notes Payable of $7,894,566 or 14,659,764 common shares (9,020,264
common shares at the current price of $0.25 per share and 5,639,500
common shares at the current price of $1.00 per share) and the exercise price of additional outstanding
warrants to purchase 12,588,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments. Warrants totaling 5,191,636 would adjust below $1.20
per share pursuant to the documents governing such
instruments.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants. The stock option grant
had an exercise price of $0.25 per share.
During the year ended September 30, 2020, the Company issued
550,000 shares of restricted common stock for services. The shares
were issued were valued at $1.90 per share, the market price of our
common stock, or $1,045,000.
65
During the year ended September 30, 2020, the Company issued
4,581,917 shares of common
stock related to the automatic conversion of Convertible
Notes and interest from a private placement to accredited investors
in 2019. The Convertible Notes and interested were automatically
converted to Common Stock at $1.00 per share on the one year
anniversary starting on February 15, 2020.
During the year ended September 30, 2020, the Company issued
733,588 shares of common stock at
$0.889 per share related to the exercise of
warrants.
On July 1, 2020, the Company entered into a Settlement Agreement
and General Mutual Release with a shareholder of the Company. On
July 6, 2020, the shareholder paid $125,000 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 which represents the
difference between the fair market value of the stock and $125,000
paid by the shareholder.
The following equity issuances occurred during the year ended
September 30, 2019:
During the year ended September 30, 2019, the Company issued
509,656 shares of common stock at $0.25 per share to consultants
and investors related to the cashless exercise of
warrants.
During the year ended September 30, 2019, the Company issued
145,000 shares of common stock for services provided by two
consultants. The common stock was valued at the daily trading price
of totaling $246,900 or $1.703 per share.
On January 2, 2019, the Company issued 100,000 shares of common
stock for services provided to Ronald P. Erickson. The shares were
valued at $102,000 or $1.02 per share.
On
January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the year ended
September 30, 2020:
During the year ended September 30, 2020, the Company issued
733,588 shares of common stock at
$0.952 per share and cancelled warrants to purchase 507,560
shares of common stock at $$1.120 per
share to related to the exercise of warrants.
During the year ended September 30, 2020, the Company issued
75,000 shares of common stock at $1.95
per share. The warrant was valued at $1.770 per
share.
Convertible Debt Offering Warrants
The
Warrants issued for the 2020 convertible Debt Offering were granted
on a 1:0.5 basis (one-half Warrant for each full share of Common
Stock into which the Convertible Notes are convertible). The
Warrants have a five-year term and an exercise price equal to 120%
of the per share conversion price of the Qualified Financing or
other mandatory conversion.
Warrants
issued in connection with 2020 convertible debt offering are
initially exercisable for 2,819,750 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
In
connection with the 2020 convertible debt offering, the placement
agent for the Convertible Notes and the Warrants received warrants
to 615,675 shares of the Company’s common stock, all based on
8% of gross proceeds to the Company.
The following warrants were issued during the year ended September
30, 2019:
The Company cancelled warrants to purchase 70,011 shares of common
stock at $3.08 per share to consultants and investors related to
the cashless exercise of warrants or expiration of
warrants.
The Company issued warrants to purchase 70,000 shares of common
stock at $1.61 to $2.72 per share to three consultants. The
warrants were valued at $30,325 or $1.989 per share. The warrants
expire during the first quarter of 2024.
The Company increased warrants by 120,000 shares at $0.25 per
shares related to the June 28, 2019 exercise of warrants by
a holder of Series A Preferred Stock.
Private Placement Warrants
The
Warrants issued for the private placements discussed above were
granted on a 1:0.5 basis (one-half Warrant for each full share of
Common Stock into which the Convertible Notes are convertible). The
Warrants have a five-year term and an exercise price equal to 120%
of the per share conversion price of the Qualified Financing or
other mandatory conversion.
66
Warrants
are initially exercisable for 2,121,258 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
In
connection with the private placement, the placement agent for the
Convertible Notes and the Warrants received warrants to purchase
542,102 shares of the Company’s common stock, all based on
8-10% of gross proceeds to the Company.
