USBC, Inc S-1/A, filed Jan 29, 2020
USBC, Inc. (USBC)
S-1/A
2020-01-29
View Original
Added on
October 20, 2026
As filed with the Securities and Exchange Commission on
January 29, 2020
Registration No. 333-231829
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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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3920
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(Primary Standard Industrial Classification Number)
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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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Ronald P. Erickson, Chairman of the Board
Know Labs, Inc.
500 Union Street, Suite 810
Seattle, WA 98101
206-903-1351
(Name,
address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Lawrence W. Horwitz, Esq.
Jessica Lockett, Esq.
Horwitz + Armstrong, A Professional Law Corporation
14 Orchard, Suite 200
Lake Forest, California 92630
(949) 540-6540
Approximate
date of commencement of proposed sale to public: As soon as practicable after this Registration
Statement is declared effective.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following
box. ☒
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer (Do not check if a smaller reporting company)
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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CALCULATION OF REGISTRATION FEE
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Title of Each Class
of Securities to
be Registered
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Amount to be
Registered (1)
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Proposed Maximum
Offering
Price Per Unit (2)
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Proposed Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Common
Stock, $0.001 par value per share, underlying the Principal
of
8% Unsubordinated Convertible Notes (3)
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4,242,515
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$ 1.53
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$ 6,491,048
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$ 786.72
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Common
Stock, $0.001 par value per share, underlying the Interest
of
8% Unsubordinated Convertible Notes (3)
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339,401
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1.53
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519,284
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62.94
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Common
Stock, $0.001 par value per share, issuable upon exercise
of
Investor Warrants (3)
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2,121,258
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1.53
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3,245,525
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393.36
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Common
Stock, $0.001 par value per share, issuable upon exercise
of
Placement Agent Private Placement Offering Warrants
(5)
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542,102
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1.53
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829,416
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100.53
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Common
Stock, $0.001 par value per share, underlying conversion of
1,016,004
outstanding shares of Series D Preferred Stock offered
by
Selling Stockholder (3)
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3,108,356
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1.53
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4,755,785
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576.40
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Common
Stock, $0.001 par value share, issuable upon exercise of
Series
F Preferred Warrants (3)
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3,984,000
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1.53
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6,095,520
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738.78
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Total
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14,337,632
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$ 1.53
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$ 21,936,577
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$ 2,658.71
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(1)
In the
event of a stock split, stock dividend or similar transaction
involving our common stock, in order to prevent dilution, the
number of shares registered shall be automatically increased to
cover the additional shares in accordance with Rule 416(a) under
the Securities Act of 1933, as amended (the “Securities
Act”).
(2)
Estimated in
accordance with Rule 457(c) of the Securities Act, solely for the
purposes of calculating the registration fee based upon the average
of the high and low prices as reported on the Over the Counter
Bulletin Board ("OTCBB") as of May 29, 2019.
(3)
This
Registration Statement covers the resale by our selling
shareholders (the "Selling Shareholders") of:
(i)
up to
4,242,515 shares of common stock underlying the conversion of
principal amount of registrants 8% Unsubordinated Convertible Notes
(“Principal Shares”)
(ii)
up to
339,401 shares of common stock issuable by the
registrant upon the conversion of interest accrued under
the 8% Unsubordinated Convertible Notes (“Interest
Shares”) (The Principal Shares and Interest Shares are
referred to collectively as the “Shares”).
(iii)
up to
2,121,258 shares (the "Investor Warrant Shares") of common stock
issuable upon the exercise of outstanding investor's warrants (the
"Investor Warrants") at an exercise price of $1.20 that were
previously issued to the Selling Shareholders in connection with 8%
Unsubordinated Convertible Notes offering that closed in a series
of closings between February 15, 2019 and May 28,
2019.
(v)
up to
3,108,356 shares of common stock underlying the outstanding Series
D Convertible Preferred Stock which is convertible at any time at
an initial conversion price of $0.25 per share of our common stock
subject to adjustment for certain events (“Series D
Shares”). There are currently 3,108,356 common shares
estimated to underlying the 1,016,004 issued and outstanding Series
D Shares.
(vi)
up to
3,984,000 shares of common stock issuable upon conversion of
outstanding Series F Warrants at an exercise price of $0.25 per
share that were previously issued to one of the Selling
Shareholders in connection with Preferred Stock and Warrant
Purchase Agreement dated November 10, 2016 (“Series F Warrant
Shares”).
(4)
We are registering 542,102 shares of our common
stock issuable upon the exercise of outstanding placement agent
warrants (the “Placement Agent Warrants”) at an
exercise price of $1.20 per share that were previously issued to
Boustead Securities, LLC and its assigns (collectively
“Placement Agent”) pursuant to an engagement agreement
dated November 6, 2018 (the “Boustead Offering Engagement
Agreement”) which provides that the Placement Agent shall
receive that certain number of warrants to purchase the common
stock of the Company equal to the number of warrants issued under
the 8% Unsubordinated Convertible Note Offering (the
“Offering”). In the event of stock splits, stock
dividends or similar transactions involving the common stock, the
number of common shares registered shall, unless otherwise
expressly provided, automatically be deemed to cover the additional
securities to be offered or issued pursuant to Rule 416 promulgated
under the Securities Act of 1933, as amended (the “Securities
Act”). In the event that the provisions of the agreements
require the registrant to issue more shares than are being
registered in this registration statement, for reasons other than
those stated in Rule 416 of the Securities Act, the registrant will
file a new registration statement to register those additional
shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated January 29, 2020
Know Labs, Inc.
500 Union Street, Suite 810
Seattle, WA 98101
206-903-1351
PRELIMINARY PROSPECTUS
This prospectus covers the resale by the Selling Stockholders (the
“Selling Stockholders”):
(I)
up
to 4,242,515 shares of common stock underlying the principal, and
up to 339,401 shares underlying the interest accrued, of
registrants 8% Unsubordinated Convertible Notes (the
“Notes”), which have a conversion price that is the
lesser of $1.00 per share or a twenty five percent (25%) discount
to the price per share paid by investors a future Qualified
Financing (the “Shares”)
(ii)
up
to 2,121,258 shares (the "Investor Warrant Shares") of common stock
issuable upon the exercise of outstanding investor's warrants (the
"Investor Warrants") at an exercise price of $1.20 that were
previously issued to the Selling Shareholders in connection with
the Notes Offering that closed in a series of closings between
February 15, 2019 and May 28, 2019.
(iii)
542,102
shares of our common stock issuable upon the exercise of
outstanding placement agent warrants (the “Placement Agent
Warrants”) at an exercise price of $1.20 per share that were
previously issued to Boustead Securities, LLC and its assigns
(collectively “Placement Agent”) pursuant to an
engagement agreement dated November 6, 2018 (the “Boustead
Offering Engagement Agreement”) which provides that the
Placement Agent shall receive that certain number of warrants to
purchase the common stock of the Company equal to the number of
warrants issued under the 8% Unsubordinated Convertible Note
Offering (the “Offering”).
(iv)
up to 3,108,356 shares of common stock underlying
the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(v)
up to 3,984,000 shares
of common stock issuable upon conversion of outstanding
Series F Warrants at an exercise price
of $0.25 per share, subject to certain adjustments, that were
previously issued to one of the Selling Shareholders in connection
with Preferred Stock and Warrant Purchase Agreement dated November
10, 2016 (“Series F Warrant
Shares”).
The common stock covered by this prospectus may be offered for
resale from time to time by the Selling Stockholders identified in
this prospectus in accordance with the terms described in the
section entitled “Plan of Distribution.”
We are not selling any shares of our common stock in this offering
and, as a result, we will not receive any proceeds from the sale of
the common stock covered by this prospectus. All of the net
proceeds from the sale of our common stock will go to the Selling
Stockholders. Upon exercise of the Investor Warrants and Placement
Agent Warrants, however, we will receive up to $1.20 per share, and
Upon exercise of the Series F Warrants, however, we will receive up
to $0.25 per share or such lower price as may result from the
anti-dilution protection features of such warrants. Any proceeds
received from the exercise of such warrants will be used for
general working capital and other corporate purposes.
The Selling Stockholders may sell common stock from time to time at
prices established on the Over the Counter Bulletin Board ("OTCBB")
or as negotiated in private transactions, or as otherwise described
under the heading "Plan of Distribution." The common stock may be
sold directly or through agents or broker-dealers acting as agents
on behalf of the Selling Stockholders. The Selling Stockholders may
engage brokers, dealers or agents who may receive commissions or
discounts from the Selling Stockholders. We will pay all the
expenses incident to the registration of the shares; however, we
will not pay for sales commissions or other expenses applicable to
the sale of our common stock registered hereunder.
Our
common stock is quoted on the OTCQB Marketplace, operated by OTC
Markets Group, under the symbol "KNWN". On May 29, 2019, the last
reported sale price for our common stock on the OTCQB Marketplace
was $1.52 per share.
On May
24, 2018, the Financial Industry Regulatory Authority
(“FINRA”) announced the effectiveness of a change in
the Company’s name from Visualant Incorporated to Know Labs,
Inc. and a change in our ticker symbol from VSUL to the new trading
symbol KNWN which became effective on the opening of trading as of
May 25, 2018. In addition, in connection with the name change and
symbol change, we were assigned the CUSIP number of
499238103.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE THE
SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 15
IN THIS PROSPECTUS. YOU SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS, AS WELL AS THE INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE YOU INVEST.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
No dealer, salesperson or any other person is authorized to give
any information or make any representations in connection with this
offering other than those contained in this prospectus and, if
given or made, the information or representations must not be
relied upon as having been authorized by us. This prospectus does
not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this
prospectus, or an offer to sell or a solicitation of an offer to
buy any securities by anyone in any jurisdiction in which the offer
or solicitation is not authorized or is unlawful.
The date of this prospectus is January 29,
2020
TABLE OF CONTENTS
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Page
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Prospectus
Summary
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6
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Summary
of the Offering
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12
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Summary
Financial Information
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14
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Risk
Factors
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15
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Special
Note Regarding Forward-Looking Statements
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26
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Use of
Proceeds
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27
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Price
Range of Our Common Stock
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27
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Dividend
Policy
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28
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Capitalization
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28
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Dilution
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29
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Selling
Security Holders
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30
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Description
of Securities Registered
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31
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Plan of
Distribution
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33
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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36
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Description
of Our Business
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43
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Management
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47
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Executive
and Director Compensation
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52
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Certain
Relationships and Related Party Transactions
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56
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Principal
Stockholders
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59
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Description
of Capital Stock
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61
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Description
of Securities Being Registered
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63
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Legal
Matters
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66
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Experts
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66
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Where
You Can Find More Information
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67
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Index
to Financial Statements
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F-1
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You
should rely only on the information contained in this prospectus
and any applicable prospectus supplement. We have not authorized
anyone to provide you with different or additional information. If
anyone provides you with different or inconsistent information, you
should not rely on it. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of securities
described in this prospectus. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this
prospectus or any prospectus supplement, as well as information we
have previously filed with the Securities and Exchange Commission,
is accurate as of the date on the front of those documents only.
Our business, financial condition, results of operations and
prospects may have changed since those dates.
For
investors outside the United States: neither we nor the
underwriters have done anything that would permit this offering or
possession or distribution of this prospectus or any free writing
prospectus we may provide to you in connection with this offering
in any jurisdiction where action for that purpose is required,
other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus and any such free
writing prospectus outside of the United States.
Unless
otherwise indicated, information contained in this prospectus
concerning our industry and the markets in which we operate,
including our general expectations and market position, market
opportunity and market share, is based on information from our own
management estimates and research, as well as from industry and
general publications and research, surveys and studies conducted by
third parties. Management estimates are derived from publicly
available information, our knowledge of our industry and
assumptions based on such information and knowledge, which we
believe to be reasonable. Our management estimates have not been
verified by any independent source, and we have not independently
verified any third-party information. In addition, assumptions and
estimates of our and our industry's future performance are
necessarily subject to a high degree of uncertainty and risk due to
a variety of factors, including those described in "Risk Factors".
These and other factors could cause our future performance to
differ materially from our assumptions and estimates. See "Special
Note Regarding Forward-Looking Statements".
Our
trademarks ChromID™
and Bio-RFID™ are used
throughout this prospectus. This prospectus also includes
trademarks, trade names and service marks that are the property of
other organizations. Solely for convenience, trademarks and trade
names referred to in this prospectus appear without the ® and
™ symbols, but those references are not intended to indicate,
in any way, that we will not assert, to the fullest extent under
applicable law, our rights or that the applicable owner will not
assert its rights, to these trademarks and trade
names.
5
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information
you should consider before investing in our common stock. You
should read this entire prospectus carefully, especially the "Risk
Factors" section of this prospectus and our financial statements
and the related notes appearing at the end of this prospectus,
before making an investment decision. As used in this prospectus,
unless the context otherwise requires, references to "we," "us,"
"our," "our company," “Know Labs, Inc.” and "Know Labs"
refer to Know Labs, Inc. and our wholly-owned subsidiaries
TransTech Systems, Inc and RAAI
Lighting, Inc., unless the context otherwise
requires.
On May 24, 2018, the Financial Industry Regulatory Authority
(“FINRA”) announced the effectiveness of a change in
our name from Visualant Incorporated to Know Labs, Inc. and a
change in our ticker symbol from VSUL to the new trading symbol
KNWN which became effective on the opening of trading as of May 25,
2018. In addition, in connection with the name change and symbol
change, we were assigned the CUSIP number of
499238103.
BACKGROUND AND CAPITAL STRUCTURE
Know Labs, Inc., formerly Visualant, Incorporated, 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.
Overview
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 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. The
Company’s ChromaID scanner sees what we like to call
“Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID the Company
can see, and identify, and authenticate based upon the color that
is present. The Company’s ChromaID scanner is capable of
uniquely identifying and authenticating almost any substance or
liquid using light to record, detect and identify its unique color
signature. More recently, the Company has focused upon extensions
and new inventions that are derived from and extend beyond our
ChromaID technology. The Company calls this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID
technology in our laboratory have caused us to move quickly into
the commercialization phase of our Company as 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.
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues, it is not central to our
current focus as a Company. Moreover, we have written down any
goodwill associated with its historic acquisition. We continue to
closely monitor this subsidiary and expect it to wind
down completely in the near
future.
6
The Know Labs Technology
We have internally and under contract with third parties developed
proprietary platform technologies to uniquely identify or
authenticate almost any material and substance. Our technology
utilizes electromagnetic energy along the electromagnetic spectrum
to perform analytics which allow the user to identify and
authenticate substances and materials depending upon the
user’s unique application and field of use. The
Company’s proprietary platform technologies are called
Bio-RFID and ChromaID.
The Company’s latest technology platform is called Bio-RFID.
Working in our lab over the last two years, we have
developed extensions and new inventions derived in part from our
ChromaID technology which we refer to as Bio-RFID technology. We
are rapidly advancing the development of this technology. We have
announced over the past year that we have successfully
been able to non-invasively ascertain blood glucose levels in
humans. We are building the internal and external development team
necessary to commercialize this newly discovered technology as well
as make additional patent filings covering the intellectual
property created with these new inventions. The first applications
of our Bio-RFID technology will be in a product we call the
UBAND™. The first UBAND product will be marketed as a
Continuous Glucose Monitor. It is a wearable product which will be
worn on the wrist or ankle and communicate with a
smart phone device via Bluetooth connectivity. It will provide the
user with real time information on their blood glucose levels. This
initial product will require US Food and Drug
Administraton approval prior to its introduction to the
market.
We have also announced the results of laboratory-based comparison
testing between our Bio-RFID technology and the leading continuous
glucose monitors from Abbott Labs (Freestyle Libre®) and
DexCom (G5®). These results provide evidence of a high degree
of correlation between our Bio-RFID based technology and the
current industry leaders and their continuous glucose monitors. Our
technology is fundamentally differentiated from these industry
leaders as our UBAND continuous glucose monitor is completely
non-invasive.
We expect to begin the process of obtaining US Food and Drug
Administration (FDA) approval of our non-invasive continuous blood
glucose monitoring device during calendar year 2020.
To guide us in that undertaking we previously
announced the hiring of a Chief Medical Officer and formed a
Medical and Regulatory Advisory Board to guide us through the FDA
process. We are unable, however, to estimate the time necessary for
such approval nor the likelihood of success in that
endeavor.
7
Our
ChromaID patented technology utilizes light at the photon
(elementary particle of light) level through a series of emitters
and detectors to generate a unique signature or
“fingerprint” from a scan of almost any solid, liquid
or gaseous material. This signature of reflected or transmitted
light is digitized, creating a unique ChromaID signature. Each
ChromaID signature is comprised of from hundreds to thousands of
specific data points.
The
ChromaID technology looks beyond visible light frequencies to areas
of near infra-red and ultraviolet light and beyond that are outside
the humanly visible light spectrum. The data obtained allows us to
create a very specific and unique ChromaID signature of the
substance for a myriad of authentication, verification and
identification applications.
Traditional
light-based identification technology, called spectrophotometry,
has relied upon a complex system of prisms, mirrors and visible
light. Spectrophotometers typically have a higher cost and utilize
a form factor (shape and size) more suited to a laboratory setting
and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific electromagnetic frequencies resulting in a
more accurate, portable and easy-to-use solution for a wide variety
of applications. The ChromaID technology not only has significant
cost advantages as compared to spectrophotometry, it is also
completely flexible is size, shape and configuration. The ChromaID
scan head can range in size from endoscopic to a scale that could
be the size of a large ceiling-mounted florescent light
fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. We call this the ChromaID Reference Data
Library. The scan head can then scan similar materials to identify,
authenticate or diagnose them by comparing the new ChromaID digital
signature scan to that of the original or reference ChromaID
signature or scan result. Over time, we believe the ChromaID
Reference Libraries can become a significant asset of the Company,
providing valuable information in numerous fields of use. The
Reference Data Libraries for our newly developed Bio-RFID will have
a similar promise regarding their utility and
value.
Bio-RFID and ChromaID: Foundational Platform
Technologies
Our Bio-RFID and
ChromaID
technologies
provide a platform upon which a myriad of applications can be
developed. As platform technologies, they are analogous to a
smartphone, upon which an enormous number of previously unforeseen
applications have been developed Bio-RFID
and ChromaID technologies are “enabling”
technologies that bring the science of electromagnetic energy to
low-cost, real-world commercialization opportunities across
multiple industries. The technologies are foundational and, as
such, the basis upon which the Company believes significant
businesses can be built.
As with other foundational technologies, a single application may
reach across multiple industries.
Bio-RFID technology can non-invasively identity the presence and
quantity of glucose in the human body. By extension, there may be
other molecular structures which this same technology can identity
in the human body which, over time, the Company will focus upon.
They may include the monitoring of drug usage or the presence of
illicit drugs. They may also involve identifying hormones and
various markers of disease.
Similarly, the ChromaID technology can, for example effectively
differentiate and identify different brands of clear vodkas that
appear identical to the human eye. By extension, this same
technology could identify pure water from water with contaminants
present. It could provide real time detection of liquid medicines
such as morphine that have been adulterated or compromised. It
could detect if jet fuel has water contamination present. It could
determine when it is time to change oil in a deep fat fryer. These
are but a few of the potential applications of the ChromaID
technology based upon extensions of its ability to identify
different liquids.
The cornerstone of a company with a foundational platform
technology is its intellectual property. We have pursued an active
intellectual property strategy and have been granted 12 patents. We
currently have more than 20 patents pendingand
continue, on a regular basis the filing of new
patents.. We possess all right, title and interest to
the issued patents. Ten 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 13 patents, 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 2034. Pending patents, if and
when issued, may have expiration dates that extend further
in time. The duration of our trademark registrations varies from
country to country. However, trademarks are generally valid and may
be renewed indefinitely as long as they are in use and/or their
registrations are properly maintained.
The
issued patents cover the fundamental aspects of the Know Labs
ChromaID technology and a number of unique applications. We have
filed patents on the fundamental aspects of our Bio-RFID technology
and growing number of unique applications. We will continue to
expand the Company’s patent portfolio. .
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.
8
On
October 9, 2012, we were issued US Patent No. 8,285,510 B2 entitled
“Method, Apparatus, and Article to Facilitate Distributed
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 31, 2027.
On
February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On
November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On
November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The patent expires February 7,
2033. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
On
March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires July 31,
2027.
On
May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On
April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires March 12,
2033. This patent describes an enhancement to the foundational
ChromaID technology.
On
April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy.” The patent expires
July 2027. This patent pertains to the use of ChromaID technology
for the identification and analysis of biological tissue. It has
many potential applications in medical, industrial and consumer
markets.
On
May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled
“Systems for Fluid Analysis Using Electromagnetic Energy that
is reflected a Number of Times through a Fluid Contained within a
Reflective Chamber.” This patent expires approximately in
approximately March 2034. This patent pertains to a method for the
use of the Company’s technology analyzing
fluids.
On
April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled
“Device for Evaluation of Fluids Using Electromagnetic
Energy.” The patent expires in approximately April 2033. This
patent pertains to the use of ChromaID technology for evaluating
and analyzing fluids such as those following through an IV drip in
a hospital or water, for example.
We continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
Product Strategy
We
are currently undertaking internal development work on potential
products for the consumer marketplace. We have announced the
development of our UBAND continuous 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.
9
Currently we are focusing our efforts on productizing our Bio-RFID
technology as we move it out of our research
laboratory and into the marketplace.
Research and Development
Our
current research and development efforts are primarily focused on
improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for this technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications. Our current internal team along with outside
consultants have considerable experience working with the
application of our technologies and their application. We engage
third party experts as required to supplement our internal team. We
believe that continued development of new and enhanced technologies
is essential to our future success. We incurred expenses of
$1,257,872 and $570,514 for the years ended September 30, 2019 and
2018, respectively, on development activities.
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 have
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.
Under the terms of the Merger Agreement, each share of RAAI common
stock issued and outstanding immediately before the Merger (1,000
shares) were cancelled and we issued 2,000,000 shares of our common
stock. As a result, we issued 2,000,000 shares of its common stock
to Phillip A. Bosua, formerly the sole stockholder of RAAI. The
consideration for the Merger was determined through arms-length
bargaining by the Company and RAAI. The Merger was structured to
qualify as a tax-free reorganization for U.S. federal income tax
purposes. As a result of the Merger, the Company received certain
intellectual property, related to RAAI.
Merger with Know Labs, Inc.
On May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated
on April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
Corporate Name Change and Symbol Change
On May
24, 2018, the Financial Industry Regulatory Authority
(“FINRA”) announced the effectiveness of a change in
our name from Know Labs Incorporated to Know Labs, Inc. and a
change in our ticker symbol from VSUL to the new trading symbol
KNWN which became effective on the opening of trading as of May 25,
2018. In addition, in connection with the name change and symbol
change, we were assigned the CUSIP number of
499238103.
Properties and Operating Leases
We are obligated under various non-cancelable operating leases for
our various facilities and certain equipment.
10
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.
Terminated Leases
On
May 1, 2018, we leased our lab facilities and executive offices
located at 304 Alaskan Way South, Suite 102, Seattle, Washington,
USA, 98101. We lease 2,800 square feet and the net monthly payment
is $4,000. The lease expired on April 30, 2019.
TransTech was located at 12142 NE Sky Lane, Suite 130, Aurora, OR
97002.TransTech terminated this lease effective May 31,
2019.
Employees
As
of September 30, 2019, we had eleven full-time employees, including
five personnel at TransTech. Our senior management and four other
personnel are located in our Seattle, Washington offices. We also
utilize consulting firms and people to supplement our
workforce.
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.
Risks That We Face
Our
business is subject to a number of risks of which you should be
aware before making an investment decision. We are exposed to various risks related to our
business and financial position (specifically our need for
additional financing), this offering, our common stock and our
recent reverse stock split. These risks are discussed more
fully in the "Risk Factors" section of this prospectus beginning on
page 15.
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 our principal website address is located at
www.knowlabs.co. The information contained on, or that can
be accessed through, our website is not incorporated into and is
not a part of this prospectus. You should not rely on our website
or any such information in making your decision whether to purchase
our common stock.
11
SUMMARY OF THE OFFERING
|
Securities
offered:
|
|
14,337,632 shares of common stock, which includes:
(i)
up to
4,242,515 shares of common stock underlying the principal, and up
to 339,401 shares underlying the interest accrued, of registrants
8% Unsubordinated Convertible Notes (the “Notes”),
which have a conversion price that is the lesser of $1.00 per share
or a twenty five percent (25%) discount to the price per share paid
by investors a future Qualified Financing (the
“Shares”)
(ii)
up to
2,121,258 shares (the "Investor Warrant Shares") of common stock
issuable upon the exercise of outstanding investor's warrants (the
"Investor Warrants") at an exercise price of $1.20 that were
previously issued to the Selling Shareholders in connection with
the Notes Offering that closed in a series of closings between
February 15, 2019 and May 28, 2019.
(iii)
542,102
shares of our common stock issuable upon the exercise of
outstanding placement agent warrants (the “Placement Agent
Warrants”) at an exercise price of $1.20 per share that were
previously issued to Boustead Securities, LLC and its assigns
(collectively “Placement Agent”) pursuant to the
Boustead Offering Engagement Agreement which provides that the
Placement Agent shall receive that certain number of warrants to
purchase the common stock of the Company equal to the number of
warrants issued under the 8% Unsubordinated Convertible Note
Offering (the “Offering”).
(iv)
up to 3,108,356 shares of common stock underlying
the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(v)
up to
3,984,000 shares of common stock issuable upon conversion of
outstanding Series F Warrants at an exercise price of $0.25 per
share, subject to certain adjustments, that were previously issued
to one of the Selling Shareholders in connection with Preferred
Stock and Warrant Purchase Agreement dated November 10, 2016
(“Series F Warrant Shares”).
Our Common Stock is described in further detail in the
section of the prospectus titled “DESCRIPTION OF
SECURITIES”
|
|
Common
stock outstanding before the offering (1):
|
|
18,468,057
shares
|
|
Common
stock to be outstanding after this offering (2):
|
|
32,805,689 shares
|
|
Use of
Proceeds:
|
|
We
will not receive any of the proceeds from the sale of shares of
common stock by the Selling Stockholders. Upon exercise of the
Investor Warrants and Placement Agent Warrants, however, we will
receive up to $1.20 per share, and upon exercise of the Series F
Warrants, we will receive up to $0.25 per share or such lower price
as may result from the anti-dilution protection features of such
warrants. Any proceeds received from the exercise of such warrants
will be used for general working capital and other corporate
purposes.
|
|
Terms
of Warrants:
|
|
The
Investor Warrants and Placement Agent Warrants entitles the holder
thereof to purchase one common share at an exercise price or $1.20
per full share, for a five year period after the date of issuance
(between March-May 2024). Each Series F Warrant entitles the holder
thereof to purchase one common share at an exercise price or $0.25
per full share, for a five year period after the date of issuance
(between November 14, 2021 and May 1, 2022). The price per Warrant
Share shall be subject to adjustment for stock splits,
combinations, and similar recapitalization events and anti-dilution
protection features.
|
12
|
Risk
Factors:
|
|
An investment in our common stock involves a high degree of risk.
You should carefully consider the risk factors set forth under the
"Risk Factors" section hereunder and the other information
contained in this prospectus before making an investment decision
regarding our common stock. Our common stock should not be
purchased by investors who cannot afford the loss of their entire
investment.
|
|
OTCQB
Symbol:
|
|
Our
common stock is currently quoted on the OTCQB (the
“OTCQB”) under the symbol
“KNWN”.
|
|
Reverse
Split:
|
|
On June
17, 2015, we effected a 1-for-150 reverse stock split of our common
stock. All warrant, option, share and per share information in this
prospectus gives retroactive effect to the 1-for-150 split with all
numbers rounded up to the nearest whole share.
|
(1)
The number of shares of our common
stock outstanding before this offering is based on
18,468,057
shares of our common stock outstanding as of December
31, 2019, and excludes, as of that date:
●
4,942,668 shares
of our common stock issuable upon the exercise of outstanding stock
options outstanding at a weighted-average exercise price of $1.165
per share;
●
13,647,779 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 4,242,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,882,581;
●
1,785,715 shares of Series C Preferred Stock
outstanding, which could potentially be converted into 5,000,000
shares of common stock, at an exercise price of $0.25,
subject to certain adjustments.
●
3,108,356 shares of
our common stock issuable upon the conversion of Series D
Convertible Preferred Stock, at an exercise price of $0.25, subject
to certain adjustments. These shares of common stock are being
registered in this offering; and
●
17,976,990 warrants
to purchase shares of our common stock at an exercise price of
$0.466 subject to certain adjustments.
(2)
This
total includes the following:
(i)
up
to 4,242,515 shares of common stock underlying the principal amount
of registrants 8% Unsubordinated Convertible Notes
(“Principal Shares”)
(ii)
up to 339,401 shares of common stock
issuable by the registrant upon the conversion of interest accrued
under the 8% Unsubordinated
Convertible Notes (“Interest Shares”) (The Principal
Shares and Interest Shares are referred to collectively as the
“Shares”).
(iii)
up
to 2,121,258 shares (the "Investor Warrant Shares") of common stock
issuable upon the exercise of investor's warrants (the "Investor
Warrants") at an exercise price of $1.20 that were previously
issued to the Selling Shareholders in connection with 8%
Unsubordinated Convertible Notes offering that closed in a series
of closings between February 15, 2019 and May 28,
2019.
(iv)
up to 3,108,356 shares of common stock underlying
the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(v)
an indeterminate number of shares of common stock
issuable upon conversion of Series D Convertible Preferred Stock.
The Series D Convertible
Preferred Stock is convertible at any time at an initial conversion
price of $0.25 per share of our common stock subject to adjustment
for certain events (“Series D Shares”). There are
currently 3,108,356 common shares estimated to underlying the
1,016,004 issued and outstanding Series D
Shares.
(vi)
up to
3,984,000 shares of common stock
issuable upon conversion of outstanding Series F Warrants at an
exercise price of $0.25 per share that were previously issued to
one of the Selling Shareholders in connection with Preferred Stock
and Warrant Purchase Agreement dated November 10, 2016
(“Series F Warrant Shares”).
13
SUMMARY FINANCIAL
INFORMATION
The
following tables set forth a summary of our historical financial
data as of, and for the period ended on, the dates indicated. We
have derived the statements of operations data for the years ended
September 30, 2019 and 2018 from our
audited financial statements included in this prospectus.
Historical results for any prior period are not necessarily
indicative of results to be expected in any future period. You
should read the following summary financial data together with our
financial statements and the related notes appearing at the end of
this prospectus and the "Capitalization” and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" sections of this prospectus.
Statements of Operations Data:
(in
thousands, except for share and per share data)
|
|
Years Ended September 30,
|
||||
|
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS DATA:
|
|
|
|
|
|
|
Net
revenue
|
$ 1,805
|
$ 4,303
|
$ 4,874
|
$ 6,024
|
$ 6,291
|
|
Cost
of goods sold
|
1,378
|
3,482
|
3,966
|
5,036
|
5,274
|
|
Gross
profit
|
427
|
821
|
908
|
988
|
1,017
|
|
Research
and development expenses
|
1,258
|
570
|
79
|
326
|
363
|
|
General
and administrative expenses
|
4,182
|
2,509
|
3,088
|
3,355
|
2,984
|
|
Impairment
of goodwill
|
-
|
-
|
984
|
-
|
-
|
|
Operating
loss
|
(5,013)
|
(2,258)
|
(3,243)
|
(2,693)
|
(2,330)
|
|
Other
income (expense)
|
(2,599)
|
(1,000)
|
(658)
|
947
|
(271)
|
|
Net
loss
|
(7,612)
|
(3,258)
|
(3,901)
|
(1,746)
|
(2,601)
|
|
Income
taxes current benefit
|
-
|
-
|
-
|
-
|
30
|
|
Net
loss
|
$ (7,612)
|
$ (3,258)
|
$ (3,901)
|
$ (1,746)
|
$ (2,631)
|
|
Net
loss per share
|
$ (0.42)
|
$ (0.38)
|
$ (1.01)
|
$ (1.22)
|
$ (2.33)
|
|
Weighted
average number of shares
|
18,053,848
|
8,630,891
|
3,844,840
|
1,428,763
|
1,131,622
|
Balance Sheet Data:
(in
thousands)
|
|
As of
|
|
|
September 30, 2019
|
|
BALANCE
SHEET DATA:
|
|
|
Total
current assets
|
$ 1,977
|
|
Total
assets
|
2,640
|
|
Total
current liabilities
|
1,861
|
|
Convertible
notes payable
|
3,954
|
|
Total
liabilities
|
5,937
|
|
Stockholders'
deficit
|
(3,297)
|
14
RISK FACTORS
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described
below, together with all of the other information contained in this
prospectus, including our financial statements and the related
notes appearing at the end of this prospectus, before deciding to
invest in our common stock. If any of the following risks actually
occur, our business, prospects, operating results and financial
condition could suffer materially, the trading price of our common
stock could decline and you could lose all or part of your
investment.
Risks Relating to the Company Generally
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through June
30, 2020. We will 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 are
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 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, 2019 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, 2019, we owe approximately
$2,713,565 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 $458,500 as of
September 30, 2019including $1,184,066 owed to entities controlled
by our chairman.
We owe $2,255,065
under various convertible promissory notes as of September 30, 2019
including $1,184,066 owed to entities controlled by our
chairman.
This excludes $4,242,515 of 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 that closed on May 28, 2019. The Convertible Notes
converts into common stock at the maturity date during early
2020.
We require 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.
15
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, 2019, we had an accumulated deficit of $42,404,000
and net losses in the amount of $7,612,000 and $3,258,000 for the
years ended September 30, 2019 and 2018, respectively. 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 business has produced minimal revenues, and
may not produce significant revenues in the near term, or at all,
which would harm our ability to continue our operations or obtain
additional financing and require us to reduce or discontinue our
operations. You must consider our business and prospects in light
of the risks and difficulties we will encounter as business with an
early-stage technology in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could significantly harm our business,
operating results and financial
condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID technology and
related products to achieve or sustain profitability.
We are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID technology, grant additional
licenses and obtain royalties or develop other revenue streams will
have a material adverse effect on our business, financial condition
and results of operations.
To date, we have generated minimal revenue from sales of
ourChromaID
and Bio-RFID products. We believe that our
commercialization success is dependent upon our ability to
significantly increase the number of customers that are using our
products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
16
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our success depends on our ability to develop and market products
that are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, some potential
customers may be required to devote significant time
and effort to testing and validating our products. In addition,
during the implementation phase, some customers may be
required to devote significant time and effort to training their
personnel on appropriate practices to ensure accurate results from
our technology and products. Any failure of our technology or
related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt systems other than ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30,
2019, 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.
If components used in our finished products become unavailable, or
third-party manufacturers otherwise experience delays, we may incur
delays in shipment to our customers, which would damage our
business.
We
depend on third-party manufacturers and suppliers for substantially
all of our components and products that are used in our ChromaID
and Bio-RFID products. We purchase these products and components
from third-party suppliers and we believe that alternative sources
of supply are readily available for most products and components.
However, consolidation could result in one or more current
suppliers being acquired by a competitor, rendering us unable to
continue purchasing necessary amounts of key components at
competitive prices. In addition, for certain of our customized
components, arrangements for additional or replacement suppliers
will take time and result in delays. We purchase products and
components pursuant to purchase orders placed from time to time in
the ordinary course of business. This means we are vulnerable to
unanticipated price increases and product shortages. Any
interruption or delay in the supply of components and products, or
our inability to obtain components and products from alternate
sources at acceptable prices in a timely manner, could harm our
business, financial condition and results of
operations.
17
While we believe alternative manufacturers for these products are
available, we have selected these particular manufacturers based on
their ability to consistently produce these products per our
specifications ensuring the best quality product at the most
cost-effective price. We depend on our third-party manufacturers to
satisfy performance and quality specifications and to dedicate
sufficient production capacity within scheduled delivery times.
Accordingly, the loss of all or one of these manufacturers or
delays in obtaining shipments could have a material adverse effect
on our operations until such time as an alternative manufacturer
could be found.
Revenues of our wholly-owned subsidiary, TransTech, are
declining
We have not been
able to successfully address this revenue decline of this
subsidiary during the year ended September 30, 2019 which is
expected to result in the winding down of operations. The
loss of the TransTech subsidiary revenue will impact the
Company’s top line revenues and its operating results and may
result in expenses associated with the winding
down.
We are dependent on key personnel.
Our success depends to a significant degree upon
the continued contributions of key management and other personnel,
some of whom could be difficult to replace, including Ronald P.
Erickson, our Chairman and Phil Bosua, our Chief Executive Officer.
We maintain key person life insurance on our Chief Executive
Officer, Phil Bosua. Our success will depend on the performance of
our officers, our ability to retain and motivate our officers, our
ability to integrate new officers into our operations, and the
ability of all personnel to work together effectively as a
team. Our failure to retain and recruit officers and
other key personnel could have a material adverse effect on our
business, financial condition and results of
operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions, or demonstrate that we did not derive our invention
from another, we may have to participate in interference or
derivation proceedings in the USPTO or in court that could result
in substantial costs in legal fees and could substantially affect
the scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
18
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 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.
19
We may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize technology without
strategic partners or licensees include:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Our
technology may have a number of potential applications in fields of
use which will require prior governmental regulatory approval
before the technology can be introduced to the marketplace. For
example, we are exploring the use of our technology for certain
medical diagnostic applications, with an initial focus on the
continuous monitoring of blood glucose.
There
is no assurance that we will be successful in developing continuous
glucose monitoring (CGM) medical applications for our
technology.
If we
were to be successful in developing continuous glucose monitoring
medical applications of our technology, prior approval by the FDA
and other governmental regulatory bodies will be required before
the technology could be introduced into the
marketplace.
There
is no assurance that such regulatory approval would be obtained for
a continuous glucose monitoring medical diagnostic or other
applications requiring such approval.
The FDA
can refuse to grant, delay, and limit or deny approval
of an application for approval of our UBAND CGM for many
reasons.
We may
not obtain the necessary regulatory approvals or clearances to
market these continuous glucose monitoring systems in the United
States or outside of the United States.
Any
delay in, or failure to receive or maintain, approval or clearance
for our products could prevent us from generating revenue from
these products or achieving profitability.
Cybersecurity risks and cyber incidents could result in the
compromise of confidential data or critical data systems and give
rise to potential harm to customers, remediation and other
expenses, expose us to liability under HIPAA, consumer protection
laws, or other common law theories, subject us to litigation and
federal and state governmental inquiries, damage our reputation,
and otherwise be disruptive to our business and
operations.
Cyber
incidents can result from deliberate attacks or unintentional
events. We collect and store on our networks sensitive information,
including intellectual property, proprietary business information
and personally identifiable information of our customers. The
secure maintenance of this information and technology is critical
to our business operations. We have implemented multiple layers of
security measures to protect the confidentiality, integrity and
availability of this data and the systems and devices that store
and transmit such data. We utilize current security technologies,
and our defenses are monitored and routinely tested internally and
by external parties. Despite these efforts, threats from malicious
persons and groups, new vulnerabilities and advanced new attacks
against information systems create risk of cybersecurity incidents.
These incidents can include, but are not limited to, gaining
unauthorized access to digital systems for purposes of
misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may not immediately produce signs of
intrusion, we may be unable to anticipate these incidents or
techniques, timely discover them, or implement adequate
preventative measures.
20
These
threats can come from a variety of sources, ranging in
sophistication from an individual hacker to malfeasance by
employees, consultants or other service providers to
state-sponsored attacks. Cyber threats may be generic, or they may
be custom-crafted against our information systems. Over the past
several years, cyber-attacks have become more prevalent and much
harder to detect and defend against. Our network and storage
applications may be vulnerable to cyber-attack, malicious
intrusion, malfeasance, loss of data privacy or other significant
disruption and may be subject to unauthorized access by hackers,
employees, consultants or other service providers. In addition,
hardware, software or applications we develop or procure from third
parties may contain defects in design or manufacture or other
problems that could unexpectedly compromise information security.
Unauthorized parties may also attempt to gain access to our systems
or facilities through fraud, trickery or other forms of deceiving
our employees, contractors and temporary staff.
There
can be no assurance that we will not be subject to cybersecurity
incidents that bypass our security measures, impact the integrity,
availability or privacy of personal health information or other
data subject to privacy laws or disrupt our information systems,
devices or business, including our ability to deliver services to
our customers. As a result, cybersecurity, physical security and
the continued development and enhancement of our controls,
processes and practices designed to protect our enterprise,
information systems and data from attack, damage or unauthorized
access remain a priority for us. As cyber threats continue to
evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures
or to investigate and remediate any cybersecurity
vulnerabilities.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
21
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:
●
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;
●
the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
We may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
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 1,785,715
outstanding shares of Series C Preferred Stock, 1,016,004
outstanding shares Series D Preferred Stock that adjust below $0.25
per share pursuant to the documents governing such instruments. In
addition, the conversion price of a Convertible Note Payable of
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share) and the exercise price of additional outstanding
warrants to purchase 12,838,286 shares of common stock
would adjust below $0.25 per share pursuant to the documents
governing such instruments.
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The conversion price of the Convertible Notes Payable of $4,242,515
(4,242,515 common shares at the
current price of $1.00 per share) which closed May 28, 2019 would
adjust below $1.00 per share pursuant to the documents governing
such instruments. Warrants totaling 2,663,359 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:
●
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;
●
Issuance
of convertible or equity securities and related warrants for
general or merger and acquisition purposes;
●
Issuance or repayment of debt, accounts payable or
convertible debt for general or merger and acquisition
purposes;
●
Sale
of a significant number of shares of our common stock by
stockholders;
●
General
market and economic conditions;
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Quarterly
variations in our operating results;
●
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; and
●
Low
liquidity; and
●
Additions
or departures of key personnel.
These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our common stock may be restricted under the
securities or securities regulations laws promulgated by various
states and foreign jurisdictions, commonly referred to as
“blue sky” laws. Absent compliance with such individual
state laws, our common stock may not be traded in such
jurisdictions. Because the securities held by many of our
stockholders have not been registered for resale under the blue sky
laws of any state, the holders of such shares and persons who
desire to purchase them should be aware that there may be
significant state blue sky law restrictions upon the ability of
investors to sell the securities and of purchasers to purchase the
securities. These restrictions may prohibit the secondary trading
of our common stock. Investors should consider the secondary market
for our securities to be a limited one.
23
Four
individual investors could have significant influence over matters
submitted to stockholders for approval.
As of September 30, 2019, four individuals in the
aggregate, assuming the exercise of all warrants to purchase common
stock, hold shares representing approximately 56% 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. 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.
Sales or issuances of a large number of shares of
common stock in the public market or the perception that sales may
occur could cause the market price of our common stock to
decline. As of September 30, 2019, we had 18,366,178 shares
of common stock issued and outstanding, held by 116 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 us. 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 4,242,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,497,581. All of which could potentially dilute future
earnings per share.
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.
24
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we
raise additional capital by issuing equity securities, our existing
stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. We may also issue
equity securities that provide for rights, preferences and
privileges senior to those of our common stock. If we raise
additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms
of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise
additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or
candidate products, or to grant licenses on terms that are not
favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid cash dividends on our capital stock.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business, and we do
not anticipate paying any cash dividends on our capital stock in
the foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our certificate of incorporation, as amended, our bylaws and Nevada
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock.
Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
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 UBAND 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.
25
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This
prospectus includes statements that are, or may be deemed,
"forward-looking statements." In some cases, these forward-looking
statements can be identified by the use of forward-looking
terminology, including the terms "believes", "estimates",
"anticipates", "expects", "plans", "intends", "may", "could",
"might", "will", "should", "approximately" or, in each case, their
negative or other variations thereon or comparable terminology,
although not all forward-looking statements contain these words.
They appear in a number of places throughout this prospectus and
include statements regarding our intentions, beliefs, projections,
outlook, analyses or current expectations concerning, among other
things, our ongoing and planned exploration activities, our results
of operations, financial condition, liquidity, prospects, growth
and strategies, the length of time that we will be able to continue
to fund our operating expenses and capital expenditures, our
expected financing needs and sources of financing, the industry in
which we operate and the trends that may affect the industry or
us.
By
their nature, forward-looking statements involve risks and
uncertainties because they relate to events, competitive dynamics,
and technologies which are capable of
uniquely authenticating or diagnosing market developments
and depend on the economic circumstances that may or may not occur
in the future or may occur on longer or shorter timelines than
anticipated. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this prospectus, we
caution you that forward-looking statements are not guarantees of
future performance and that our actual results of operations,
financial condition and liquidity, and the development of the
industry in which we operate may differ materially from the
forward-looking statements contained in this prospectus. In
addition, even if our results of operations, financial condition
and liquidity, and the development of the industry in which we
operate are consistent with the forward-looking statements
contained in this prospectus, they may not be predictive of results
or developments in future periods.
Any
forward-looking statements that we make in this prospectus speak
only as of the date of such statement, and we undertake no
obligation to update such statements to reflect events or
circumstances after the date of this prospectus.
You
should also read carefully the factors described in the "Risk
Factors" section of this prospectus to better understand the risks
and uncertainties inherent in our business and underlying any
forward-looking statements. As a result of these factors, we cannot
assure you that the forward-looking statements in this prospectus
will prove to be accurate. Furthermore, if our forward-looking
statements prove to be inaccurate, the inaccuracy may be material.
In light of the significant uncertainties in these forward-looking
statements, you should not regard these statements as a
representation or warranty by us or any other person that we will
achieve our objectives and plans in any specified timeframe, or at
all. We disclaim any obligation to update or revise any
forward-looking statement as a result of new information, future
events or for any other reason.
26
USE OF
PROCEEDS
We are not selling any shares of our common stock in this offering
and, as a result, we will not receive any proceeds from the sale of
the common stock covered by this prospectus. All of the net
proceeds from the sale of our common stock will go to the Selling
Stockholders. Upon exercise of the Series F Warrants, however, we
will receive up to $0.25 per share or such lower price as may
result from the anti-dilution protection features of such warrants.
Upon exercise of the Private Placement and Placement Agent
Warrants, however, we will receive up to $1.20 per share or such
lower price as may result from the anti-dilution protection
features of such warrants The Warrants may expire without having
been exercised. Even if some or all of these Warrants are
exercised, we cannot predict when they will be exercised and when
we would receive the proceeds. Any proceeds received from the
exercise of such warrants will be used for general working capital
and other corporate purposes. See “Selling Security
Holders” and “Plan of Distribution.”
With the exception of any brokerage fees and commissions which are
the respective obligations of the Selling Stockholders, we are
responsible for the fees, costs and expenses of this Registration
Statement, which includes our legal and accounting fees, printing
costs, and filing and other miscellaneous fees and
expenses.
PRICE RANGE OF OUR COMMON
STOCK
Our
common stock is currently quoted on the OTCQB under the symbol
"KNWN". The following table sets forth the range of the high and
low sale prices of the common stock for the periods indicated. The
quotations reflect inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.
Consequently, the information provided below may not be indicative
of our common stock price under different conditions.
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.
|
Period
Ended
|
High
|
Low
|
|
Year Ending September 30, 2020
|
|
|
|
Through
January 23, 2020
|
$ 2.90
|
$ 1.70
|
|
December
31, 2019
|
$ 1.95
|
$ 0.92
|
|
|
|
|
|
Year Ending September 30, 2019
|
|
|
|
September
30, 2019
|
$ 1.70
|
$ 1.20
|
|
June
30, 2019
|
$ 2.00
|
$ 1.26
|
|
March
31, 2019
|
$ 2.97
|
$ 0.90
|
|
December
31, 2018
|
$ 4.44
|
$ 0.85
|
|
|
|
|
|
Year Ending September 30, 2018
|
|
|
|
September
30, 2018
|
$ 5.71
|
$ 0.62
|
|
June
30, 2018
|
$ 0.65
|
$ 0.24
|
|
March
31, 2018
|
$ 0.36
|
$ 0.21
|
|
December
31, 2017
|
$ 0.44
|
$ 0.20
|
As of January 23,
2020, the high and low sales price of our common stock was $2.26
per share and $1.70 per share, respectively. As of January 23,
2020, there were 19,209,328
shares of common stock outstanding held by approximately 116
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.
27
DIVIDEND
POLICY
We have
never declared or paid any cash dividends on our common stock and
intend, for the foreseeable future, to retain any future earnings
to finance the growth and development of our business. Our future
dividend policy will be determined by our Board of Directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2019 and on a pro
forma basis to give effect to this offering.
In
thousands, except for share and per share data
|
|
September 30, 2019
|
|
|
|
Actual
|
Pro Forma (1)
|
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
$ 1,901
|
$ 6,093
|
|
|
|
|
|
Convertible
notes payable
|
3,954
|
2,256
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
Series
C Convertible Preferred Stock
|
2
|
2
|
|
Series
D Convertible Preferred Stock
|
1
|
-
|
|
Common
stock
|
18
|
33
|
|
Additional
paid in capital
|
39,085
|
43,263
|
|
Accumulated
deficit
|
(42,403)
|
(42,403)
|
|
Total
stockholders' deficit
|
(3,297)
|
895
|
|
Total
capitalization
|
$ 657
|
$ 3,151
|
(1)
Pro Forma balances
include the issuance of the following:
(i)
up to 4,242,515 shares of common stock underlying the principal
amount of registrants 8% Unsubordinated Convertible Notes
(“Principal Shares”)
(ii) up to 339,401 shares of common stock
issuable by the registrant upon the conversion of interest accrued
under the 8% Unsubordinated
Convertible Notes (“Interest Shares”) (The Principal
Shares and Interest Shares are referred to collectively as the
“Shares”).
(iii)
up to 2,121,258 shares (the "Investor Warrant Shares") of common
stock issuable upon the exercise of outstanding
investor's warrants (the "Investor Warrants") at an exercise price
of $1.20 that were previously issued
to the Selling Shareholders in connection with 8% Unsubordinated
Convertible Notes offering that closed in a series of closings
between February 15, 2019 and May 28, 2019.
(iv)
542,102 shares of our common stock issuable upon the exercise of
outstanding Placement Agent Warrants at an exercise price of $1.20
per share that were previously issued to Boustead Securities, LLC
and its assigns.
(v) up to 3,108,356 shares of common stock
underlying the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(vi) up to 3,984,000 shares of common stock issuable upon conversion of
outstanding Series F Warrants at an exercise price of $0.25 per
share that were previously issued to one of the Selling
Shareholders in connection with Preferred Stock and Warrant
Purchase Agreement dated November 10, 2016 (“Series F Warrant
Shares”).
You
should read this table together with the sections entitled "Summary
Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial
statements and the related notes included elsewhere in this
prospectus.
(2)
The number of
shares of our common stock outstanding before this offering is
based on 18,366,178 shares of our common stock outstanding as
of September 30, 2019, and excludes, as of that
date:
●
4,532,668 shares
of our common stock issuable upon the exercise of outstanding stock
options outstanding at a weighted-average exercise price of $2.025
per share (including unearned stock option grants totaling
2,410,000 and excluding certain stock option grants for a cancelled
kickstarter program);
●
13,262,779 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 4,242,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,497,581;
●
1,785,715 shares of Series C Preferred Stock
outstanding, which could potentially be converted into 5,000,000
shares of common stock, at an exercise price of $0.25,
subject to certain adjustments;
28
●
3,108,356 shares of
our common stock issuable upon the conversion of Series D
Convertible Preferred Stock, at an exercise price of $0.25, subject
to certain adjustments, and
●
17,747,090
warrants to purchase shares of our common stock at an exercise
price of $0.455 subject to certain
adjustments.
The pro
forma information discussed above is to illustrate only and will
change based on the actual public offering price, number of shares
and other terms of this offering determined in
pricing.
DILUTION
If you invest in our common stock in this offering, your ownership
interest will be immediately diluted to the extent of the
difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value
per share of our common stock immediately after this
offering.
Our
historical net tangible book value deficit of $3,297,290 is the
amount of our total tangible assets less our total liabilities as
of September 30, 2019. Net historical tangible book value deficit
per share of ($0.180) is our historical net tangible book value
deficit divided by 18,366,178 shares of common stock outstanding as
September 30, 2019.
Pro
forma as adjusted net book value is our pro forma net tangible book
value, after giving effect to the sale of shares of our common
stock by the Selling Stockholders in this offering at a public
offering price of $1.53. Our pro forma as adjusted net book value
as of September 30, 2019, after giving effect to this offering
would have been approximately $895,000, or $0.027 per share. This
amount represents an immediate increase in pro forma as adjusted
net tangible book value of $0.207 per share to our existing
stockholders, and an immediate dilution of $1.503 per share to new
investors participating in this offering. Dilution per share to new
investors is determined by subtracting pro forma as adjusted net
tangible book value per share after this offering from the public
offering price per share paid by new investors.
The following table illustrates this dilution on a per share
basis:
|
Assumed
public offering price per share
|
|
$ 1.530
|
|
Pro
forma net tangible book value per share as of September 30,
2019
|
$ (0.180)
|
|
|
Increase
in net tangible book value per share attributable to this
offering
|
$ 0.207
|
|
|
Pro
forma as adjusted net tangible book value per share after this
offering
|
|
$ 0.027
|
|
Amount
of dilution in net tangible book value per share to new investors
in this offering
|
|
$ 1.503
|
The number of
shares of our common stock outstanding before this offering is
based on 18,366,178 shares
of our common stock outstanding as of September 30, 2019, and
excludes, as of that date:
●
4,532,668 shares
of our common stock issuable upon the exercise of outstanding stock
options outstanding at a weighted-average exercise price of $2.025
per share (including unearned stock option grants totaling
2,410,000 and excluding certain stock option grants for a cancelled
kickstarter program);
●
13,262,779 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 4,242,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,497,581;
●
1,785,715 shares of Series C Preferred Stock
outstanding, which could potentially be converted into 5,000,000
shares of common stock, at an exercise price of $0.25,
subject to certain adjustments;
29
●
3,108,356 shares of
our common stock issuable upon the conversion of Series D
Convertible Preferred Stock, at an exercise price of $0.25, subject
to certain adjustments, and
●
17,747,090 warrants
to purchase shares of our common stock at an exercise price of
$0.455 subject to certain adjustments.
We may
choose to raise additional capital through the sale of equity or
convertible debt securities due to market conditions or strategic
considerations even if we believe we have sufficient funds for our
current or future operating plans. To the extent that any of these
options or warrants are exercised, new options are issued under our
equity incentive plans or we issue additional shares of common
stock or other equity securities in the future, there may be
further dilution to new investors participating in this
offering.
SELLING SECURITY HOLDERS
This prospectus covers the resale by our Selling Stockholders of
14,337,632 shares of common stock, including:
(i)
up
to 4,242,515 shares of common stock underlying the principal, and
up to 339,401 shares underlying the interest accrued, of
registrants Notes
(ii)
up to 2,121,258 shares of common stock issuable
upon the exercise of outstanding Investor's Warrants at an exercise
price of $1.20 that were previously issued to the Selling
Shareholders in connection with the Notes Offering that closed in a
series of closings between February 15, 2019 and May 28,
2019.
(iii)
542,102
shares of our common stock issuable upon the exercise of
outstanding Placement Agent Warrants at an exercise price of $1.20
per share that were previously issued to Boustead Securities, LLC
and its assigns pursuant to the Offering
(iv)
up to 3,108,356 shares of common stock underlying
the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(v)
up to
3,984,000 shares of common stock issuable upon conversion of
outstanding Series F Warrants at an exercise price of $0.25 per
share, subject to certain adjustments, that were previously issued
to one of the Selling Shareholders in connection with Preferred
Stock and Warrant Purchase Agreement dated November 10,
2016
We are registering these securities in order to permit the Selling
Stockholders to dispose of its shares of common stock from time to
time. The Selling Stockholders may decide to sell all, some, or
none of the securities listed below. See the section
entitled “Plan of Distribution.” We cannot
provide an estimate of the number of our securities that the
Selling Stockholders will hold in the future. For purposes of this
table, beneficial ownership is determined in accordance with the
rules of the SEC, and includes voting power and investment power
with respect to such securities.
The Selling Stockholders has had no material relationship with us
or our affiliates during the last three years, other than as a
purchaser of the Notes, Warrants, and Series D Shares and Series F
Warrants from us in the Offering and private placement,
respectively. Information
regarding prior securities transactions between the issuer (or any
of its predecessors) and the Selling Shareholders, any affiliates
of the Selling Shareholders, or any person with whom any Selling
Shareholder has a contractual relationship regarding the
transaction (or any predecessors of those persons) is set forth
below the Selling Stockholders table. To our knowledge, none
of the Selling Stockholders are a registered broker-dealer or an
affiliate of a broker-dealer , with the exception of the
Placement Agent, Boustead Securities, LLC and their assigns.
All
securities offered by an affiliate of a broker-dealer were
purchased by the seller in the ordinary course of business, and, at
the time of the purchase of the securities to be resold, the seller
had no agreements or understandings, directly or indirectly, with
any person to distribute the securities.
The table below lists the Selling Stockholders and other
information regarding the beneficial ownership of the shares of
common stock by the Selling Stockholders. Column B lists the number
of shares of common stock beneficially owned by the Selling
Stockholders prior to this offering. Column C lists the shares of
common stock covered by this prospectus that may be disposed of by
the Selling Stockholders. Column D lists the warrant shares covered
by this prospectus that may be disposed of by the Selling
Stockholders. Column E lists the number of Placement Agent Warrants
that will be beneficially owned by the Selling Stockholders
assuming all of the shares covered by this prospectus are sold.
Column F lists the number of shares of common stock that will be
beneficially owned by the Selling Stockholders assuming all of the
shares covered by this prospectus are sold. Column G lists the
percentage of shares of common stock that will be beneficially
owned by the Selling Stockholders assuming all of the shares
covered by this prospectus are sold. Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act.
30
|
Name of Selling Shareholder (A)
|
Securities
Beneficially
Owned Prior to
this
Offering (B)
|
Securities
Being
Offered (C)
|
Warrant
Being
Offered (C)
|
Placement
Agent
Warrants (D)
|
Securities
Beneficially
Owned After
Offering (E)
|
% Beneficial
Ownership
After Offering (F)
|
|
Series D Preferred
Stock
|
|
|
|
|
|
|
|
Clayton
A. Struve
|
800,000
|
3,108,356
|
3,984,000
|
-
|
800,000
|
2.7%
|
|
|
|
|
|
|
|
|
|
Private
Placement
|
|
|
|
|
|
|
|
Vijay
Panikar
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Ritesh
Ramesh Sangavi
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Mark
Swaim
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
F
Geddes & S Geddes TTEE Geddes Revocable Trust U/A DTD / F.
Michael Geddes
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Howard
Miller
|
-
|
75,000
|
37,500
|
-
|
-
|
*
|
|
Jerry
Yang
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
K.
H. Krueger
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
John
Levinsohn
|
-
|
75,000
|
37,500
|
-
|
-
|
*
|
|
Les
Walter
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Robert
H Stewart
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Joshua
Miksanek
|
-
|
30,000
|
15,000
|
-
|
-
|
*
|
|
Joseph
W & Patricia G Abrams Family Trust dtd 3/15/1995 / Joseph
Abrams
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Daniel
Cassinelli
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Karl
L Matthies Trust / Karl Matthies
|
-
|
300,000
|
150,000
|
-
|
-
|
*
|
|
Ronald
Oh
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Norman
G Glassman
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Caesar
Capital Group, LLC / Michael Woloshin
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Jon
D and Linda W Gruber Trust
|
-
|
700,000
|
350,000
|
-
|
-
|
*
|
|
David
S Nagelberg 2003 Revocable Trust / David Nagelberg
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Hank
Bannister
|
-
|
5,000
|
2,500
|
-
|
-
|
*
|
|
Pensco
Trust, LLC FBO Brian G. Swift Roth IRA
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Potter
Family Trust / Bruce Potter
|
-
|
300,000
|
150,000
|
-
|
-
|
*
|
|
Stephen
Kircher, Scott Kircher JT TEN
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Stephen
Kircher, Douglas Kircher JT TEN
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Kircher
Family Trust
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Terry
F and Sandra L Walker
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Eight
Family Trust, Walter Bilofsky, TTEE u/t/a dtd 11/8/99 / Walter
Bilofsky
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Dean
Delis
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Intracostal
Capital LLC / Keith Goodman
|
-
|
125,000
|
62,500
|
-
|
-
|
*
|
|
Warberg
WF VII, LP / Daniel Warsh
|
-
|
50,000
|
25,000
|
-
|
-
|
*
|
|
Bradley
E Sparks
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Kenan
S Block
|
-
|
25,015
|
12,508
|
-
|
-
|
*
|
|
Daniel
Block
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Steven
Machtinger
|
-
|
10,000
|
5,000
|
-
|
-
|
*
|
|
Jody
Burnham
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Clayton
A. Struve
|
800,000
|
1,000,000
|
500,000
|
-
|
800,000
|
3.5%
|
|
Ritesh
R Sanghavi
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
David
W Zenk
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Kenneth
Followwill
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Sulinder
Singh Binning
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Marc
R Jalbert
|
-
|
35,000
|
17,500
|
-
|
-
|
*
|
|
Thomas
Hughes
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Josh
Jacobs
|
-
|
12,500
|
6,250
|
-
|
-
|
*
|
|
Robert
J Lamoreaux
|
-
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Michael
Hoffman
|
-
|
100,000
|
50,000
|
-
|
-
|
*
|
|
Srikanth
Tummala
|
|
25,000
|
12,500
|
-
|
-
|
*
|
|
Boustead
Securities LLC
|
-
|
-
|
-
|
164,985
|
-
|
*
|
|
Garden
State Securities Inc
|
-
|
-
|
-
|
24,750
|
-
|
*
|
|
Ernest
Pellegrino
|
-
|
-
|
-
|
37,125
|
-
|
*
|
|
Terry
Brodt
|
-
|
-
|
-
|
37,125
|
-
|
*
|
|
Peter
Conley
|
-
|
-
|
-
|
176,102
|
-
|
*
|
|
Brian
Swift
|
-
|
-
|
-
|
71,610
|
-
|
*
|
|
Michael
Jacks
|
-
|
-
|
-
|
11,550
|
-
|
*
|
|
Brinson
Lingenfelter
|
-
|
-
|
-
|
18,855
|
-
|
*
|
|
Total
Private Placement
|
800,000
|
4,242,515
|
2,121,258
|
542,102
|
800,000
|
*
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
-
|
339,401
|
-
|
-
|
-
|
*
|
|
Grand
Total
|
800,000
|
7,690,272
|
6,105,258
|
542,102
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Total
being registered
|
|
|
13,795,530
|
542,102
|
14,337,632
|
|
*Less than 1% ownership.