A
summary of the warrants outstanding as of September 30,
2020 were as
follows:
|
|
September 30,
2020
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Shares
|
Price
|
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
|
Issued
|
3,510,425
|
1.216
|
|
Exercised
|
(733,588)
|
(0.952)
|
|
Forfeited
|
(507,560)
|
(1.120)
|
|
Expired
|
-
|
-
|
|
Outstanding
at end of period
|
20,016,367
|
$0.556
|
|
Exerciseable
at end of period
|
20,016,367
|
|
The following table summarizes information about warrants
outstanding and exercisable as of September 30,
2020:
|
|
September 30, 2020
|
|||
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
Average
|
Average
|
|
Average
|
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
|
13,133,286
|
1.76
|
$0.250
|
13,133,286
|
$0.250
|
|
714,286
|
0.83
|
0.700
|
714,286
|
0.700
|
|
882,159
|
1.12
|
1.000
|
882,159
|
1.000
|
|
5,191,636
|
4.12
|
1.20-1.50
|
5,191,636
|
1.20-1.50
|
|
95,000
|
4.19
|
2.00-4.08
|
95,000
|
2.34-4.08
|
|
|
|
|
|
|
|
20,016,367
|
3.04
|
$0.556
|
20,016,367
|
$0.556
|
|
|
|
|
|
|
67
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the year ended September
30, 2020 were as
follows:
|
Assumptions
|
|
|
Dividend
yield
|
0%
|
|
Expected
life
|
5 years
|
|
Expected
volatility
|
176%-177%
|
|
Risk
free interest rate
|
1.51%-1.71%
|
There were vested and in the money warrants of 19,996,367
with an aggregate intrinsic value of
$35,329,983.
|
13.
|
STOCK INCENTIVE PLANS
|
Know Labs, Inc.
On
January 23, 2019, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 2,200,000 to 2,500,000 to
common shares. On May 22, 2019, the Compensation Committee
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 2,500,000 to 3,000,000 to common shares. See Note 18 for
increase in option pool subsequent to September 30,
2020.
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
year ended September 30, 2020:
During the year ended September 30, 2020, the Company granted stock
option grants to executives, directors and consultants for
3,085,000 shares with a weighted
average exercise price of $1.142 per share. The grants expire in
five years and generally vest quarterly over four years. Stock
option grants totaling 2,630,000 shares of common stock are performance stock
option grants and are not vested until the performance is
achieved.
During the year ended September 30, 2020, executives and employees
voluntarily cancelled stock option grants for 2,739,477
shares with a weighted average
exercise price of $2.593 per share.
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants totaling 93,750 shares.
The stock option grant had an exercise price of $0.25 per
share.
There are currently 4,805,000 (including unearned stock option
grants totaling 2,630,000 shares related to performance targets)
options to purchase common stock at an
average exercise price of $1.161 per share outstanding as of
September 30, 2020 under the 2011
Stock Incentive Plan. The Company recorded $868,314
and $1,141,674 of compensation
expense, net of related tax effects, relative to stock options for
the years ended September 30, 2020 and 2019 and in accordance with ASC 718. As
of September 30, 2020, there is
approximately $361,947, net of
forfeitures, of total unrecognized costs related to employee
granted stock options that are not vested. These costs are expected
to be recognized over a period of approximately 3.67
years.
68
The Company had the following stock option transactions during the
year ended September 30, 2019:
On
October 31, 2018, the Board awarded stock option grants to two
directors to acquire 50,000 shares each of the Company’s
common stock. The grants had an exercise price of $3.03 per share
and expire on October 31, 2023. The grants vested
immediately.
On
October 31, 2018, the Board awarded Phillip A. Bosua a stock option
grant to acquire 1,000,000 shares of the Company’s common
which vests upon approval of the Company’s blood glucose
measurement technology by the U.S. Food and Drug Administration.
The grants had an exercise price of $3.03 per share and expire on
October 31, 2023.
On
October 31, 2018, the Board awarded Ronald P Erickson a stock
option grant to acquire 1,000,000 shares of the Company’s
common which vests upon the Company’s successful listing of
its Common Stock on NASDAQ or the New York Stock Exchange
(including the NYSE American Market). The grant had an exercise
price of $3.03 per share and expires on October 31,
2023.