31
The price of the Company’s common stock on the date the
Selling Shareholders acquired securities
by which they can acquire the offered common stock was as
follows:
(i)
the
offering price of the 8% convertible notes, warrants and related
securities issued between January 31, 2019 and May 2019, was set at
approximately $1.00 per share which was the closing price of the
Company’s common stock as of January 31, 2019 (the date the
offering commenced). The average closing stock price between
January 31, 2019 and May 31, 2019 was approximately $1.57,
and
(ii)
the
Series D Preferred Stock and Series F Warrants were acquired on
November 10, 2016 at a stated value of $0.80 per share; the closing
price of the common stock on the date before the agreement was
executed was $1.33 per share.
With
the exception of the $361,401 fee paid to Boustead Securities and
their affiliates or assign, no cash fee was paid to the Selling
Shareholders owning the 8% convertible notes, warrants and related
securities, nor the Selling Stockholder owning the Series D
Preferred Stock and Series F Warrants.
The 8%
notes and warrants will be adjusted proportionately in the event of
dividends, splits, or other reclassifications. With respect to the
conversion and exercise price adjustments for events requiring
adjustments, pursuant to Section 5(a) of the Series D Preferred
Stock, the conversion price will be adjusted proportionately in the
event of dividends in shares, stock splits, or other
reclassifications, and pursuant to Section 5(b) will be adjusted
downwards to match a conversion, exchange or exercise price per
share offered by the Company to another party which is less than
the Conversion Price of the Series D Preferred immediately in
effect prior to such sale or issuance. The stated value of the
Series D Preferred Stock is currently $0.70 per share.
Information regarding prior securities transactions between the
issuer and Selling Stockholders:
Garden State Securities, Inc.
The Company issued the following warrants for the issuance of
common stock to Garden State Securities, Inc. or its employees
related to the Clayton A. Struve transactions detailed
below.
Convertible Promissory Notes, Series C and D Preferred Stock and
related warrants- warrants for the purchase of 837,901 common
shares exercisable at $0.25 per share.
Private placement being registered- warrants for the purchase of
99,000 shares of common stock exercisable at $1.20 per
share.
None of the Garden State Securities, Inc. shares have been
previously registered. On March 28, 2019, 10,610 shares of common
stock were issued to an employee of Garden State Securities, Inc.
related to the exercise of a warrant.
Clayton A. Struve
The Company has engaged in transactions with Mr. Struve, the
Preferred D holder, since approximately 2016. The following is a
summary of transactions with Mr. Struve:
Convertible Promissory Note dated September 30, 2016
On September 30, 2016, the Company entered into a $210,000
Convertible Promissory Note with Clayton A. Struve, an accredited
investor of the Company, to fund short-term working capital. The
Convertible Promissory Note accrued interest at a rate of 10% per
annum and was due on March 30, 2017. The Note holder can convert
the Note into common stock at $0.70 per share. During the year
ended September 30, 2017, the Company recorded interest of $21,000
related to the convertible note. This note was extended in the
Securities Purchase Agreement, General Security Agreement and
Subordination Agreement dated August 14, 2017 with a maturity date
of August 13, 2018. Also, the conversion price of the Debenture was
adjusted to $0.25 per share, subject to certain adjustments. The
balance was increased $75,000 during the year ended September 30,
2018. On November 16, 2018, we signed Amendment 1 to Senior
Secured Convertible Redeemable Notes dated September 30,
2016extending the due dates of the Note to February 27, 2019. On
September 24, 2018, Mr. Struve converted $200,000 of the Note into
800,000 shares of our common stock. The Company recorded accrued interest of $54,671
as of September 30, 2018.
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 1,785,715 shares of
common stock at $0.70 per share. These
were registered via Form S-1 as amended by Post Effective Amendment
made effective August 21, 2018. No shares have been sold by the
Selling Shareholder.
32
To
determine the effective conversion price, a portion of the proceeds
received by the Company upon issuance of the Series C Preferred
Stock was first allocated to the freestanding warrants issued as
part of this transaction. Given that the warrants will not
subsequently be measured at fair value, the Company determined that
the warrants should receive an allocation of the proceeds based on
their relative fair value. This is based on the understanding that
the FASB staff and the SEC staff believe that a freestanding
instrument issued in a basket transaction should be initially
measured at fair value if it is required to be subsequently
measured at fair value pursuant to US generally accepted accounting
principles (“GAAP”), with the residual proceeds from
the transaction allocated to any remaining instruments based on
their relative fair values. As such, the warrants were allocated a
fair value of approximately $514,706 upon issuance, with the
remaining $735,294 of proceeds allocated to the Series C Preferred
Stock.
Proportionately,
this allocation resulted in approximately 59% of the face amount of
the Series C Preferred Stock issuance remaining, which applied to
the stated conversion price of $0.70 resulted in an effective
conversion price of approximately $0.41.
Having
determined the effective conversion price, the Company then
compared this to the fair value of the underlying Common Stock as
of the commitment date, which was approximately $1.06 per share,
and concluded that the conversion feature did have an intrinsic
value of $0.65 per share. As such, the Company concluded that the
Series C Preferred Stock did contain a beneficial conversion
feature and an accounting entry and additional financial statement
disclosure was required.
Because
our preferred stock is perpetual, with no stated maturity date, and
the conversions may occur any time from inception, the dividend is
recognized immediately when a beneficial conversion exists at
issuance. During the year ending September 30, 2016, the Company
recognized preferred stock dividends of $1.16 million on Series C
preferred stock related to the beneficial conversion feature
arising from a common stock effective conversion rate of $0.41
versus a current market price of $1.06 per common
share.
On
November 14, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to certain accredited
investors for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated November 10,
2016.
The
warrants associated with the November 14, 2016 issuance were
allocated a fair value of approximately $56,539 upon issuance, with
the remaining $63,539 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 53% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.34. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$1.14 per share, and concluded that the conversion feature did have
an intrinsic value of $0.80 per share. As such, the Company
concluded that the Series D Preferred Stock did contain a
beneficial conversion feature of $150,211 which was recorded as a
beneficial conversion in stockholders’ equity.
On
December 19, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to an accredited
investor for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated December 14,
2016.
The
warrants associated with the December 19, 2016 issuance were
allocated a fair value of approximately $60,357 upon issuance, with
the remaining $69,643 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 54% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.37. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$0.81 per share, and concluded that the conversion feature did have
an intrinsic value of $0.44 per share. As such, the Company
concluded that the Series C Preferred Stock did contain a
beneficial conversion feature of $82,232 which was recorded as a
beneficial conversion in stockholders’ equity.
Because
the Company’s preferred stock is perpetual, with no stated
maturity date, and the conversions may occur any time from
inception, the dividend is recognized immediately when a beneficial
conversion exists at issuance. During the year ending September 30,
2017, the Company recognized preferred stock dividends of $2.3
million on Series D preferred stock related to the beneficial
conversion feature arising from a common stock effective conversion
rate of $0.34 and $0.37 versus the original market price of $1.14
and $1.06 per common share, respectively.
On May 1, 2017, the Company issued 357,143 shares of Series D
Convertible Preferred Stock and a warrant to purchase 357,143
shares of common stock in a private placement to an accredited
investor for gross proceeds of $250,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated May 1,
2016.
The initial conversion price of the Series D Shares is $0.70 per
share, subject to certain adjustments. The initial exercise price
of the warrant is $0.70 per share, also subject to certain
adjustments. The Company also amended and restated the Certificate
of Designations, resulting in an adjustment to the conversion price
of all currently outstanding Series D Shares to $0.70 per
share.
On August 14, 2017, the price of the Series C and D Preferred Stock were
adjusted to $0.25 per share pursuant
to the documents governing such instruments. After adjustment there
were 3,108,356 shares of Series D preferred stock
authorized.
On July
17, 2018, the Company filed with the State of Nevada a second
Amended and Restated Certificate of Designation of Preferences,
Powers, and Rights of the Series D Convertible Preferred Stock. The
Amended Certificate restates the prior Certificate of Designation
filed on May 8, 2017 to decrease the number of authorized Series D
shares from 3,906,250 shares to 1,016,014 shares.
As of June 30, 2019, the Company has 3,108,356 of Series D
Preferred Stock outstanding with Clayton A. Struve, an accredited
investor, outstanding. 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.
33
Securities Purchase Agreement dated August 14, 2017
On August 14, 2017, the Company issued a senior convertible
exchangeable debenture with a principal amount of $360,000 and a
common stock purchase warrant to purchase 1,440,000 shares of
common stock in a private placement to Clayton Struve for gross
proceeds of $300,000 pursuant to a Securities Purchase Agreement
dated August 14, 2017. The debenture accrues interest at 20% per
annum and matures August 13, 2018. The convertible debenture
contains a beneficial conversion valued at $110,629. The warrants
were valued at $111,429. Because the note is immediately
convertible, the warrants and beneficial conversion were expensed
as interest.
On the same date, the Company entered into a General Security
Agreement with the Mr. Struve, pursuant to which the Company has
agreed to grant a security interest to the investor in
substantially all of our assets, effective upon the filing of a
UCC-3 termination statement to terminate the security interest held
by Capital Source Business Finance Group in the assets of the
Company. In addition, an entity affiliated with Ronald P. Erickson,
out then Chief Executive Officer, entered into a Subordination
Agreement with the investor pursuant to which all debt owed by us
to such entity is subordinated to amounts owed by us to Mr. Struve
under the Debenture (including amounts that become owing under any
Debentures issued to the investor in the future).
The initial conversion price of the Debenture is $0.25 per share,
subject to certain adjustments. The initial exercise price of the
Warrant is $0.25 per share, also subject to certain
adjustments.
As part of the Purchase Agreement, the Company granted the investor
“piggyback” registration rights to register the shares
of common stock issuable upon the conversion of the Debenture and
the exercise of the Warrant with the Securities and Exchange
Commission for resale or other disposition.
The Debenture and the Warrant were issued in a transaction that was
not registered under the Securities Act of 1933, as amended in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and Rule 506 of SEC Regulation D under the Act.
Under the terms of the Purchase Agreement, Mr. Struve may purchase
up to an aggregate of $1,000,000 principal amount of Debentures
(before a 20% original issue discount) (and Warrants to purchase up
to an aggregate of 250,000 shares of common stock). These
securities are being offered on a “best efforts” basis
by the placement agent.
During the year ended September 30, 2017, $156,941 was recorded as
interest expense related to debt discounts, beneficial conversions
and warrants associated with Convertible Promissory
Notes.
On December 12, 2017, the Company closed an additional $250,000 and
issued a senior convertible exchangeable debenture with a principal
amount of $300,000 and a common stock purchase warrant to purchase
1,200,000 shares of common stock in a private placement dated
December 12, 2017 with Mr. Struve pursuant to a Securities Purchase
Agreement dated August 14, 2017. The convertible debenture contains
a beneficial conversion valued at $93,174. The warrants were valued
at $123,600. Because the note is immediately convertible, the
warrants and beneficial conversion were expensed as
interest.
On March 2, 2018, the Company received gross proceeds of $280,000
in exchange for issuing a senior convertible redeemable debenture
with a principal amount of $336,000 and a warrant to purchase
1,344,000 shares of common stock in a private placement dated
February 28, 2018 with Mr. Struve pursuant to a Securities Purchase
Agreement dated August 14, 2017. The convertible debenture contains
a beneficial conversion valued at $252,932. The warrants were
valued at $348,096. Because the note is immediately convertible,
the warrants and beneficial conversion were expensed as
interest.
In connection with the February 28, 2018 private placement, the
placement agent for the debenture and the warrant received a cash
fee of $28,000 and the Company issued warrants to purchase shares
of the Company’s common stock to the placement agent or its
affiliates based on 10% of proceeds.
On
November 16, 2018, the Company signed Amendment 1 to Senior Secured
Convertible Redeemable Notes dated August 14, 2017 and December 12,
2017, extending the due dates of the Notes to February 27,
2019.
Convertible Promissory Notes with Clayton A. Struve
As of June 30, 2019, the Company owes Clayton A.
Struve $1,071,000 under convertible promissory or OID notes. The
Company recorded accrued interest of $60,281 as of June 30,
2019. 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, we signed Amendments to
the convertible promissory or OID notes, extending the due dates to
March 31, 2020.Mr. Struve also invested $1,000,000 in the May 2019
Debt Offering.
34
DESCRIPTION OF 8%
UNSUBORDINATED NOTE OFFERING AND WARRANTS
Between February 11 and and May 30, 2019, the Company
closed a total of 7 rounds of the private placement for gross
proceeds of $4,242,515 in exchange for issuing Subordinated
Convertible Notes and 2,121,258 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.
Both the principal amount of and the interest are payable on a
payment-in-kind basis in shares of Common Stock of the Company.
They are due and payable in common stock on the earlier of (a)
mandatory and automatic conversion of the Convertible Notes into a
financing that yields gross proceeds of at least $10,000,000 or (b)
on the one-year anniversary of the Convertible Notes. Investors
will be required to convert their Convertible Notes into Common
Stock in any $10,000,000 financing at a conversion price per share
equal to the lower of (i) $1.00 per share or (ii) a 25% discount to
the price per share paid by investors in the $10,000,000 Financing.
If the Convertible Notes have not been paid or converted prior to
the Maturity Date, the outstanding principal amount of the
Convertible Notes will be automatically converted into shares of
Common Stock at the lesser of (a) $1.00 per share or (b) any
adjusted price resulting from the application of a “most
favored nations” provision, which requires the issuance of
additional shares of Common Stock to investors if the Company
issues certain securities at less than the then-current conversion
price.
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 $1.20 or 120% of the per share conversion
price of the Qualified Financing or other mandatory
conversion.
The Convertible Notes are convertible into an aggregate 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 private placement, 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% of gross proceeds to
the Company. The placement agent has also received a $25,000
advisory fee.
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.
Boustead Securities, LLC a FINRA member, acted as our exclusive
placement agent. They have received a 8% cash fee and 8% in
warrants which are exercisable for 5 years at an exercise price of
$1.20. The Placement Agent Warrants have a cashless exercise
feature.
DESCRIPTION OF SERIES D PREFERRED STOCK AND WARRANT PURCHASE
AGREEMENT
We
currently have 5,000,000 shares of Preferred Stock, par value of
$0.001 authorized, of which we have authorized the designation of
1,016,014 shares as Series D Convertible Preferred Stock
(“Series D Preferred”). On May 8, 2017, we applied with
the State of Nevada for approval of the Certificate of
Designations, Preferences, and Rights of Series D Convertible
Preferred Stock. On July 17, 2018, we
filed with the State of Nevada a second Amended and Restated
Certificate of Designation of Preferences, Powers, and Rights of
the Series D Convertible Preferred Stock to decrease the number of
authorized Series D Shares from 3,906,250 to 1,016,014.
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.
On November 14, 2016, we issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to Clayton Struve for
gross proceeds of $150,000 pursuant to a Series D Preferred Stock
and Warrant Purchase Agreement dated November 10,
2016.
35
On December 19, 2016, we issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to Clayton Struve for
gross proceeds of $150,000 pursuant to a Series D Preferred Stock
and Warrant Purchase Agreement dated December 14,
2016.
On February 23, 2017 we issued 283,861 shares of Series D
Convertible Preferred Stock and a warrant to purchase 283,861
shares of common stock in a private placement to Clayton Struve for
gross proceeds of $200,000 pursuant to a Series D Preferred Stock
and Warrant Purchase Agreement dated May 1, 2016.
On May 1, 2017, we issued 357,143 shares of Series D Convertible
Preferred Stock and a warrant to purchase 357,143 shares of common
stock in a private placement to an accredited investor for gross
proceeds of $250,000 pursuant to a Series D Preferred Stock and
Warrant Purchase Agreement dated May 1, 2016.
The Preferred Series D has an annual yield of 8% and an ownership
blocker of 4.99%. In addition, all of the investor warrants
discussed above are exercisable for a term of five years at strike
price of $0.25. The underlying common stock upon the conversion of
the Series D Preferred and Series F Warrants issued were required
to be included in a registration statement as filed by the
Company.
PLAN OF
DISTRIBUTION
We are registering under this prospectus (i) up to 4,242,515 shares
of common stock underlying the principal, and up to 339,401 shares
underlying the interest accrued, of registrants 8% Unsubordinated
Convertible Notes (the “Notes”), which have a
conversion price that is the lesser of $1.00 per share or a twenty
five percent (25%) discount to the price per share paid by
investors a future Qualified Financing (the “Shares”);
(ii) up to 2,121,258 shares (the "Investor Warrant Shares") of
common stock issuable upon the exercise of outstanding investor's
warrants (the "Investor Warrants") at an exercise price of $1.20
that were previously issued to the Selling Shareholders in
connection with the Notes Offering that closed in a series of
closings between February 15, 2019 and May 28, 2019; and
(iii) 542,102 shares of our common stock issuable upon the exercise
of outstanding placement agent warrants (the “Placement Agent
Warrants”) at an exercise price of $1.20 per share that were
previously issued to Boustead Securities, LLC and its assigns
(collectively “Placement Agent”) pursuant to an
engagement agreement dated November 6, 2018 (the “Boustead
Offering Engagement Agreement”) which provides that the
Placement Agent shall receive that certain number of warrants to
purchase the common stock of the Company equal to the number of
warrants issued under the 8% Unsubordinated Convertible Note
Offering (the “Offering”). We are required under the terms of the Securities
Purchase Agreement between the Company and the investors to
register the common stock issuable upon conversion of the 8%
Unsubordinated Convertible Notes, Investor Warrants and
Placement Agent Warrants.
Additionally, we are registering under this prospectus (iv) up to
3,108,356 shares of common stock underlying the outstanding Series
D Convertible Preferred Stock
which is convertible at any time at an initial conversion price of
$0.25 per share of our common stock subject to adjustment for
certain events (“Series D Shares”). There are currently
3,108,356 common shares estimated to underlying the 1,016,004
issued and outstanding Series D Shares, and (v) up to 3,984,000 shares
of common stock issuable upon conversion of outstanding
Series F Warrants which are exercisable at an exercise price of $0.25 per share, subject
to certain adjustments, that were previously issued to one of the
Selling Shareholders in connection with Preferred Stock and Warrant
Purchase Agreement dated November 10, 2016 (“Series F Warrant
Shares”). We are registering the common stock underlying the
Series D Shares and Series F Warrant Shares that may be issued by
us to the Selling Stockholders in order to permit the resale of
these shares of common stock.
We are not selling any shares of our common stock in this offering
and, as a result, we will not receive any proceeds from the sale of
the common stock covered by this prospectus. All of the net
proceeds from the sale of our common stock will go to the Selling
Stockholders. We will not receive any of the proceeds from the sale
of shares of common stock by the Selling Stockholders. Upon
exercise of the Investor Warrants and Placement Agent Warrants,
however, we will receive up to $1.20 per share, and upon exercise
of the Series F Warrants, we will receive up to $0.25 per share or
such lower price as may result from the anti-dilution protection
features of such warrants. Any proceeds received from the exercise
of such warrants will be used for general working capital and other
corporate purposes.
36
The Selling Stockholders may decide not to sell any of its shares
of common stock, or may sell all or a portion of its shares of
common stock. The Selling Stockholders will act
independently of us in making decisions with respect to the timing,
manner and size of any sale of shares, and may sell the shares
directly or through one or more broker-dealers or
agents. To the extent that the Selling Stockholders
employs broker-dealers or other agents in connection with the sale
of its stock, the Selling Stockholders will pay any commissions,
discounts or other amounts due to such broker-dealers or
agents. To our knowledge, the Selling Stockholders has
not entered into any agreement, arrangement or understanding with
any particular broker-dealer or market maker with respect to the
sale or distribution of the shares of common stock offered
hereby.
The Selling Stockholders, which as used herein includes its donees,
pledgees, transferees or other successors-in-interest selling
shares of common stock or interests in shares of common stock
received after the date of this prospectus from a Selling
Stockholders as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise
dispose of any or all of its shares of common stock or interests in
shares of common stock on any stock exchange, market or trading
facility on which the shares are traded, or in private
transactions. These dispositions may be at fixed prices,
at prevailing market prices at the time of sale, at prices related
to the prevailing market price, at varying prices determined at the
time of sale, or at negotiated prices.
The Selling Stockholders may use any one or more of the following
methods when disposing of shares or interests therein:
-
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
-
block
trades in which the broker-dealer will attempt to sell the shares
as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
-
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its account;
-
an
exchange distribution in accordance with the rules of the
applicable exchange;
-
privately
negotiated transactions;
-
short
sales effected after the date the Registration Statement of which
this prospectus is a part is declared effective by the
SEC;
-
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
-
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such shares at a stipulated price per share;
-
a
combination of any such methods of sale; and
-
any
other method permitted by applicable law.
The Selling Stockholders may, from time to time, pledge or grant a
security interest in some or all of the shares of common stock
owned by it and, if it defaults in the performance of its secured
obligations, the pledgees or secured parties may offer and sell the
shares of common stock, from time to time, under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list
of Selling Stockholders to include the pledgee, transferee or other
successors in interest as Selling Stockholders under this
prospectus. The Selling Stockholders also may transfer
the shares of common stock in other circumstances, in which case
the transferees, pledgees or other successors in interest will be
the Selling Stockholders for purposes of this
prospectus.
37
In connection with the sale of our common stock or interests
therein, the Selling Stockholders may enter into hedging
transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the common stock in the
course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and
deliver these securities to close out its short positions, or loan
or pledge the common stock to broker-dealers that in turn may sell
these securities. The Selling Stockholders may also
enter into option or other transactions with broker-dealers or
other financial institutions or the creation of one or more
derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by
this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus as supplemented
or amended to reflect such transaction.
The aggregate proceeds to the Selling Stockholders from the sale of
the common stock will be the purchase price of the common stock
less discounts or commissions, if any. The Selling
Stockholders reserves the right to accept and, together with its
agents from time to time, to reject, in whole or in part, any
proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from
these stock sales by the Selling
Stockholders.
The Selling Stockholders also may resell all or a portion of its
shares of common stock in open market transactions in reliance upon
Rule 144 under the Securities Act of 1933, provided that it meets
the criteria and conform to the requirements of that
rule.
To the extent required, the shares of our common stock to be sold,
the names of the Selling Stockholders(s), the respective purchase
prices and public offering prices, the names of any agents, dealer
or underwriter, any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying
prospectus supplement or, if appropriate, a post-effective
amendment to the Registration Statement that includes this
prospectus.
In order to comply with the securities laws of some states, if
applicable, the common stock may be sold in these jurisdictions
only through registered or licensed brokers or
dealers. In addition, in some states the common stock
may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is
available and is complied with.
We have advised the Selling Stockholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of
shares in the market and to the activities of the Selling
Stockholders and its affiliates. In addition, to the
extent applicable we will make copies of this prospectus as it may
be supplemented or amended from time to time available to the
Selling Stockholders for the purpose of satisfying the prospectus
delivery requirements of the Securities Act. The Selling
Stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We have agreed to indemnify the Selling Stockholders against
liabilities, including liabilities under the Securities Act and
state securities laws, arising out of or based upon any untrue
statement or alleged untrue
statement of a material fact
contained in the Registration
Statement, prospectus, prospectus supplement, or any
information incorporated by reference
therein, or arising out of or based upon any omission or alleged
omission to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that we will not
be liable for any liabilities finally adjudicated to be caused
solely by a false statement of material fact contained within
written information provided by such the Selling Stockholders
expressly for the purpose of including it in this Registration
Statement or the prospectus that is part of this Registration
Statement.
We also have agreed with the Selling Stockholders to keep the
Registration Statement of which this prospectus constitutes a part
effective until the earlier of (1) the date on which all of the
shares covered by this prospectus have been sold, or (2) the date
on which all of the shares may be sold without restriction pursuant
to Rule 144 of the Securities Act.
38
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.
Know Labs, Inc., formerly Visualant, Incorporated, 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.
Overview
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 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. The Company’s ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID the Company
can see, and identify, and authenticate based upon the color that
is present. The Company’s ChromaID scanner is capable of
uniquely identifying and authenticating almost any substance or
liquid using light to record, detect and identify its unique color
signature. More recently, the Company has focused upon extensions
and new inventions that are derived from and extend beyond our
ChromaID technology. The Company calls this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID
technology in our laboratory have caused us to move quickly into
the commercialization phase of our Company as 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.
In
2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues, it is not central to our current
focus as a Company. Moreover, we have written down any goodwill
associated with its historic acquisition. We continue to closely
monitor this subsidiary and expect it to wind down completely in
the near future.
39
Year Ended September 30, 2019 Compared to
Year Ended September 30,
2018
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 September 30,
|
|||
|
|
2019
|
2018
|
$ Variance
|
% Variance
|
|
|
|
|
|
|
|
Revenue
|
$ 1,805
|
$ 4,303
|
$ (2,498)
|
-58.1%
|
|
Cost
of sales
|
1,378
|
3,482
|
(2,104)
|
60.4%
|
|
Gross
profit
|
427
|
821
|
(394)
|
-48.0%
|
|
Research
and development expenses
|
1,258
|
570
|
688
|
-120.7%
|
|
Selling,
general and administrative expenses
|
4,182
|
2,509
|
1,673
|
-66.7%
|
|
Operating
loss
|
(5,013)
|
(2,258)
|
(2,755)
|
-122.0%
|
|
Other
(expense) income:
|
|
|
|
|
|
Interest
expense
|
(2,945)
|
(1,195)
|
(1,750)
|
-146.4%
|
|
Other
income
|
(10)
|
25
|
(35)
|
140.0%
|
|
Gain on debt
settlements
|
356
|
170
|
186
|
109.4%
|
|
Total
other income (expense), net
|
(2,599)
|
(1,000)
|
(1,599)
|
-159.9%
|
|
Loss
before income taxes
|
(7,612)
|
(3,258)
|
(4,354)
|
-133.6%
|
|
Income taxes - current
(benefit)
|
-
|
-
|
-
|
0.0%
|
|
Net
loss
|
$ (7,612)
|
$ (3,258)
|
$ (4,354)
|
-133.6%
|
Sales
Revenue
for the year ended September 30, 2019 decreased $2,498,000 to
$1,805,000 as compared to $4,303,000 for the year ended September
30, 2018. The decrease was due to lower sales by TransTech. We have
focused TransTech on maximizing sales at the lower sales level. We
are seeing customers purchase similar products directly from other
sources and we have not been investing in this
business.
Cost of Sales
Cost
of sales for the year ended September 30, 2019 decreased $2,104,000
to $1,378,000 as compared to $3,482,000 for the year ended
September 30, 2018. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Gross profit was $427,000 for the year ended September 30, 2019 as
compared to $821,000 for the year ended September 30, 2018. Gross
profit was 23.6% for the year ended September 30, 2019 as compared
to 19.1% for the year ended September 30, 2018. We have focused
TransTech on maximizing profits at the current sales
level.
Research and Development Expenses
Research and development expenses for the year
ended September 30, 2019 increased $688,000 to $1,258,000 as
compared to $570,000 for the year ended September 30, 2018. The
increase was due to the hiring of additional personnel, the
use of consultant and expenditures
related to the development of our Bio-RFID™
technology,
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the year ended September 30, 2019 increased $1,673,000 to
$4,182,000 as compared to $2,509,000 for the year ended September
30, 2018.
The
increase primarily was due to (i) increased depreciation and
amortization expense of $127,000; (ii) increased stock based
compensation of $969,000; (iii) increased rent of $70,000; (iv)
increased travel of $99,000; (v) increased legal of $48,000; and
(vii) increased other expenses of $121,000. As part of the selling,
general and administrative expenses for the year ended September
30, 2019, we recorded $120,000 of investor relation expenses and
business development expenses.
40
Other (Expense)
Other expense for the year ended September 30,
2019 was $2,599,000 as compared to other expense of $1,000,000 for
the year months ended September 30, 2018. 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. During the year ended September 30,
2019, we closed a private placement and received gross proceeds of
$4,242,515 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.
The
other expense for the year ended September 30, 2018 included (i)
interest expense of $1,195,000; offset by (ii) other income of
$25,000 and (iii) gain on debt settlements of $170,000. The
interest expense related a senior convertible exchangeable
debenture issued on December 12, 2017 and February 28, 2018 in
conjunction with a Securities Purchase Agreement dated August 14,
2017. The gain on debt settlements and forgiveness of accounts
payable.
Net Loss
Net loss for the year ended September 30, 2019 was
$7,612,000 as compared to $3,258,000 for the year ended September
30, 2018. 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.
TransTech’s net loss from
operations was $78,000 for the year ended September 30, 2019 as
compared to a net income from operations of $49,000 for the year
ended September 30, 2018.
The net loss for the year ended September 30,
2018, included non-cash
expenses of $1,935,000. The non-cash items include (i) depreciation
and amortization of $133,000; (ii) issuance of capital stock for
services and expenses of $440,000; (iii) stock based compensation
of $291,000; (iv) conversion of interest and amortization of debt
discount of $539,000; (v) conversion of accrued liabilities of
$492,000;(vi) issuance of common stock for conversion of
liabilities of $200,000; and (vii) other of $10,000; (viii) offset
by non-cash gain on accounts payable of $170,000. TransTech’s
net income from operations was $49,000 for the year ended September
30, 2018 as compared to a net loss from operations of ($256,000)
for the year ended September 30, 2017.
We expect losses to continue as we
commercialize our ChromaID™ and Bio-RFID™
technology.
Year Ended September 30, 2018 Compared to Year Ended September 30,
2017
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
September 30,
|
|||
|
|
2018
|
2017
|
$
Variance
|
%
Variance
|
|
|
|
|
|
|
|
Revenue
|
$4,303
|
$4,874
|
$(571)
|
-11.7%
|
|
Cost of
sales
|
3,482
|
3,966
|
(484)
|
12.2%
|
|
Gross
profit
|
821
|
908
|
(87)
|
-9.6%
|
|
Research and
development expenses
|
570
|
79
|
491
|
-621.5%
|
|
Selling, general
and administrative expenses
|
2,509
|
3,088
|
(579)
|
18.8%
|
|
Impairment of
goodwill
|
-
|
984
|
(984)
|
100.0%
|
|
Operating
loss
|
(2,258)
|
(3,243)
|
985
|
30.4%
|
|
Other (expense)
income:
|
|
|
|
|
|
Interest
expense
|
(1,195)
|
(377)
|
(818)
|
-217.0%
|
|
Other income
(expense)
|
25
|
(63)
|
88
|
139.7%
|
|
(Loss) on change-
derivative liability warrants
|
-
|
(218)
|
218
|
100.0%
|
|
Gain on debt
settlements
|
170
|
-
|
170
|
100.0%
|
|
Total other income
(expense)
|
(1,000)
|
(658)
|
(342)
|
-52.0%
|
|
(Loss) before
income taxes
|
(3,258)
|
(3,901)
|
643
|
16.5%
|
|
Income taxes -
current (benefit)
|
-
|
-
|
-
|
0.0%
|
|
Net
(loss)
|
$(3,258)
|
$(3,901)
|
$643
|
16.5%
|
Sales
Revenue for the year ended September 30, 2018
decreased $571,000 to $4,303,000 as compared to $4,874,000 for the
year ended September 30, 2017. The decrease was due to lower sales
by TransTech. We have focused TransTech on maximizing profits at
the lower sales level.
41
Cost of Sales
Cost of sales for the year ended September 30, 2018 decreased
$484,000 to $3,482,000 as compared to $3,966,000 for the year ended
September 30, 2017. The decrease was due to lower sales by
TransTech. We have focused TransTech on maximizing profits at the
lower sales level.
Gross profit was $821,000 for the year ended September 30, 2018 as
compared to $908,000 for the year ended September 30, 2017. Gross
profit was 19.1% for the year ended September 30, 2018 as compared
to 18.6% for the year ended September 30, 2017. We have focused
TransTech on maximizing profits at the lower sales
level.
Research and Development Expenses
Research and development expenses for the year ended September 30,
2018 increased $491,000 to $570,000 as compared to $79,000 for the
year ended September 30, 2017. The increase was due to expenditures
related to the Consulting and Services Agreement with Phillip A.
Bosua, our Chief Product Officer for product development, including
the development of our Bio-RFID™
technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for year ended
September 30, 2018 decreased $579,000 to $2,509,000 as compared to
$3,088,000 for the year ended September 30,
2017.
The decrease primarily was due to (i) reduced payroll, bad debt and
other expenses of $465,000 at TransTech; (ii) decreased corporate
development expense of $425,000; (iii) decreased other corporate
expenses of $217,000; and (iv) offset by increased stock based
compensation expenses of $581,000 . As part of the selling, general
and administrative expenses for the three months ended September
30, 2018, we recorded $198,000 of investor relation expenses and
corporate development expenses.
Impairment of Goodwill
Our TransTech business is very capital intensive. We reviewed
TransTech’s operations based on its overall financial
constraints and determined the value has been impaired. We recorded
an impairment of goodwill associated with TransTech of $984,000
during the year ended September 30, 2017.
Other Income (Expense)
Other expense for the year ended September 30, 2018 was $1,000,000
as compared to other expense of $657,000 for the year ended
September 30, 2017. The other expense for the year ended September
30, 2018 included (i) interest expense of $1,195,000; offset by
(ii) other income of $25,000 and (iii) gain on debt settlements of
$170,000. The interest expense related a senior convertible
exchangeable debenture issued on December 12, 2017 and February 28,
2018 in conjunction with a Securities Purchase Agreement dated
August 14, 2017. The gain on debt settlements and forgiveness of
accounts payable.
The other expense for the year ended September 30, 2017 included
(i) change in the value of derivatives of $218,000; (ii) interest
expense of $377,000; (iii) other expense of $63,000. The decrease
is a result of the decline of the derivative liability as our
underlying stock price has declined and conversion of interest and
amortization of debt discount of $227,000.
Net Loss
Net loss for the year ended September 30, 2018 was $3,258,000 as
compared to $3,901,000 for the year ended September 30, 2017. The
net loss for the year ended September 30, 2018, included
non-cash expenses of $1,935,000. The
non-cash items include (i) depreciation and amortization of
$133,000; (ii) issuance of capital stock for services and expenses
of $440,000; (iii) stock based compensation of $291,000; (iv)
conversion of interest and amortization of debt discount of
$539,000; (v) conversion of accrued liabilities of $492,000; (vi)
issuance of common stock for conversion of liabilities of $200,000;
and (vii) other of $10,000; (viii) offset by non cash gain on
accounts payable of $170,000. TransTech’s net income from
operations was $49,000 for the year ended September 30, 2018 as
compared to a net loss from operations of ($256,000) for the year
ended September 30, 2017.
42
The net loss for the year ended September 30, 2017, included
non-cash expenses of non-cash items of
$2,397,000. The non-cash items include (i) depreciation and
amortization of $81,000; (ii) issuance of capital stock for
services and expenses of $548,000; (iii) stock based compensation
of $38,000; (iv) bad debt losses and provision on loss on accounts
receivable of $141,000; (v) impairment of goodwill of $984,000;
(vi) loss on sale of assets $113,000; (vii) conversion of interest
and amortization of debt discount of $227,000; and (viii)
reclassification of derivative liability of $410,000; offset by
(ix) loss on change- derivative liability warrants of
$145,000.
We expect losses to continue as we commercialize our
ChromaID™ and Bio-RFID™technology.
Liquidity and Capital Resources
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. Significant factors in the
management of liquidity are funds generated by operations, levels
of accounts receivable and accounts payable and capital
expenditures.
We had cash of approximately $1,901,000 and net
working capital of approximately $241,000 (not including
convertible notes payable and notes payable) as of September 30,
2019. We have experienced net losses since inception and
we expect losses to continue as we commercialize our
ChromaID™ technology. As of September 30, 2019, we had an
accumulated deficit of $42,404,000 and net losses in the amount of
$7,612,000 and $3,258,000 for the year ended September 30, 2019 and
2018, respectively. We believe that our
cash on hand will be sufficient to fund our operations through June
30, 2020.
During the year
ended September 30, 2019, we closed a private placement and
received gross proceeds of $4,242,515 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
Convertible Notes have a principal amount of $4,242,515 and bear
annual interest of 8%. Both the principal amount of and the
interest are payable on a payment-in-kind basis in shares of Common
Stock of the Company (the “Common Stock”). They are due
and payable (in Common Stock) on the earlier of (a) mandatory and
automatic conversion of the Convertible Notes into a financing that
yields gross proceeds of at least $10,000,000 (a “Qualified
Financing”) or (b) on the one-year anniversary of the
Convertible Notes (the “Maturity Date”). Investors will
be required to convert their Convertible Notes into Common Stock in
any Qualified Financing at a conversion price per share equal to
the lower of (i) $1.00 per share or (ii) a 25% discount to the
price per share paid by investors in the Qualified Financing. If
the Convertible Notes have not been paid or converted prior to the
Maturity Date, the outstanding principal amount of the Convertible
Notes will be automatically converted into shares of Common Stock
at the lesser of (a) $1.00 per share or (b) any adjusted price
resulting from the application of a “most favored
nations” provision, which requires the issuance of additional
shares of Common Stock to investors if we issue certain securities
at less than the then-current conversion price. The note principal,
interest and an additional 10% are payable in cash upon a change in
control as defined.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2019 contains an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon
raising capital from financing transactions.
We need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, or eliminate the
development of business opportunities and our operations and
financial condition may be materially adversely
affected.
43
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.
We
expect exercises of warrants. There were vested and in the money
warrants of 17,677,091 as of September 30, 2019 with an aggregate
intrinsic value of $18,052,811.
Operating Activities
Net cash used in operating activities for the year
ended September 30, 2019 was $3,104,000. This amount was primarily
related to (i) a net loss of $7,612,000; offset by (ii) working
capital changes of $189,000; and (iii) non-cash expenses of
$4,319,000. The non-cash items include (iv) depreciation and
amortization of $259,000; (v) stock based compensation of
$1,260,000; (vi) issuance of capital stock for services and
expenses of $349,000;(vii) amortization of debt discount of
$2,771,000; and (viii) other of $34,000; and (ix) offset by
non-cash gain on accounts payable of
$356,000.
Investing Activities
Net
cash used in investing activities for the year ended September 30,
2019 was $80,000. This amount was primarily related to the
investment in equipment for research and
development.
Financing Activities
Net
cash provided by financing activities for the year ended September
30, 2019 was $4,150,000. This amount was primarily related to
issuance of convertible notes payable of $4,242,000 as discussed
above, offset by repayments of line of credit of
$92,000.
Our contractual cash obligations as of September 30,
2019 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
|
$ 270,008
|
$133,996
|
$ 136,012
|
$ -
|
$ -
|
|
Convertible
notes payable
|
6,497,581
|
6,497,581
|
-
|
-
|
-
|
|
Capital
expenditures
|
-
|
-
|
-
|
-
|
-
|
|
|
$6,767,589
|
$ 6,631,577
|
$ 136,012
|
$ -
|
$ -
|
(1)
Convertible notes
payable includes $4,242,515 that converts into common stock at the
maturity date during early 2020. 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,
2019
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:
44
Inventories – Inventories
consist 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 at a warehouse
location. We recorded a provision for excess and
obsolete inventory whenever an impairment has been identified.
There is a $28,000 and $35,000 reserve for impaired inventory as of
September 30, 2019 and 2018,
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).
Derivative financial instruments -We evaluate all of its
financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. 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.
Accounts Receivable and Revenue –
We recognize 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, we extend thirty day terms to some customers. Accounts
receivable are reviewed periodically for
collectability.
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, 2019 and 2018, there
was a reserve for sales returns of $40,000 and $60,000,
respectively, which is minimal based upon our historical
experience.
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 to purchase shares of
our common stock at the fair market value at the time of grant.
Stock-based compensation cost is measured by us at the grant date,
based on the fair value of the award, over the requisite service
period, using an estimated forfeiture rate. For
options issued to employees, we recognize stock compensation costs
utilizing the fair value methodology over the related period of
benefit. Grants of stock options and stock to
non-employees and other parties are accounted for in accordance
with the ASC 718.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities issued subsequent to September 30,
2015. We will evaluate our contracts based upon the earliest
issuance date.
Quantitative and Qualitative Disclosure 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.
45
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.
Overview
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 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. The Company’s ChromaID scanner sees what we like to
call “Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID the Company
can see, and identify, and authenticate based upon the color that
is present. The Company’s ChromaID scanner is capable of
uniquely identifying and authenticating almost any substance or
liquid using light to record, detect and identify its unique color
signature. More recently, the Company has focused upon extensions
and new inventions that are derived from and extend beyond our
ChromaID technology. The Company calls this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID
technology in our laboratory have caused us to move quickly into
the commercialization phase of our Company as 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.
In
2010, we acquired TransTech Systems, Inc. as an adjunct to our
business. TransTech is a distributor of products for employee and
personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues, it is not central to our current
focus as a Company. Moreover, we have written down any goodwill
associated with its historic acquisition. We continue to closely
monitor this subsidiary and expect it to wind down completely in
the near future.
The Know Labs Technology
We
have internally and under contract with third parties developed
proprietary platform technologies to uniquely identify or
authenticate almost any material and substance. Our technology
utilizes electromagnetic energy along the electromagnetic spectrum
to perform analytics which allow the user to identify and
authenticate substances and materials depending upon the
user’s unique application and field of use. The
Company’s proprietary platform technologies are called
Bio-RFID and ChromaID.
46
The Company’s latest technology platform is called Bio-RFID.
Working in our lab over the last two years, we have
developed extensions and new inventions derived in part from our
ChromaID technology which we refer to as Bio-RFID technology. We
are rapidly advancing the development of this technology. We have
announced over the past year that we have successfully
been able to non-invasively ascertain blood glucose levels in
humans. We are building the internal and external development team
necessary to commercialize this newly discovered technology as well
as make additional patent filings covering the intellectual
property created with these new inventions. The first applications
of our Bio-RFID technology will be in a product we call the
UBAND™. The first UBAND product will be marketed as
a Continuous Glucose Monitor. It is a wearable product which will
be worn on the wrist or ankle and communicate with a
smart phone device via Bluetooth connectivity. It will provide the
user with real time information on their blood glucose levels. This
initial product will require US Food and Drug
Administration approval prior to its introduction to the
market.