On
March 26, 2019, the Board awarded two employees stock option grants
totaling 260,000 shares of the Company’s common which vests
upon approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grant had
an exercise price of $1.50 per share and expires on March 26,
2024.
During
April 2019, the Board awarded stock option grants to two employees
and a consultant to acquire 185,000 shares of the Company’s
common stock. The grants had an exercise price from $1.39 per share
to $1.90 per share and expire during April 2024. Grants totaling
10,000 common shares vested immediately and grants totaling 50,000
vests quarterly over three years. Grants totaling 125,000 common
shares vest quarterly over four years, with no vesting during the
first six months.
On
April 15, 2019, the Board awarded an employee was granted a stock
option grant to acquire 50,000 shares of the Company’s common
which vests upon approval of the Company’s blood glucose
measurement technology by the U.S. Food and Drug Administration.
The grants had an exercise price of $1.50 per share and expire on
April 15, 2024.
During
July and August of 2019, the Board awarded stock option grants to
four consultants to acquire 275,000 shares of the Company’s
common stock. The grants have an exercise price from $1.34 per
share to $1.40 per share and expire during July and August 2024.
Grants totaling 10,000 common shares vested immediately and grants
totaling 50,000 vest quarterly over three years. Grants totaling
15,000 common shares vest monthly over six months. A grant of
100,000 shares of common stock vests quarterly over four years,
with no vesting during the first six months. A grant for 100,000
shares of common stock vests quarterly over four years, with no
vesting during the first six months. A grant for 100,000 shares of
common stock vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration.
During
the year ended September 30, 2019, the Board four employees a stock
option grants to acquire 125,000 shares of the Company’s
Common stock for each $1,000,000 raised by the Company in revenue
generated in a planned Kickstarter campaign at a price range for
$1.50 to $3.03 per share. During the year ended September 30, 2019,
the Company recently decided that it would not undertake a
Kickstarter campaign. Options are expected to be cancelled or have
alternative Company milestones.
During the year ended September 2019, stock option grants for
520,000 shares of common stock with an exercise price ranging from
$3.03 to $4.20 per share were forfeited.
Stock option activity for the years ended September 30, 2020 and
2019 was as follows:
|
|
|
Weighted
Average
|
|
|
|
Options
|
Exercise
Price
|
$
|
|
Outstanding as of
September 30, 2018
|
2,182,668
|
$1.698
|
$3,706,519
|
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
|
Outstanding as of
September 30, 2019
|
4,532,668
|
2.025
|
9,180,369
|
|
Granted
|
3,085,000
|
1.142
|
3,522,400
|
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
|
Forfeitures
|
(2,739,477)
|
(2.593)
|
(7,103,921)
|
|
Outstanding as of
September 30, 2020
|
4,805,000
|
$1.161
|
$5,580,550
|
|
|
|
|
|
69
The following table summarizes information about stock options
outstanding and exercisable as of September 30,
2020:
|
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
|
Average
|
Average
|
|
Average
|
|
Range of
|
Number
|
Remaining Life
|
Exercise Price
|
Number
|
Exercise Price
|
|
Exercise Prices
|
Outstanding
|
In Years
|
Outstanding
|
Exerciseable
|
Exerciseable
|
|
$0.25
|
230,000
|
2.71
|
$0.250
|
129,375
|
$0.250
|
|
1.10-1.25
|
2,940,000
|
4.10
|
1.10
|
306,250
|
1.103
|
|
1.28-1.52
|
1,500,000
|
4.10
|
1.33
|
695,313
|
1.310
|
|
1.79-2.25
|
135,000
|
3.75
|
1.37
|
66,250
|
1.961
|
|
|
4,805,000
|
3.67
|
$1.161
|
1,197,188
|
$1.158
|
There were in the money stock option grants of 4,805,000
shares as of September 30, 2020 with
an aggregate intrinsic value of $5,446,854.
Particle, Inc.
On May
21, 2020, Particle approved a 2020 Stock Incentive Plan and
reserved 8,000,000 shares under the Plan. The Plan requires vesting
annually over four years, with no vesting in the first two
quarters.