We have also announced the results of laboratory-based comparison
testing between our Bio-RFID technology and the leading continuous
glucose monitors from Abbott Labs (Freestyle Libre®) and
DexCom (G5®). These results provide evidence of a high degree
of correlation between our Bio-RFID based technology and the
current industry leaders and their continuous glucose monitors. Our
technology is fundamentally differentiated from these industry
leaders as our UBAND continuous glucose monitor is completely
non-invasive.
We expect to begin the process of obtaining US Food and Drug
Administration (FDA) approval of our non-invasive continuous blood
glucose monitoring device during calendar year 2020.
To guide us in that undertaking we previously
announced the hiring of a Chief Medical Officer and formed a
Medical and Regulatory Advisory Board to guide us through the FDA
process. We are unable, however, to estimate the time necessary for
such approval nor the likelihood of success in that
endeavor.
Our
ChromaID patented technology utilizes light at the photon
(elementary particle of light) level through a series of emitters
and detectors to generate a unique signature or
“fingerprint” from a scan of almost any solid, liquid
or gaseous material. This signature of reflected or transmitted
light is digitized, creating a unique ChromaID signature. Each
ChromaID signature is comprised of from hundreds to thousands of
specific data points.
The
ChromaID technology looks beyond visible light frequencies to areas
of near infra-red and ultraviolet light and beyond that are outside
the humanly visible light spectrum. The data obtained allows us to
create a very specific and unique ChromaID signature of the
substance for a myriad of authentication, verification and
identification applications.
Traditional
light-based identification technology, called spectrophotometry,
has relied upon a complex system of prisms, mirrors and visible
light. Spectrophotometers typically have a higher cost and utilize
a form factor (shape and size) more suited to a laboratory setting
and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific electromagnetic frequencies resulting in a
more accurate, portable and easy-to-use solution for a wide variety
of applications. The ChromaID technology not only has significant
cost advantages as compared to spectrophotometry, it is also
completely flexible is size, shape and configuration. The ChromaID
scan head can range in size from endoscopic to a scale that could
be the size of a large ceiling-mounted florescent light
fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. We call this the ChromaID Reference Data
Library. The scan head can then scan similar materials to identify,
authenticate or diagnose them by comparing the new ChromaID digital
signature scan to that of the original or reference ChromaID
signature or scan result. Over time, we believe the ChromaID
Reference Libraries can become a significant asset of the Company,
providing valuable information in numerous fields of use. The
Reference Data Libraries for our newly developed Bio-RFID will have
a similar promise regarding their utility and
value.
Bio-RFID and ChromaID: Foundational Platform
Technologies
Our
Bio-RFID and ChromaID technologies provide a platform
upon which a myriad of applications can be developed. As platform
technologies, they are analogous to a smartphone, upon which an
enormous number of previously unforeseen applications have been
developed. Bio-RFID
and ChromaID technologies are “enabling”
technologies that bring the science of electromagnetic energy to
low-cost, real-world commercialization opportunities across
multiple industries. The technologies are foundational and, as
such, the basis upon which the Company believes significant
businesses can be built.
As with other foundational technologies, a single application may
reach across multiple industries. The Bio-RFID
technology can non-invasively identity the presence and quantity of
glucose in the human body. By extension, there may be other
molecular structures which this same technology can identity in the
human body which, over time, the Company will focus upon. They may
include the monitoring of drug usage or the presence of illicit
drugs. They may also involve identifying hormones and various
markers of disease.
Similarly,
the ChromaID technology can, for example effectively differentiate
and identify different brands of clear vodkas that appear identical
to the human eye. By extension, this same technology could identify
pure water from water with contaminants present. It could provide
real time detection of liquid medicines such as morphine that have
been adulterated or compromised. It could detect if jet fuel has
water contamination present. It could determine when it is time to
change oil in a deep fat fryer. These are but a few of the
potential applications of the ChromaID technology based upon
extensions of its ability to identify different
liquids.
The cornerstone of a company with a foundational platform
technology is its intellectual property. We have pursued an active
intellectual property strategy and have been granted 13 patents. We
currently have a number of patents pending and continue, on a
regular basis the filing of new patents. We possess all
right, title and interest to the issued patents. Nine issued
and pending patents are licensed exclusively to us in
perpetuity by our strategic partner, Allied Inventors, a spin-off
entity of Intellectual Ventures, an intellectual property
fund.
47
Our Patents and Intellectual Property
We believe that our 13 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 2034. Pending
patents, if and when issued, may have expiration dates
that extend further in time. The duration of our trademark
registrations varies from country to country. However, trademarks
are generally valid and may be renewed indefinitely as long as they
are in use and/or their registrations are properly
maintained.
The
issued patents cover the fundamental aspects of the Know Labs
ChromaID technology and a number of unique applications. We have
filed patents on the fundamental aspects of our Bio-RFID technology
and growing number of unique applications. We will continue to
expand the Company’s patent
portfolio.
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.
48
On
May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March 12, 2033. This patent
describes a ChromaID fluid sampling devices.
On
April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires March 12,
2033. This patent describes an enhancement to the foundational
ChromaID technology.
On
April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy.” The patent expires
July 2027. This patent pertains to the use of ChromaID technology
for the identification and analysis of biological tissue. It has
many potential applications in medical, industrial and consumer
markets.
On
May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled
“Systems for Fluid Analysis Using Electromagnetic Energy that
is reflected a Number of Times through a Fluid Contained within a
Reflective Chamber.” This patent expires approximately in
approximately March 2034. This patent pertains to a method for the
use of the Company’s technology analyzing
fluids.
On
April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled
“Device for Evaluation of Fluids Using Electromagnetic
Energy.” The patent expires in approximately April 2033. This
patent pertains to the use of ChromaID technology for evaluating
and analyzing fluids such as those following through an IV drip in
a hospital or water, for example.
We continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
Product Strategy
We
are currently undertaking internal development work on potential
products for the consumer marketplace. We have announced the
development of our UBAND continuous glucose monitor and our desire
to obtain US Food and Drug Administration approval for the
marketing of this product to the diabetic and pre-diabetic
population. We have also announced the engagement of a
manufacturing partner we will work with to bring this product to
market. We will make further announcements regarding this product
as development, manufacturing and regulatory approval work
progresses.
Currently we are focusing our efforts on productizing our Bio-RFID
technology as we move it out of our research
laboratory and into the marketplace.
Research and Development
Our
current research and development efforts are primarily focused on
improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for this technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications. Our current internal team along with outside
consultants have considerable experience working with the
application of our technologies and their application. We engage
third party experts as required to supplement our internal team. We
believe that continued development of new and enhanced technologies
is essential to our future success. We incurred expenses of
$1,257,872 and $570,514 for the years ended September 30, 2019 and
2018, respectively, on development
activities.
49
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 have
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.
Under the terms of the Merger Agreement, each share of RAAI common
stock issued and outstanding immediately before the Merger (1,000
shares) were cancelled and we issued 2,000,000 shares of our common
stock. As a result, we issued 2,000,000 shares of its common stock
to Phillip A. Bosua, formerly the sole stockholder of RAAI. The
consideration for the Merger was determined through arms-length
bargaining by the Company and RAAI. The Merger was structured to
qualify as a tax-free reorganization for U.S. federal income tax
purposes. As a result of the Merger, the Company received certain
intellectual property, related to RAAI.
Merger with Know Labs, Inc.
On May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated
on April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
Corporate Name Change and Symbol Change
On May
24, 2018, the Financial Industry Regulatory Authority
(“FINRA”) announced the effectiveness of a change in
our name from Know Labs Incorporated to Know Labs, Inc. and a
change in our ticker symbol from VSUL to the new trading symbol
KNWN which became effective on the opening of trading as of May 25,
2018. In addition, in connection with the name change and symbol
change, we were assigned the CUSIP number of
499238103.
MANAGEMENT
Identification of Directors and Executive Officers
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
|
|
68
|
|
Director
(2)
|
|
Ichiro
Takesako
|
|
60
|
|
Director
|
|
William
A. Owens
|
|
79
|
|
Director
(3)
|
(1)
Chairman of the
Nominating and Corporate Governance Committee.
(2)
Chairman of the
Audit Committee.
(3)
Chairman of the
Compensation Committee.
All directors hold
office until their successors are duly appointed or until their
earlier resignation or removal.
50
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.
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
Mr. Takesako was appointed as a Director based on his
previous position with Sumitomo and Sumitomo's
previous significant partnership with the
Company.
51
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. Mr. 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. Mr. Owens serves on the board of
directors at Wipro Technologies and is a director of the following
private companies: Humm Kombucha, a beverage company and Versium.
Mr. Owens is on the advisory board of the following private
companies: Healthmine, Platform Science, Sarcos, Sierra Nevada
Corporation, and Vodi. Mr. Owens is on the board of trustees at
EastWest Institute, Seattle University, and an advisor to the
Fiscal Responsibility Amendment (CFFRA) Association which aims to
establish a balanced budget amendment to the US Constitution. He is
also a member of the Council of Foreign Relations.
From
2007 to 2015, Mr. 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. Mr. 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. Mr. 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). Mr. 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.
Mr.
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
Mr.
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.
Mr.
Owen was appointed as a director because of his business skills
with technology companies.
Board of Directors Composition
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.
52
|
|
|
|
|
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
|
There
are no family relationships among any of our directors or executive
officers.
Communication with our Board of Directors
Our
stockholders and other interested parties may communicate with our
Board of Directors by sending written communication in an envelope
addressed to "Board of Directors" in care of the Secretary, 500
Union Street, Suite 810, Seattle, Washington 98101.
Director Independence
The Board has affirmatively determined that Mr. Pepper, Mr.
Takesako and William A. Owens are each an independent director. For purposes of making
that determination, the Board used NASDAQ’s Listing Rules
even though the Company is not currently listed on
NASDAQ.
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.
Audit Committee
Our
Board of Directors established an audit committee in July
2010. Our audit committee
provides assistance to the Board in fulfilling its responsibilities
to our stockholders relating to: (1) maintaining the integrity
of our financial reports, including our compliance with legal and
regulatory requirements, (2) the independent auditor's
qualifications and independence, (3) the performance of our
internal audit function in cooperation with the independent
auditors, and (4) the preparation of the report required by
the rules of the SEC to be included in our annual proxy statement.
Our audit committee is directly responsible for the appointment,
compensation and oversight of the independent auditors (including
the resolution of any disagreements between management and the
independent auditors regarding financial reporting), approving in
advance all auditing services, and approving in advance all
non-audit services provided by the independent auditors. The
independent auditors report directly to the committee. In addition,
our audit committee is to review our annual and quarterly financial
reports in conjunction with the independent auditors and financial
management.
Our Board of Directors has adopted a written charter for the audit
committee, a copy of which is available on our website at
www.knowlabs.co.
53
Compensation Committee
Our
Board of Directors established a compensation committee in July
2010. Our compensation committee is responsible for:
(1) reviewing and approving goals and objectives underlying
the compensation of our Chief Executive Officer, evaluating the
CEO's performance in accordance with those goals and objectives,
and determining and approving the CEO's compensation;
(2) recommending to the board the compensation of executive
officers other than the CEO, subject to board approval;
(3) administering any incentive compensation and equity-based
plans, subject to board approval; (4) preparing the
compensation report required by the rules and regulations of the
SEC for inclusion in our annual proxy statement; and
(5) periodically reviewing the results of our executive
compensation and perquisite programs and making recommendations to
the board with respect to annual compensation (salaries, fees and
equity) for our executive officers and non-employee
directors.
Our Board of Directors has adopted a written charter for the
compensation committee, a copy of which is available on our website
at www.knowlabs.co.
Nominations and Governance Committee
Our
Board of Directors established the nominations and governance
committee in July 2010 for the purpose of: (1) assisting the
board in identifying individuals qualified to become board members
and recommending to the board the nominees for election as
directors at the next annual meeting of stockholders;
(2) assist the board in determining the size and composition
of the board committees; (3) develop and recommend to the
board the corporate governance principles applicable to us; and
(4) serve in an advisory capacity to the board and the
Chairman of the Board on matters of organization, management
succession planning, major changes in our organizational and the
conduct of board activities.
Our Board of Directors has adopted a written charter for the
nominations and governance committee, a copy of which is available
on our website at www.knowlabs.co.
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;
|
54
|
|
●
|
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.
|
Compliance with Section 16(a) of the Exchange Act
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, 2019 our executive officers,
directors and 10% holders complied with all filing requirements
except as follows:
Jon Pepper filed a
Form 4 on November 12, 2018 that was required to be filed on
November 2, 2018.
Ichiro Takesako
filed a Form 4 on November 12, 2018 that was required to be filed
on November 2, 2018.
Jon Pepper filed a
Form 4 on September 25, 2019 that was required to be filed on
September 19, 2019.
Ichiro Takesako
filed a Form 4 on September 25, 2019 that was required to be filed
on September 19, 2019.
EXECUTIVE AND DIRECTOR
COMPENSATION
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, 2019 and 2018:
Summary Compensation Table
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, 2019 and 2018:
|
|
|
|
|
|
|
|
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
|
9/30/2019
|
$188,750
|
$-
|
$102,000
|
$-
|
$-
|
$290,750
|
|
|
|
9/30/2018
|
$180,000
|
$-
|
$21,000
|
$-
|
$-
|
$201,000
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
A. Bosua (2)
|
Chief
Executive Officer
|
9/30/2019
|
$233,750
|
$-
|
$-
|
$-
|
$-
|
$233,750
|
|
|
|
9/30/2018
|
$106,095
|
$-
|
$177,000
|
$1,280,000
|
$167,500
|
$1,730,595
|
(1)
During the years ended September 30, 2019 and
2018, 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. On March 5,
2019, the annual compensation was increased to
$195,000. The 100,000 of restricted common stock issued on
January 16, 2018 to Mr. Erickson were valued at the grant date
market value of $0.21 per share. 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
stock grant was authorized at $0.17 per share.
(2)
On April 10, 2018, we appointed Mr. Bosua as our
Chief Executive Officer. During the period April 10,
2018 to September 30, 2018, Mr. Bosua was compensated at a monthly
salary of $18,750. We entered into a Consulting Agreement with Mr.
Bosua’s company, Blaze Clinical on July 7, 2017. We paid
$167,500 during the period October 1, 2017- April 9, 2018. We paid
$17,500 during the period July 7, 2017 to September 30, 2017. The
50,000 of restricted common stock was issued on February 7, 2018 to
Mr. Bosua at the grant date market value of $0.24 per
share. The 500,000 of restricted common stock was issued
on June 25, 2018 to Mr. Bosua at the grant date market value of
$0.33 per share. The 50,000 of restricted common stock was
issued on July 14, 2017 to Mr. Bosua at the grant date market value
of $0.17 per share. On July 30, 2018, Mr. Bosua was awarded a
stock option grant for 1,000,000 shares of our common stock that
was awarded at $1.28 per share.
55
(3)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
Grants
of Stock Based Awards in Fiscal Year Then Ended September 30,
2019
The Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers during the
year ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
Option
Awards;
|
|
|
|
|
|
Estimated Future Payouts Under
|
Estimated Future Payouts Under
|
Stock Awards;
|
Number of
|
|
|
||||
|
|
|
Non-Equity Incentive Plan
|
Equity Incentive Plan
|
Number of
|
Securities
|
Exercise or
|
Grant Date
|
||||
|
|
|
Awards
|
Awards
|
Shares of
|
Underlying
|
Base Price of
|
Fair Value of
|
||||
|
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Stock or Units
|
Options
|
Option Awards
|
Stock and
|
|
Name
|
Date
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($/Sh) (2)
|
Option Awards
|
|
|
|
|
|
|
|
|
|
||||
|
Ronald
P. Erickson (1)
|
|
$-
|
$-
|
$-
|
100,000
|
100,000
|
100,000
|
100,000
|
-
|
$1.020
|
$102,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
A. Bosua
|
|
$-
|
$-
|
$-
|
-
|
-
|
-
|
-
|
-
|
$-
|
$-
|
(1)
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 stock grant was authorized at
$0.17 per share. The estimated future payment include 100,000
shares to be issued on January 1, 2020 were valued at the grant
date market value of $0.17 per share when authorized by the
Board.
(2)
These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
56
Outstanding Equity Awards as of Fiscal Year Then Ended September
30, 2019
Our Named Executive Officers have the following outstanding equity
awards as of September 30,
2019.
|
|
Option Awards
|
|||
|
|
Number of Securities
Underlying Unexercised
Options Exercisable
|
Number of Securities
Underlying Unexercised
Options Unexerciseable
|
Option
Exercise
Price
|
Option
Expiration
|
|
Name
|
(#)
|
(#)
|
($) (2)
|
Date
|
|
|
|
|
|
|
|
Ronald
P. Erickson
|
-
|
-
|
$-
|
|
|
|
|
|
|
|
|
Phillip
A. Bosua (1)
|
312,500
|
687,500
|
$1.28
|
7/23/2023
|
(1)
On July 30, 2018, Mr. Bosua was awarded a stock
option grant for 1,000,000 shares of our common stock that was
awarded at $1.28 per share. The
stock option grant vests quarterly over four
years.
(2)
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.
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. These performance stock option grants have not
been earned as of September 30, 2019.
Option Exercises and Stock Vested
Our Named Executive Officers did not have any option exercises
during the year ended September 30, 2019.
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 Ronald P. Erickson and Phillip
A. Bosua.
Potential Payments upon Termination or Change in
Control
We have the following potential payments upon termination or change
in control with Ronald P. Erickson:
|
Executive Payments Upon
Separation
|
For Cause Termination on
9/30/19
|
Early or Normal Retirement
on 9/30/19
|
Not For GoodCause Termination
on9/30/19
|
Change in Control
Termination on
9/30/19
|
Disability or Death on
9/30/19
|
|
Compensation:
|
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$195,000
|
$195,000
|
$-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$17,000
|
$17,000
|
$-
|
|
Stock
options
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
|
Health
and welfare benefits (3)
|
$-
|
$-
|
$36,000
|
$36,000
|
$-
|
|
Accrued
vacation pay
|
$-
|
$-
|
$51,000
|
$51,000
|
$-
|
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$299,000
|
$299,000
|
$-
|
(1)
Reflects a salary
for twelve months.
(2)
Reflects
the vesting of estimated future payments includes 100,000 shares to
be issued on January 1, 2019 and 2020 valued at $0.17 per
share.
(3)
Reflects
the cost of medical benefits for eighteen months.
57
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 9/30/19
|
on 9/30/19
|
on 9/30/19
|
on 9/30/19
|
on 9/30/19
|
|
Compensation:
|
|
|
|
|
|
|
Base
salary (1)
|
$-
|
$-
|
$240,000
|
$240,000
|
$-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
(2)
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Stock
options
|
$-
|
$-
|
$440,000
|
$440,000
|
$-
|
|
|
|
|
|
|
|
|
Benefits
and Perquisites:
|
|
|
|
|
|
|
Health
and welfare benefits (3)
|
$-
|
$-
|
$21,600
|
$21,600
|
$-
|
|
Accrued
vacation pay
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
Total
|
$-
|
$-
|
$701,600
|
$701,600
|
$-
|
(1)
Reflects a salary
for one year.
(2)
Reflects
the vesting of 1,000,000 shares to be issued upon a change in
control valued at $0.64 per share.
(3)
Reflects
the cost of medical benefits for eighteen
months.
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, 2019, 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 55 represents the total
compensation for Mr. Erickson and Mr.
Bosua.
58
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, 2019.
|
|
Stock
|
Option
|
Other
|
|
|
Name
|
Awards
|
Awards
(3)
|
Compensation
|
Total
|
|
Jon
Pepper (1)
|
$-
|
$137,346
|
$-
|
$137,346
|
|
Ichiro
Takesako (2)
|
-
|
137,346
|
-
|
137,346
|
|
William
A. Owens
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$-
|
$274,692
|
$-
|
$274,692
|
(1) The stock option grant for 50,000 shares of
common stock was issued on October 31, 2018 to Mr. Pepper and was
valued at the black scholes value of $2.747 per share. The stock option grant
was voluntarily cancelled by Mr. Pepper on September 17,
2019.
(2)
The stock option grant for 50,000 shares of common stock was issued
on October 31, 2018 to Mr. Takesako and was valued at the black
scholes value of $2.747 per share. The stock option grant was
voluntarily cancelled by Mr. Takesako on September 17,
2019.
(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.
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Since October 1,
2017, 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.
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,
2017, 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.
Transactions with Clayton Struve
We have
the following transactions with Clayton Struve:
Convertible Promissory Note dated September 30, 2016
On September 30, 2016, we entered into a $210,000 Convertible
Promissory Note with Clayton A. Struve, an accredited investor of
the Company, to fund short-term working capital. The Convertible
Promissory Note accrued interest at a rate of 10% per annum and was
due on March 30, 2017. The Note holder can convert the Note into
common stock at $0.70 per share. This note was extended in the
Securities Purchase Agreement, General Security Agreement and
Subordination Agreement dated August 14, 2017 with a maturity date
of August 13, 2018. Also, the conversion price of the Debenture was
adjusted to $0.25 per share, subject to certain adjustments. The
balance was increased $75,000 during the year ended September 30,
2018. On November 16, 2018, we signed Amendment 1 to Senior
Secured Convertible Redeemable Notes dated September 30,
2016, extending the due dates of the Note to February
27, 2019. On September 24, 2018, Mr. Struve converted $200,000 of
the Note into 800,000 shares of our common stock.
Securities Purchase Agreement dated August 14, 2017
On August 14, 2017, we issued a senior convertible exchangeable
debenture with a principal amount of $360,000 and a common stock
purchase warrant to purchase 1,440,000 shares of common stock in a
private placement to Clayton Struve for gross proceeds of $300,000
pursuant to a Securities Purchase Agreement dated August 14, 2017.
The debenture accrues interest at 20% per annum and had an
initial maturity date of August 13, 2018.
59
On the same date, we entered into a General Security Agreement with
the Mr. Struve, pursuant to which the Company has agreed to grant a
security interest to the investor in substantially all of our
assets, effective upon the filing of a UCC-3 termination statement
to terminate the security interest held by Capital Source Business
Finance Group in the assets of the Company. In addition, an entity
affiliated with Ronald P. Erickson, out then Chief Executive
Officer, entered into a Subordination Agreement with the investor
pursuant to which all debt owed by us to such entity is
subordinated to amounts owed by us to Mr. Struve under the
Debenture (including amounts that become owing under any Debentures
issued to the investor in the future).
The initial conversion price of the Debenture is $0.25 per share,
subject to certain adjustments. The initial exercise price of the
Warrant is $0.25 per share, also subject to certain
adjustments.
As part of the Purchase Agreement, we granted the investor
“piggyback” registration rights to register the shares
of common stock issuable upon the conversion of the Debenture and
the exercise of the Warrant with the Securities and Exchange
Commission for resale or other disposition.
The Debenture and the Warrant were issued in a transaction that was
not registered under the Securities Act of 1933, as amended in
reliance upon applicable exemptions from registration under Section
4(a)(2) of the Act and Rule 506 of SEC Regulation D under the Act.
Under the terms of the Purchase Agreement, Mr. Struve may purchase
up to an aggregate of $1,000,000 principal amount of Debentures
(before a 20% original issue discount) (and Warrants to purchase up
to an aggregate of 250,000 shares of common stock). These
securities are being offered on a “best efforts” basis
by the placement agent.
On December 12, 2017, we closed an additional $250,000 and issued a
senior convertible exchangeable debenture with a principal amount
of $300,000 and a common stock purchase warrant to purchase
1,200,000 shares of common stock in a private placement dated
December 12, 2017 with Mr. Struve pursuant to a Securities Purchase
Agreement dated August 14, 2017.
On March 2, 2018, we received gross proceeds of $280,000 in
exchange for issuing a senior convertible redeemable debenture with
a principal amount of $336,000 and a warrant to purchase 1,344,000
shares of common stock in a private placement dated February 28,
2018 with Mr. Struve pursuant to a Securities Purchase Agreement
dated August 14, 2017.
On November 16, 2018, we signed Amendment 1 to Senior Secured
Convertible Redeemable Notes dated August 14, 2017 and December 12,
2017, extending the due dates of the Notes to February 27, 2019.
As of September 30, 2019, the Company
owes Clayton A. Struve $1,071,000 under convertible promissory or
OID notes. The Company recorded accrued interest of $62,171 as of
September 30, 2019. 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 March 31,
2020.
Series C and D Preferred Stock and Warrants
See
page 32 for a description of Series C and D Preferred
Stock and Warrants.
Debt Offering
Mr. Struve invested
$1,000,000 in the Debt Offering which closed in May
2019.
Related Party Transactions with Ronald P. Erickson
On January 16, 2018, Mr. Erickson was issued 100,000
of restricted common stock on to at the grant date market value of
$0.21 per share. 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 stock grant was authorized at $0.17 per
share.
On
January 25, 2018, we entered into amendments to two demand
promissory notes, totaling $600,000 with Mr. Erickson, our
former Chief Executive Officer and current
chairman of the board and/or entities in which Mr. Erickson
has a beneficial interest. The amendments extend the due date from
December 31, 2017 to September 30, 2018 and continue to provide for
interest of 3% per annum and a third lien on company assets if not
repaid by September 30, 2018 or converted into convertible
debentures or equity on terms acceptable to the Holder. On March
16, 2018, the demand promissory notes and accrued interest were
converted into convertible notes payable.
60
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, 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 July 9, 2018, we repaid a $199,935 Business Loan Agreement with
Umpqua Bank from funds previously provided by an entity
affiliated with Ronald P. Erickson, our Chairman of the Board. The
Company paid $27,041 and issued
800,000 shares of common stock in exchange for the conversion of
this debt. Mr. Erickson is an accredited investor. These shares
were issued in transactions that were not registered under 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.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $657,551
as of September 30, 2018.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately
$458,500 as of September 30,
2019.
Related Party Transaction with Phillip A. Bosua
On
February 7, 2018, we issued 50,000 shares of our common stock to
Phillip A. Bosua under the terms of a consulting agreement dated
July 6, 2017. The fair value of the shares issued was
$12,000.
On
April 10, 2018, we issued 2,000,000 shares of our common stock to
Phillip A. Bosua under the terms of the Merger Agreement with RAAI
common stock. The fair value of the shares issued was
$520,000.
On June
25, 2018, we issued 500,000 shares of our common stock to Phillip
A. Bosua under the terms of an Employment agreement dated April 10,
2018. The fair value of the shares issued was
$165,000.
On June
25, 2018, we closed a debt conversion
with an entity controlled by Phillip A. Bosua and issued 255,000
shares of common stock in exchange for the conversion of $63,750 in
preexisting debt owed by the Company to this
entity.
On July 30, 2018, Mr. Bosua was awarded a stock option grant for
1,000,000 shares of our common stock that was awarded at $1.28 per
share.
Stock Issuances to Named Executive Officers and
Directors
During January to May 2018, we issued 275,000 shares of restricted
common stock to one Named Executive Officer and two directors for
services during 2018. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $0.246 per share, the
market price of our common stock.
61
Stock Option Grant Cancellations
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.
Indemnification
Our
articles of incorporation provide that we will indemnify our
directors and officers to the fullest extent permitted by Nevada
law. In addition, we have an Indemnification Agreements with the
current Board of Directors.
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
ownership of our common stock as of September 30, 2019
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.
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.
62
|
|
Shares Beneficially
Owned
|
|
|
|
Amount
|
Percentage
|
|
Directors
and Officers-
|
|
|
|
Ronald
P. Erickson (1)
|
7,989,015
|
32%
|
|
Phillip
A. Bosua (2)
|
3,167,500
|
17%
|
|
Jon
Pepper (3)
|
238,000
|
1.3%
|
|
Ichiro
Takesako (4)
|
150,000
|
*%
|
|
William
A. Owens (5)
|
650,000
|
3.5%
|
|
Total
Directors and Officers (5 in total)
|
12,194,515
|
-%
|
* Less than 1%.
(1)
Reflects 1,358,085 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.
(2)
Reflects
2,855,000 shares of shares of common stock beneficially owned by
Phillip A. Bosua and vested stock option grants to purchase 312,500
shares of our common stock that are exercisable within 60
days.
(3)
Reflects 238,000 shares of shares of common stock
beneficially owned by Jon Pepper.
(4)
Reflects
150,000 shares of shares of common stock beneficially owned Ichiro
Takesako.
(5)
Reflects
450,000 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.
|
|
Shares Beneficially Owned
|
|
|
|
Amount
|
Percentage
|
|
|
|
|
|
Greater Than 5% Ownership
|
|
|
|
|
|
|
|
Clayton
A. Struve (1)
|
21,478,075
|
55.0%
|
|
|
Blocker
at 4.99%
|
|
|
Ronald
P. Erickson (2)
|
7,989,015
|
32.0%
|
|
|
|
|
|
Phillip
A. Bosua (3)
|
3,167,500
|
17.0%
|
|
|
|
|
|
Dale
Broadrick (4)
|
2,226,036
|
11.4%
|
|
|
|
|
(1)
Reflects 800,000 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
1,358,085 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
2,855,000 shares of shares of common stock beneficially owned by
Phillip A. Bosua and vested stock option grants to purchase 312,500
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 1,113,018 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.
63
DESCRIPTION OF CAPITAL
STOCK
General
The
following description of our capital stock and provisions of our
articles of incorporation and bylaws are summaries and are
qualified by reference to our articles of incorporation, as amended
and restated, and our bylaws, as amended and restated. We have
filed copies of these documents with the SEC as exhibits to our
Registration Statement, of which this prospectus forms a
part.
Authorized Capital Stock
We have
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 voting preferred stock, par
value $0.001 per share.
Capital Stock Issued and Outstanding
The
number of shares of our common stock outstanding before this
offering is based on 18,366,178 shares of our common
stock outstanding as of September 30, 2019, and
excludes, as of that date:
●
4,532,668 shares
of our common stock issuable upon the exercise of outstanding stock
options outstanding at a weighted-average exercise price of $2.025
per share (including unearned stock option grants totaling
2,410,000 and excluding certain stock option grants for a cancelled
kickstarter program);
●
13,262,779 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 4,242,515 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $6,497,581;
●
1,785,715 shares of Series C Preferred Stock
outstanding, which could potentially be converted into 5,000,000
shares of common stock, at an exercise price of $0.25,
subject to certain adjustments;
●
3,108,356 shares of
our common stock issuable upon the conversion of Series D
Convertible Preferred Stock, at an exercise price of $0.25, subject
to certain adjustments, and
●
17,747,090 warrants
to purchase shares of our common stock at an exercise price of
$0.455 subject to certain
adjustments.
Voting Common Stock
The Company has
authorized to issue up to 100,000,000 shares of common stock with a
par value of $0.001. As of September 30, 2019, the Company had
18,366,178 shares of common stock issued and outstanding, held by
116 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 us. 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 4,242,515 common
shares at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of $6,497,581. All of
which could potentially dilute future earnings per
share.
64
Holders
of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have
cumulative voting rights for the election of directors. An election
of directors by our stockholders shall be determined by a plurality
of the votes cast by the stockholders entitled to vote on the
election. On all other matters, the affirmative vote of the holders
of a majority of the stock present in person or represented by
proxy and entitled to vote is required for approval, unless
otherwise provided in our articles of incorporation, bylaws or
applicable law. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our Board of
Directors, subject to any preferential dividend rights of
outstanding preferred stock.
In the
event of our liquidation or dissolution, the holders of common
stock are entitled to receive proportionately all assets available
for distribution to stockholders after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of common stock are
subject to and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Voting Preferred Stock
As of
September 30, 2019, we are authorized to issue up to
5,000,000 shares of preferred stock with a par value of $0.001 per
share.
Series A Preferred Stock
There are 23,334 shares 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 may not be
redeemed without the consent of the holder.
On January 29, 2019, a sole 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 September
30, 2019.
Series C Preferred Stock and Warrants
On August 11, 2016, we filed a Certificate of Designations,
Preferences, and Rights of Series C Convertible Preferred Stock. On
August 14, 2017, the price of the Series C Preferred Stock were adjusted to
$0.25 per share pursuant to the
documents governing such instruments. The Certificate designated
1,785,715 shares as Series C Convertible Preferred Stock at a par
value of $.001 per share that is currently convertible into common
stock at $0.25 per share, with certain adjustments as set forth in
the Certificate. The Series C Preferred stock has a
yield of 8% and an ownership blocker of 4.99%.
As of September 30, 2019, the Company has 1,785,715
shares of Series C Preferred Stock outstanding.
In addition, a corresponding number of five-year warrants to
acquire 1,785,714 shares of common stock at $0.25 per share were
issued in conjunction with the Series C Preferred Shares and remain
outstanding.
Series D Preferred Stock and Warrants
We have
authorized the designation of 1,016,014 shares as Series D
Convertible Preferred Stock (“Series D Preferred”).
On August 14, 2017, the price
of the Series D Preferred Stock
was adjusted to $0.25 per share pursuant to the documents governing such
instruments. On May 8, 2017, we applied with the State of
Nevada for approval of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock.
On July 17, 2018, we filed with the
State of Nevada a second Amended and Restated Certificate of
Designation of Preferences, Powers, and Rights of the Series D
Convertible Preferred Stock to decrease the number of authorized
Series D Shares from 3,906,250
to 1,016,014.
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%.
65
In conjunction with Series D Preferred Stock we authorized Series F
Warrants, which are exercisable for a term of five years at strike
price of $0.25. The underlying common stock upon the conversion of
the Series D Preferred and Series F Warrants issued were required
to be included in a registration statement as filed by the
Company.
As of September 30, 2019, the Company has 1,016,004
shares of Series D Preferred Stock outstanding, which have a total
of 3,108,356 common stock shares currently conversion if the
underlying conversion price remains $0.25, and there are 3,984,000
Series F warrant shares.
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.
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 1,785,715
outstanding shares of Series C Preferred Stock, 1,016,004
outstanding shares Series D Preferred Stock that adjust below $0.25
per share pursuant to the documents governing such instruments. In
addition, the conversion price of a Convertible Note Payable of
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share) and the exercise price of additional outstanding
warrants to purchase 12,838,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
The conversion price
of Convertible Note Payable
of $4,242,515
(4,242,515 common
shares at the current price of $1.00 per share) would adjust below
$1.00 per share pursuant to the documents governing such
instruments. Warrants totaling 2,663,359 would adjust below $1.20
per share pursuant to the documents governing such
instruments.
DESCRIPTION OF
SECURITIES BEING REGISTERED
This prospectus covers the resale by the Selling Stockholders named
herein of up to 14,337,632 shares of our common stock. The common stock
covered by this prospectus will be offered for resale from time to
time by the Selling Stockholders identified in this prospectus in
accordance with the terms described in the section entitled
“Plan of Distribution.” We will not receive any of the
proceeds from the resale of the common stock by the Selling
Stockholders.
66
Common Stock
The
material terms and provisions of our common stock and each other
class of our securities which qualifies or limits our common stock
are described under the caption “Description of Capital
Stock” in this prospectus.
Options to Purchase Common Stock
Stock Incentive Plan
On March 21, 2013,
an amendment to the Stock Option Plan was approved by the
stockholders of the Company, increasing the number of shares
reserved for issuance under the Plan to 93,333 shares. On April 10, 2018, 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 93,333 to 1,200,000. On August 7, 2018, 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 1,200,000 to 2,000,000 to common shares. 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.
There
are currently 4,532,668 options to purchase common stock at an
average exercise price of $2.025 per share outstanding as of
September 30, 2019 under the 2011 Stock Incentive Plan. The Company
recorded $1,141,674 and $50,899 of compensation expense, net of
related tax effects, relative to stock options for the year ended
September 30, 2019 and 2018 and in accordance with ASC 718. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.060) and ($0.010) per share, respectively. As of
September 30, 2019, there is approximately $631,026, 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 3.70
years. Stock option grants totaling 2,410,000 shares of common
stock are performance stock option grants and are not vested until
the performance is achieved.
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. In addition, our articles
of incorporation restrict our ability to pay any dividends on our
common stock without the approval of 66% of our then outstanding
Series A Preferred Stock.
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 December 31, 2019, 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.
67
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.
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.
In
addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
●
authorizing,
creating, designating, establishing or issuing an increased number
of shares of Series A Preferred Stock or any other class or series
of capital stock ranking senior to or on a parity with the Series A
Preferred Stock;
●
adopting a plan for
the liquidation, dissolution or winding up the affairs of our
company or any recapitalization plan (whether by merger,
consolidation or otherwise);
●
amending, altering
or repealing, whether by merger, consolidation or otherwise, our
articles of incorporation or bylaws in a manner that would
adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock; and
●
declaring or paying
any dividend (with certain exceptions) or directly or indirectly
purchase, redeem, repurchase or otherwise acquire any shares of our
capital stock, stock options or convertible securities (with
certain exceptions).
68
Such
provisions may have the effect of discouraging a third-party from
acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
Board of Directors and in the policies formulated by them, and to
discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition
proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in
an improvement of their terms.
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.
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.
Offer Restrictions Outside the United States
Other
than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for
that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be
distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons into whose
possession this prospectus comes are advised to inform themselves
about and to observe any restrictions relating to the offering and
the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy
any securities offered by this prospectus in any jurisdiction in
which such an offer or a solicitation is unlawful.
LEGAL MATTERS
Unless
otherwise indicated in the applicable prospectus supplement,
Horwitz + Armstrong, A Professional Law Corporation, Lake Forest,
California, will provide opinions regarding the validity of the
shares of our Common Stock. Horwitz + Armstrong, A Professional Law
Corporation may also provide opinions regarding certain other
matters.
EXPERTS
SD Mayer and Associates, LLP, independent
registered public accounting firm, audited our financial statements
at September 30, 2018, and for the year ended September 30, 2018,
as set forth in their report which includes an explanatory
paragraph relating to our ability to continue as a going concern,
included elsewhere in this prospectus. We have included our
financial statements in this prospectus and elsewhere in this
Registration Statement in reliance on SD Mayer and Associates, LLP’s
report, given on their authority as experts in accounting and
auditing.
BPM LLP, independent registered public
accounting firm, audited our financial statements as of September
30, 2019, and for the year then ended as set forth in their report
which includes an explanatory paragraph relating to our ability to
continue as a going concern, included elsewhere in this prospectus.
We have included our September 30, 2019 financial statements in
this prospectus and elsewhere in this Registration Statement in
reliance on BPM LLP’s
report, given the authority of said firm as experts in accounting
and auditing.
Except
as noted below, no expert or counsel named in this prospectus
as having prepared or certified any part of this prospectus or
having given an opinion upon the validity of the securities being
registered or upon other legal matters in connection with the
registration or offering of the shares and warrants and its
underlying securities was employed on a contingency basis, or had,
or is to receive, in connection with the offering, a substantial
interest, direct or indirect, in the registrant or any of its
parents or subsidiaries. Nor was any such person connected with the
registrant or any of its parents or subsidiaries as a promoter,
managing or principal underwriter, voting trustee, director,
officer, or employee.
69
WHERE YOU CAN FIND MORE
INFORMATION
We have
filed with the SEC a Registration Statement on Form S-1 under
the Securities Act of 1933 with respect to the shares of common
stock we are offering to sell. This prospectus, which constitutes
part of the Registration Statement, does not include all of the
information contained in the Registration Statement and the
exhibits, schedules and amendments to the Registration Statement.
For further information with respect to us and our common stock, we
refer you to the Registration Statement and to the exhibits and
schedules to the Registration Statement. Statements contained in
this prospectus about the contents of any contract, agreement or
other document are not necessarily complete, and, in each instance,
we refer you to the copy of the contract, agreement or other
document filed as an exhibit to the Registration Statement. Each of
these statements is qualified in all respects by this
reference.
You may
read and copy the Registration Statement of which this prospectus
is a part at the SEC's public reference room, which is located at
100 F Street, N.E., Room 1580, Washington, DC 20549. You
can request copies of the Registration Statement by writing to the
Securities and Exchange Commission and paying a fee for the copying
cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the SEC's public reference room. In
addition, the SEC maintains a website, which is located at
www.sec.gov,
that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC. You may access the Registration Statement of which this
prospectus is a part at the SEC's website.
We are
subject to the information reporting requirements of the Securities
Exchange Act of 1934 and are required to file reports, proxy
statements and other information with the SEC. All documents filed
with the SEC are available for inspection and copying at the public
reference room and website of the SEC referred to above. We
maintain a website at www.knowlabs.co. You may access our reports,
proxy statements and other information free of charge at this
website as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC. The
information on such website is not incorporated by reference and is
not a part of this prospectus.
70
Report of Independent Registered Public Accounting
Firm
To the Board of
Directors and Stockholders of Know Labs, Inc.
Opinion
on the Financial Statements
We have audited the
accompanying consolidated balance sheet of Know Labs, Inc. (the
Company) as of September 30, 2019, and the consolidated related
statements of operations, stockholders’ deficit, and cash
flows for the year ended September 30, 2019 and the related notes
(collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of September 30,
2019, and the results of its operations and its cash flows for the
year ended September 30, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
Basis
for Opinion
These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s 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
audit 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 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 audit, 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 audit included
performing procedures to assess the risks of material misstatement
of the 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 financial statements. Our audit also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
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.
/s/ BPM
LLP
BPM LLP
We
served as the Company’s auditor since October
2019
Walnut
Creek, California
December
27, 2019
F-1
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
Know Labs, Inc.