During
July 2020, Particle approved stock option grants to non-executive
employees and consultants totaling 2,250,000 shares at an average
of $0.147 per share. The stock option grants vest annually over
four years, with no vesting in the first two quarters.
On July
2, 2020, Particle approved stock option grants for 1,500,000 shares
at $0.10 per share to both Phillip A. Bosua and Ronald P. Erickson.
The stock option grants vest (i) 33.3% upon issuance; (ii) 33.3%
after the first sale; and (iii) 33.4% after one million in sales
are achieved. The 500,000 vests stock option grants for both Mr.
Bosua and Erickson were valued at $0.788 per share or
$394,000.
The Company recorded $833,771 and $0 of compensation expense, net of related tax
effects, relative to stock options for the years ended September
30, 2020 and 2019 and in
accordance with ASC 718. As of September 30,
2020, there is approximately
$840,729, net of forfeitures,
of total unrecognized costs related to employee granted stock
options that are not vested. These costs are expected to be
recognized over a period of approximately 3.77
years.
The following table summarizes information about Particle stock
options outstanding and exercisable as of September 30,
2020:
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Average
|
Weighted
|
|
Average
|
|
Range of
|
Number
|
Remaining Life
|
Average
|
Number
|
Exercise Price
|
|
Exercise Prices
|
Outstanding
|
In Years
|
Exercise Price
|
Exerciseable
|
Exerciseable
|
|
$0.10
|
5,100,000
|
4.76
|
$0.10
|
1,116,170
|
$0.10
|
|
0.80
|
150,000
|
5.00
|
$0.80
|
-
|
-
|
|
|
|
|
|
|
|
|
|
5,250,000
|
4.77
|
$0.12
|
1,116,170
|
$0.10
|
There were in the money stock option grants of 1,116,170
shares as of September 30, 2020 with
an aggregate intrinsic value of $758,996.
70
|
14.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Notes 10, 13 and 15 for related party transactions with Ronald
P. Erickson.
On
March 16, 2018, the Company entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020. On May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 2020. On December
8, 2020, the Company signed Amendment 4 to the convertible
promissory or OID notes, extending the due dates to March 31,
2021.
On January 2, 2019, Mr. Erickson was issued 100,000 shares of
restricted common stock at the grant date market value of $1.02 per
share.
On October 4, 2019, Ronald P. Erickson voluntarily cancelted a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Ronald P. Erickson for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon uplisting to the NASDAQ or NYSE exchanges.
On January 1, 2020, the Company issued 100,000 shares of restricted
common stock to Ronald P. Erickson. The shares were issued in
accordance with the 2011 Stock Incentive Plan and were valued at
$1.90 per share, the market price of the Company’s common
stock, or $190,000.
On June 1, 2020, Mr. Erickson received a salary of $10,000 per
month for work on Particle, Inc.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $597,177
and $487,932 as of September 30, 2020 and 2019,
respectively.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Ronald P. Erickson. The stock option grant
vests (i) 33.3% upon issuance; (ii) 33.3% after the first sale; and
(iii) 33.4% after one million in sales are achieved.
Related Party Transaction with Phillip A. Bosua
On October 4, 2019, Philip A. Bosua voluntarily cancelled a stock
option grant for 1,000,000 shares with an exercise price of $3.03
per share. The grants was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Philip A. Bosua for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon FDA approval of the UBAND blood glucose
monitor.
On January 1, 2020, the Company issued 150,000 shares of restricted
common stock to Phillip A. Bosua. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$285,000.
On June 1, 2020, Mr. Bosua received a salary of $10,000 per month
for work on Particle, Inc.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Philip A.
Bosua. The stock option grant vests (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved.
Stock Issuances and Cancellations to Named Executive Officers and
Directors
During the year ended September 30, 2019, two directors voluntarily
forfeited stock option grants for 100,000 shares of common stock at
$3.03 per share.
71
On November 4, 2019, the Company granted stock option grants to two
directors totaling 105,000 shares with an exercise price of $1.10
per share. The stock option grants expire in five years. The stock
option grants vested immediately.
On January 1, 2020, the Company issued 120,000 shares of restricted
common stock to three directors. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$228,000.
15. 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
Phillip A. Bosua was appointed our Chief Executive Officer on April
10, 2018. Previously, Mr. Bosua served as the Company’s Chief
Product Officer since August 2017. The Company entered into a
Consulting Agreement with Mr. Bosua’s company, Blaze Clinical
on July 7, 2017. From September 2012 to February 2015, Mr. Bosua
was the founder and Chief Executive Officer of LIFX Inc. (where he
developed and marketed an innovative “smart” light
bulb) and from August 2015 until February 2016 was Vice President
Consumer Products at Soraa (which markets specialty LED light
bulbs). From February 2016 to July 2017, Mr. Bosua was the founder
and CEO of RAAI, Inc. (where he continued the development of his
smart lighting technology). From May 2008 to February 2013 he was
the Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, the Company entered into an Employment Agreement
with Mr. Bosua reflecting his appointment as Chief Executive
Officer. The Employment Agreement is for an initial term of 12
months (subject to earlier termination) and will be automatically
extended for additional 12-month terms unless either party notifies
the other party of its intention to terminate the Employment
Agreement with at least ninety (90) days prior to the end of
the Initial Term or renewal term. Mr.
Bosua was paid a base salary of $225,000 per year, received 500,000
shares of common stock valued at $0.33 per share and may be
entitled to bonuses and equity awards at the discretion of the
Board or a committee of the Board. The Employment Agreement
provides for severance pay equal to 12 months of base salary if Mr.
Bosua is terminated without “cause” or voluntarily
terminates his employment for “good reason.”
From March 5, 2019 to May 1, 2020, the annual compensation
was $240,000, and from May 5, 2020 to September 30, 2020, the
annual compensation was $260,000. The Compensation Committee and the Board of Particle,
Inc. compensated Phillip A. Bosua with an annual salary of $120,000
from June 1, 2020.
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
On April 10, 2018, the Company entered into an Amended Employment
Agreement for Ronald P. Erickson which amends the Employment
Agreement dated July 1, 2017. The Agreement expires March 21,
2019. automatically be extended for additional one (1) year
periods unless either Party delivers written notice of such
Party’s intention to terminate this Agreement at least ninety
(90) days prior to the end of the Initial Term or renewal
term.
Mr.
Erickson’s annual compensation was $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus. From
October 1, 2018 to March 4, 2019,
from March 5, 2019 to May 1, 2020, the annual compensation
was $195,000, and from May 5, 2020 to September 30, 2020, the
annual compensation was $215,000. The Compensation Committee and the Board of Particle
Inc. compensated Ronald P. Erickson with an annual salary of
$120,000 from June 1, 2020.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by the Company to its senior executives
and management employees from time to time, subject to the terms
and conditions of such benefit plans, including any eligibility
requirements.
If the Company terminates Mr. Erickson’s employment at any
time prior to the expiration of the Term without Cause, as defined
in the Employment Agreement, or if Mr. Erickson terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
Properties and Operating Leases
The Company is obligated under the following leases for its various
facilities.
72
Corporate Offices
On April 13, 2017, the Company leased its executive office located
at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101.
The Company leases 943 square feet and the net monthly payment is
$2,672. The monthly payment increases approximately 3% each year
and the lease expires on May 31, 2022.
Lab Facilities and Executive Offices
On
February 1, 2019, the Company leased its lab facilities and
executive offices located at 915 E Pine Street, Suite 212, Seattle,
WA 98122. The Company leases 2,642 square feet and the net monthly
payment is $8,256. The monthly payment increases approximately 3%
on July 1, 2019 and annually thereafter. The lease expires on June
30, 2021 and can be extended.
On June
26, 2020, the Company leased temporary lab facilities located at
3131 Western Avenue, Suite A350, Seattle, WA 98121. The Company
leased 5,707 square feet and the net monthly payment is $11,414.
The lease was terminated August 31, 2020.
16. INCOME TAXES
The
Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise from United States
sources.
Pretax
losses arising from United States operations were approximately
$4,077,000 and $2,957,000 for the years ended September 30, 2020
and 2019.
The
Company has net operating loss carryforwards of approximately
$36,209,000 which expire in 2021-2038. Because it is not more
likely than not that sufficient tax earnings will be generated to
utilize the net operating loss carryforwards, a corresponding
valuation allowance of approximately $8,248,000 was established as
of September 30, 2020. Additionally, under the Tax Reform Act of
1986, the amounts of, and benefits from, net operating losses may
be limited in certain circumstances, including a change in
control.
Section 382
of the Internal Revenue Code generally imposes an annual limitation
on the amount of net operating loss carryforwards that may be used
to offset taxable income when a corporation has undergone
significant changes in its stock ownership. There can be no
assurance that the Company will be able to utilize any net
operating loss carryforwards in the future. The Company is subject
to possible tax examination for the years 2013 through
2020.
For the year ended September 30, 2020, the Company’s
effective tax rate differs from the federal statutory rate
principally due to net operating losses, interest expense and
warrants issued for services.
The principal components of the Company’s deferred tax assets
at September 30, 2020 and 2019 are as follows:
|
|
2020
|
2019
|
|
U.S. operations
loss carry forward at statutory rate of 21%
|
$6,536,413
|
$6,763,238
|
|
Deferred tax assets
related to timing differences-accruals
|
1,746,486
|
192,897
|
|
Total
|
8,282,899
|
6,956,135
|
|
Less Valuation
Allowance
|
(8,248,637)
|
(6,956,135)
|
|
|
|
|
|
Other
|
(34,263)
|
-
|
|
Deferred tax
liabilities
|
(34,263)
|
-
|
|
|
|
|
|
Net Deferred Tax
Assets
|
-
|
-
|
|
Change in Valuation
allowance
|
$(1,292,502)
|
$(813,996)
|
73
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended September
30, 2020 and 2019 are as follows:
|
|
2020
|
2019
|
|
Federal Statutory
Rate
|
21.0%
|
21.0%
|
|
State
Taxes
|
0.9%
|
0.0%
|
|
Meals
|
0.0%
|
0.0%
|
|
Warrants Int.
Exp.
|
-8.8%
|
0.0%
|
|
PY
True-up
|
-3.8%
|
0.0%
|
|
Increase in Income
Taxes Resulting from:
|
|
|
|
Change
in Valuation allowance
|
-9.3%
|
-21.0%
|
|
Effective Tax
Rate
|
0.0%
|
0.0%
|
As of
September 30, 2020, there were no uncertain tax positions.
Management does not anticipate any future adjustments in the next
twelve months which would result in a material change to its tax
position. For the years ended September 30, 2020 and 2019, the
Company did not have any interest and penalties.
17. SEGMENT REPORTING
The
management of the Company considers the business to have two
operating segments (i) the development of the Bio-RFID™” and
“ChromaID™” technologies; (ii) Particle, Inc.
technology; and (iii) TransTech, a distributor of products for employee
and personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. TransTech was shut down on June 30, 2020. Particle
commenced operations in the three months ended June 30,
2020.
The
reporting for the year ended September 30, 2020 and 2019 was as
follows (in thousands):
|
|
|
|
Segment
|
|
|
|
|
Gross
|
Operating
|
Segment
|
|
Segment
|
Revenue
|
Margin
|
Profit (Loss)
|
Assets
|
|
Year
Ended September 30, 2020
|
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(5,481)
|
$4,360
|
|
Particle,
Inc. technology
|
-
|
-
|
(1,280)
|
322
|
|
TransTech
distribution business
|
122
|
70
|
(65)
|
-
|
|
Total
segments
|
$122
|
$70
|
$(6,826)
|
$4,682
|
|
|
|
|
|
|
|
Year
Ended September 30, 2019
|
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(4,935)
|
$2,882
|
|
TransTech
distribution business
|
1,805
|
427
|
(78)
|
58
|
|
Total
segments
|
$1,805
|
$427
|
$(5,013)
|
$2,940
|
During
years ended September 30, 2020 and 2019, the Company incurred non-cash expenses of
$2,990,072 and $1,867,379.
74
18. 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 September 30, 2020, there
were the following material transactions that require
disclosure:
Convertible Notes Dated October 17, 2019
The
Company issued 561,600
shares of common stock related
to the automatic conversion of Convertible Notes and interest from
a private placement to accredited investors in 2019. The
Convertible Notes and interested were automatically converted to
Common Stock at $1.00 per share on the one year
anniversary.
2011 Stock Incentive Plan
On
November 23, 2020, the Board of Directors increased the size of the
stock available under the Stock Option Plan by 9,750,000 shares.
This increase is based on an industry peer group
study.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On
December 8, 2020, the Company signed Amendment 4 to the $1,184,066
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
Convertible Promissory Notes with Clayton A. Struve
On
December 23, 2020, the Company signed Amendments to the $1,071,000
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
Stock Option Exercises and Issuances
A
consultant exercised a stock option grants on a cashless basis. The
consultant received 3,750 shares of common stock for vested stock
option grants and forfeited 11,250 shares. The stock option grant
had an exercise price of $1.25 per share.
The compensation committee of Particle, Inc. issued a stock option
grant to a consultant for 50,000 shares of Particle common stock.
The stock option grant had an exercise price at $0.80 per share. The grant vests annually over
four years after a six month cliff vesting
period.
The Compensation committee issued a stock option grant to a consultant for 140,000
shares at an exercise price of $1.24 per share. The stock option
grant expires in five years. The stock option grant vests quarterly
over four years after a six month cliff vesting
period.
On
December 15, 2020, the Company issued 30,000 shares each to three
directors shares at an exercise price of $1.53 per
share.
On
December 15, 2020, the Company issued 20,000 warrants to purchase
common stock each to three directors shares at $1.53 per share. The
warrants expire on December 15, 2025.
On
December 15, 2020, the Company issued a warrant for to purchase
common stock for 2,000,000 shares to Ronald P. Erickson at $1.53
per share. The warrants were issued for the extension of loans and
deferral of other expenses. The warrant expires on December 15,
2025.
On
December 15, 2020, the Company stock
option grant to Ronald P. Erickson for 1,865,675 shares at an
exercise price of $1.53 per share. The stock option grant expires
in five years. The stock option grants vest when earned based on
certain performance criteria.
On
December 15, 2020, the Company stock
option grant to Phillip A. Bosua for 2,132,195 shares at an
exercise price of $1.53 per share. The stock option grant expires
in five years. The stock option grants vest when earned based on
certain performance criteria.
Simple Agreement for Future Equity
Particle entered into Simple Agreements for Future Equity
(“SAFE”) with two accredited investors pursuant to
which Particle received $55,000 in cash in exchange for the
providing the investor the right to receive shares of the Particle
stock. The Company expects to issue 44,000 shares of the Particle
stock that was initially valued at $0.80 per share. The Company
paid $1,800 in broker fees which were expensed as business
development expenses.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Know Labs, Inc. (the "Registrant")
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KNOW LABS, INC.
(Registrant)
|
|
|
|
|
|
Date: December 29, 2020
|
By:
|
/s/ Phillip A
Bosua
|
|
|
|
|
Phillip A. Bosua
|
|
|
|
|
Chief Executive Officer, and Director
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date: December 29, 2020
|
By:
|
/s/ Ronald
P. Erickson
|
|
|
|
|
Ronald P. Erickson
|
|
|
|
|
Interim Chief Financial Officer, and Treasurer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
|
/s/ Phillip A. Bosua |
Chief Executive Officer
and Director |
December 29,
2020 |
| Phillip A.
Bosua |
(Principal Executive
Officer) |
|
|
/s/ Ronald P. Erickson |
Chairman of the Board
and Interim Chief Financial Officer and Director |
December 29,
2020 |
|
Ronald P. Erickson
|
(Principal
Financial/Accounting Officer)
|
|
|
|
|
|
|
/s/ Jon Pepper
|
Director
|
December 29, 2020
|
|
Jon Pepper
|
|
|
|
|
|
|
|
/s/ Ichiro Takesako
|
Director
|
December 29, 2020
|
|
Ichiro Takesako
|
|
|
|
/s/ William A. Owens
|
Director
|
December 29, 2020
|
|
William A. Owens
|
|
|
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