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Know
Labs, Inc. as of September 30, 2018, and the related consolidated
statements of operations, stockholders’ deficit, and cash
flows for the year ended September 30, 2018 and the related notes
(collectively referred to as the ‘financial
statements’). In our opinion, the financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Know Labs, Inc. at September 30,
2018, and the consolidated results of its operations and its cash
flows for each of the year in the period ended September 30, 2018,
in conformity with U.S. generally accepted accounting
principles.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and 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 financial statements
are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of
material misstatement of the 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 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 financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
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.
/s/ SD Mayer &
Associates, LLP
SD Mayer & Associates, LLP
We
served as the Company’s auditor from 2016 to October
2019
San Francisco, CA
December
21, 2018
F-2
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September
30,
2019
|
September
30,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash and cash
equivalents
|
$1,900,836
|
$934,407
|
|
Accounts
receivable, net of allowance of $40,000 and $60,000,
respectively
|
63,049
|
320,538
|
|
Prepaid
expenses
|
6,435
|
20,140
|
|
Inventories,
net
|
7,103
|
203,582
|
|
Total current
assets
|
1,977,423
|
1,478,667
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
130,472
|
169,333
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
Intangible
assets
|
274,446
|
447,778
|
|
Other
assets
|
13,766
|
7,170
|
|
Operating lease
right of use asset
|
243,526
|
-
|
|
|
|
|
|
TOTAL
ASSETS
|
$2,639,633
|
$2,102,948
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable -
trade
|
$810,943
|
$1,512,617
|
|
Accounts payable -
related parties
|
7,048
|
12,019
|
|
Accrued
expenses
|
460,055
|
72,140
|
|
Accrued expenses -
related parties
|
458,500
|
657,551
|
|
Deferred
revenue
|
-
|
55,959
|
|
Convertible notes
payable
|
3,954,241
|
2,255,066
|
|
Notes
payable
|
-
|
145,186
|
|
Current portion of
operating lease right of use liability
|
124,523
|
-
|
|
Total current
liabilities
|
5,815,310
|
4,710,538
|
|
|
|
|
|
NON-CURRENT PORTION
OF OPERATING LEASE RIGHT OF USE LIABILITY
|
121,613
|
-
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 15)
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
|
|
|
|
outstanding at
9/30/2019 and 9/30/2018, respectively
|
-
|
-
|
|
Series A
Convertible Preferred stock - $0.001 par value, 23,334 shares
authorized, 0 shares and
|
|
|
|
20,000 shares
issued and outstanding at 9/30/2019 and 9/30/2018,
respectively
|
-
|
11
|
|
Series C
Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
|
|
|
|
1,785,715 shares
issued and outstanding at 9/30/2019 and 9/30/2018,
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 9/30/2019 and 9/30/2018,
respectively
|
1,015
|
1,015
|
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 18,366,178 and
17,531,502 shares
|
|
|
|
issued and
outstanding at 9/30/2019 and 9/30/2018, respectively
|
18,366
|
17,532
|
|
Additional paid in
capital
|
39,085,179
|
32,163,386
|
|
Accumulated
deficit
|
(42,403,640)
|
(34,791,324)
|
|
Total stockholders'
deficit
|
(3,297,290)
|
(2,607,590)
|
|
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
$2,639,633
|
$2,102,948
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years
Ended,
|
|
|
|
September
30,
2019
|
September
30,
2018
|
|
|
|
|
|
REVENUE
|
$1,804,960
|
$4,303,296
|
|
COST OF
SALES
|
1,378,413
|
3,481,673
|
|
GROSS
PROFIT
|
426,547
|
821,623
|
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
1,257,872
|
570,514
|
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
4,181,687
|
2,508,846
|
|
OPERATING
LOSS
|
(5,013,012)
|
(2,257,737)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
Interest
expense
|
(2,945,312)
|
(1,195,329)
|
|
Other
income
|
(9,561)
|
25,160
|
|
Gain on debt
settlements
|
355,569
|
170,309
|
|
Total other income
(expense), net
|
(2,599,304)
|
(999,860)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(7,612,316)
|
(3,257,597)
|
|
|
|
|
|
Income taxes -
current provision
|
-
|
-
|
|
|
|
|
|
NET
LOSS
|
$(7,612,316)
|
$(3,257,597)
|
|
|
|
|
|
Basic and diluted
loss per share
|
$(0.42)
|
$(0.38)
|
|
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
18,053,848
|
8,630,891
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
(DEFICIT)
|
|
|
|
Series
B
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
|
Redeemable
Convertible
|
Series C
Convertible
|
Series D
Convertible
|
|
|
Additional
|
|
Total
|
||||
|
|
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Stockholders'
|
|||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Amount
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
Balance as of September 30,
2017
|
23,334
|
$23
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
4,655,486
|
$4,655
|
$27,565,453
|
$(31,533,727)
|
$(3,960,791)
|
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
50,899
|
-
|
50,899
|
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,279,676
|
1,280
|
439,039
|
-
|
440,319
|
|
Issuance of Series D Convertible
Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
817,802
|
-
|
817,802
|
|
Issuance of common stock for
conversion of liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,435,000
|
2,435
|
709,515
|
-
|
711,950
|
|
Issuance of common stock for
cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
7,000,000
|
7,000
|
1,743,000
|
-
|
1,750,000
|
|
Stock based compensation-
warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
239,680
|
-
|
239,680
|
|
Issuance of common stock for
technology
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,000,000
|
2,000
|
518,000
|
-
|
520,000
|
|
Issuance of common stock for warrant
exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
158,026
|
158
|
79,989
|
-
|
80,147
|
|
Conversion of Series A Convertible
Preferred Stock
|
(3,334)
|
(12)
|
|
|
|
|
|
|
3,334
|
3
|
9
|
-
|
-
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,257,597)
|
(3,257,597)
|
|
Balance as of September 30,
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)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years
Ended,
|
|
|
|
September
30,
2019
|
September
30,
2018
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
Net loss
|
$(7,612,316)
|
$(3,257,597)
|
|
Adjustments to reconcile net loss to
net cash (used in)
|
|
|
|
operating
activities
|
|
|
|
Depreciation and
amortization
|
259,347
|
132,615
|
|
Issuance of capital stock for
services and expenses
|
348,900
|
440,319
|
|
Stock based compensation-
warrants
|
117,458
|
239,680
|
|
Conversion of
interest
|
-
|
64,233
|
|
Stock based compensation- stock
option grants
|
1,141,674
|
50,899
|
|
Amortization of debt
discount
|
2,771,270
|
475,174
|
|
Conversion of accrued liabilities-
related parties to notes payable
|
-
|
491,802
|
|
Provision on loss on accounts
receivable
|
-
|
10,747
|
|
Issuance of common stock for
conversion of liabilities
|
-
|
199,935
|
|
Non cash gain on debt
settlements
|
(355,000)
|
(170,309)
|
|
Loss on sale of property and
equipment
|
32,777
|
-
|
|
Right of use,
net
|
2,610
|
-
|
|
Changes in operating assets and
liabilities:
|
|
|
|
Accounts
receivable
|
257,489
|
362,035
|
|
Prepaid expenses
|
13,705
|
7,547
|
|
Inventory
|
196,479
|
22,327
|
|
Other assets
|
(6,596)
|
(2,100)
|
|
Accounts payable - trade and accrued
expenses
|
(215,873)
|
(176,495)
|
|
Deferred revenue
|
(55,959)
|
(7,943)
|
|
NET CASH (USED IN) OPERATING
ACTIVITIES
|
(3,104,035)
|
(1,117,131)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
Investment in research and
development equipment
|
(79,932)
|
(97,251)
|
|
NET CASH (USED IN) BY INVESTING
ACTIVITIES:
|
(79,932)
|
(97,251)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
Repayments on line of
credit
|
(92,094)
|
(220,539)
|
|
Proceeds from convertible notes
payable
|
4,242,490
|
636,000
|
|
Proceeds from issuance of common/
preferred stock, net of costs
|
-
|
1,750,000
|
|
Issuance of common stock for warrant
exercise
|
-
|
80,147
|
|
Repayment of note
payable
|
-
|
(200,000)
|
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
4,150,396
|
2,045,608
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
966,429
|
831,226
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning
of period
|
934,407
|
103,181
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of
period
|
$1,900,836
|
$934,407
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
Interest paid
|
$22,521
|
$64,228
|
|
Taxes paid
|
$-
|
$-
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
Beneficial conversion
feature
|
$2,857,960
|
$348,096
|
|
Related party accounts
converted to notes
|
$-
|
$1,184,066
|
|
Issuance of stock for
acquisition of technology
|
$-
|
$520,000
|
|
Penalty on notes
payable
|
$-
|
$75,000
|
|
Issuance of warrants to debt
holders
|
$1,384,530
|
$-
|
|
Issuance of warrants for services
related to debt offering
|
$1,072,095
|
$-
|
|
Cashless warant
exercise
|
$127,414
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-6
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. We call these
our “Bio-RFID™” and “ChromaID™”
technologies.
Historically,
the Company focused on the development of our proprietary ChromaID
technology. Using light from low-cost LEDs (light emitting diodes)
the ChromaID technology maps the color of substances, fluids and
materials. With the Company’s proprietary processes, the
Company can authenticate and identify based upon the color that is
present. The color is both visible to us as humans but also outside
of the humanly visible color spectrum in the near infra-red and
near ultra-violet and beyond. The Company’s ChromaID scanner
sees what we like to call “Nature’s Color
Fingerprint.” Everything in nature has a unique color
identifier and with ChromaID the Company can see, and identify, and
authenticate based upon the color that is present. The
Company’s ChromaID scanner is capable of uniquely identifying
and authenticating almost any substance or liquid using light to
record, detect and identify its unique color signature. More
recently, the Company has focused upon extensions and new
inventions that are derived from and extend beyond our ChromaID
technology. The Company calls this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID
technology in our laboratory have caused us to move quickly into
the commercialization phase of our Company as the Company works to
create revenue generating products for the marketplace. Today, the
sole focus of the Company is on its Bio-RFID technology and its
commercialization.
In 2010, the
Company acquired TransTech Systems, Inc. as an adjunct to the
Company’s business. TransTech is a distributor of products
for employee and personnel identification and authentication.
TransTech has historically provided substantially all of the
Company’s revenues. The financial results from our TransTech
subsidiary have been diminishing as vendors of their products
increasingly move to the Internet and direct sales to their
customers. While it does provide our current revenues, it is not
central to the Company’s current focus. Moreover, the Company
has written down any goodwill associated with its historic
acquisition. The Company continues to closely monitor this
subsidiary and expect it to wind down completely in the near
future. that as a result of this wind down, the Company has been
negotiating payables with vendors and has settled the liabilities
for amounts lower than the face value and recorded the settlements
as non cash gain on debt settlement of $355,000.
The Company is in the process of commercializing
its Bio-RFID technology. The Company plans its first commercial
applications to be a wearable non-invasive Continuous Glucose
Monitor. This product will require approval from the United States
Food and Drug Administration prior to introduction to the market.
In addition, it has a technology license agreement with Allied
Inventors, formerly Xinova and
Invention Development Management Company, a subsidiary of
Intellectual Ventures.
The
Company believes that its commercialization success is dependent
upon its ability to significantly increase the number of customers
that are purchasing and using its products. To date the Company has
generated minimal revenue from sales of products derived from its
ChromaID and Bio-RFID technology. The Company is currently not
profitable. Even if the Company succeeds in introducing its
technology and related products to its target markets, the Company
may not be able to generate sufficient revenue to achieve or
sustain profitability. Regulatory requirements may also inhibit the
speed with which the Company’s products can enter the
marketplace.
ChromaID was invented by scientists under contract
with the Company. Bio-RFID was invented by individuals working for
the Company. The Company actively pursues a robust intellectual
property strategy and has been granted thirteen patents. The
Company also has several patents pending. The Company possesses all
right, title and interest to the issued patents. Nine additional
issued and pending patents are licensed exclusively to the Company
in perpetuity by the Company’s strategic partner, Allied
Inventors.
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 $7,612,316 and $3,257,597 for the years
ended September 30, 2019 and 2018, respectively. Net cash used in
operating activities was $3,104,035 and $1,117,131 for the years
ended September 30, 2019 and 2018, respectively.
F-7
The Company
anticipates that it will record losses from operations for the
foreseeable future. As of September 30, 2019, the Company’s
accumulated deficit was $42,403,640. The Company has
limited capital resources, and operations to date have been funded
with the proceeds from private equity and debt financings and loans
from Ronald P. Erickson, the Company’s Chairman of the Board
and Interim Chief Financial Officer, or entities with which he is
affiliated. These conditions raise substantial doubt about our
ability to continue as a going concern. The audit report prepared
by the Company’s independent registered public accounting
firm relating to our consolidated financial statements for the year
ended September 30, 2019 includes an explanatory paragraph
expressing the substantial doubt about the Company’s ability
to continue as a going concern.
The Company
believes that its cash on hand will be sufficient to fund our
operations until June 30, 2020. The
Company needs additional financing to implement our business plan
and to service our ongoing operations and pay our current debts.
There can be no assurance that we will be able to secure any needed
funding, or that if such funding is available, the terms or
conditions would be acceptable to us. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities or file for
bankruptcy and our operations and financial condition may be
materially adversely affected.
3.
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
Basis of Presentation – The accompanying unaudited
consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been
eliminated. The preparation of these unaudited condensed
consolidated financial statements were prepared in conformity with
U.S. generally accepted accounting principles
(“GAAP”).
Principles of
Consolidation – The
consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries,
TransTech Systems, Inc and RAAI Lighting, Inc. Inter-Company items
and transactions have been eliminated in
consolidation.
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, 2019, the Company had
uninsured deposits in the amount of $1,650,836.
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 are reviewed periodically for
collectability.
TransTech
Systems Inc. sells products directly to customers. Our products are
typically sold pursuant to purchase orders placed by our customers,
and our terms and conditions of sale do not require customer
acceptance. We account 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 have a
single performance obligation to transfer products and are short
term in nature, usually less than one year. Our revenue is 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 expect to be entitled to receive in exchange for
those goods.
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, 2019 and 2018, there
was a reserve for sales returns of $40,000 and $60,000,
respectively, which is minimal based upon our historical
experience.
F-8
Inventories – Inventories consist 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 $28,000 and
$35,000 reserve for impaired inventory as of September 30, 2019 and
2018, 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.
Research, Development and Engineering
Expenses – Research, development and engineering
expenses consist of the cost of employees, consultants and
contractors who design, engineer and develop new products and
processes as well as materials, supplies and facilities used in
producing prototypes.
The
Company’s current research and development efforts are
primarily focused on improving our Bio-RFID technology, extending
its capacity and developing new and unique applications for this
technology. As part of this effort, the Company conducts on-going
laboratory testing to ensure that application methods are
compatible with the end-user and regulatory requirements, and that
they can be implemented in a cost-effective manner. The Company
also is actively involved in identifying new applications. The
Company’s current internal team along with outside
consultants has considerable experience working with the
application of the Company’s technologies and their
applications. The Company engages third party experts as required
to supplement our internal team. The Company believes that
continued development of new and enhanced technologies is essential
to our future success. We incurred expenses of $1,257,872 and
$570,514 for the years ended September 30, 2019 and 2018,
respectively, on development activities.
Fair Value Measurements and Financial
Instruments – ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
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, 2019 and 2018 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, 2019 was $1,901,278.
F-9
Derivative Financial Instruments
–Pursuant to ASC 815 “Derivatives and
Hedging”, the Company evaluates all of its financial
instruments to determine if such instruments are derivatives or
contain features that qualify as embedded derivatives. The Company
then determines if embedded derivative must bifurcated and
separately accounted for. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a Black-Scholes-Merton
option pricing model to value the derivative instruments at
inception and on subsequent valuation dates. The classification of
derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of
each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet
date.
The Company
determined that none of the conversion features within its
currently outstanding convertible notes payable must be bifurcated
and thus there was no derivative liability as of September 30, 2019 and 2018.
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, 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) and are issuable upon conversion of convertible
debentures of $6,497,581. All of these securities could potentially
dilute future earnings per share.
As
of September 30, 2018, there were options outstanding for the
purchase of 2,182,668 common shares, warrants for the purchase of
15,473,398 common shares, 4,914,071 shares of the Company’s
common stock issuable upon the conversion of Series A, Series C and
Series D Convertible Preferred Stock. In addition, we have an
unknown number of shares (9,020,264 common shares at the current
price of $0.25 per share) are issuable upon conversion of
convertible debentures of $2,255,066. None of these securities were
included in net loss per share.
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
On October 1, 2018,
we adopted Accounting Standards Codification (“ASC”)
Topic 606, Revenue from
Contracts with Customers (“ASC 606”), and
its related amendments, using the modified retrospective method
applied to those contracts which were not completed as of October
1, 2018. The adoption of ASC 606, using the modified retrospective
approach, had no significant impact to our accumulated deficit as
of October 1, 2018 and no significant impact to the total net cash
from or used in operating, investing, or financing activities
within the consolidated statements of cash flows.
F-10
In June 2018, the
FASB issued ASU No. 2018-07, Improvements to Nonemployee
Share-Based Payment Accounting (“ASU 2018-07”) which
aligns the accounting treatment of stock awards granted to
nonemployee consultants to those granted to employees. The Company
adopted the amendment as of October 1, 2018. The adoption of ASU
2018-07 did not have a material impact on the Company’s
consolidated financial statements. All share-based compensation for
employees and non-employees will be accounted under ASC
718.
In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU
2016-02”), which will replace the existing guidance in ASC
840, “Leases.” The FASB has also issued amendments to
ASU 2016-02, including ASU No. 2018-11, Leases (Topic 842):
Targeted Improvements (ASU 2018-11), which the Company collectively
refers to as the new leasing standard. . The Company’s
outstanding leases primarily relate to its two facility leases
Seattle, Washington. In conjunction with these leases, the Company
adopted this new retrospectively on July 1, 2019 and recognized a
lease liability and related right-of-use asset on the
Company’s consolidated balance sheet. The retrospect
adjustment did not require any adjustment to previously reported
equity.
In June 2016, the
FASB issued ASU No. 2016-13, Financial Instruments—Credit
Losses (Topic 326) (“ASU 2016-13”), which introduces a
new methodology for accounting for credit losses on financial
instruments, including available-for-sale debt securities. The
guidance establishes a new “expected loss model” that
requires entities to estimate current expected credit losses on
financial instruments by using all practical and relevant
information. Any expected credit losses are to be reflected as
allowances rather than reductions in the amortized cost of
available-for sale debt securities. This standard is effective for
the Company in the fiscal year beginning October 1, 2020. The
Company adopted ASU No. 2016-13 as of October 1, 2018. The adoption
of ASU 2016-13 did not have an 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 $63,049 and $320,538, net
of allowance, as of September 30, 2019 and 2018, respectively. The
Company has a total allowance for bad debt in the amount of $40,000
and $60,000 as of September 30, 2019 and 2018,
respectively. The decrease is due to the winddown of
TransTech.
5. INVENTORIES
Inventories
were $7,103 and $203,582 as of September 30, 2019 and 2018,
respectively. Inventories consist primarily of printers and
consumable supplies, including ribbons and cards, badge
accessories, capture devices, and access control components held
for resale. There was a $28,000 and $35,000 reserve for impaired
inventory as of September 30, 2019 and 2018,
respectively.
6. FIXED
ASSETS
Fixed assets, net of accumulated depreciation, was
$130,472 and $169,333 as of September 30, 2019 and 2018,
respectively. Accumulated depreciation was $379,259 and $532,966 as
of September 30, 2019 and 2018, respectively. Total depreciation
expense was $86,016 and $60,393 for the years ended September 30,
2019 and 2018, respectively. All equipment is used for selling,
general and administrative purposes and accordingly all
depreciation is classified in selling, general and administrative
expenses.
Property
and equipment as of September 30, 2019 and 2018 was comprised of
the following:
|
|
Estimated
|
September
30,
|
September
30,
|
|
|
Useful
Lives
|
2019
|
2018
|
|
Machinery
and equipment
|
2-10 years
|
$412,238
|
$332,306
|
|
Leasehold
improvements
|
2-3 years
|
3,612
|
276,112
|
|
Furniture
and fixtures
|
2-3 years
|
58,051
|
58,051
|
|
Software
and websites
|
3-7 years
|
35,830
|
35,830
|
|
Less:
accumulated depreciation
|
|
(379,259)
|
(532,966)
|
|
|
|
$130,472
|
$169,333
|
F-11
7. INTANGIBLE
ASSETS
Intangible
assets as of September 30, 2019 and September 30, 2018 consisted of
the following:
|
|
Estimated
|
September
30,
|
September
30,
|
|
|
Useful
Lives
|
2019
|
2018
|
|
|
|
|
|
|
Technology
|
3 years
|
$520,000
|
$520,000
|
|
Less:
accumulated amortization
|
|
(245,554)
|
(72,222)
|
|
Intangible
assets, net
|
|
$274,446
|
$447,778
|
Total
amortization expense was $173,331 and $72,222 for the years ended
September 30, 2019 and 2018, 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.
Under
the terms of the Merger Agreement, each share of RAAI common stock
issued and outstanding immediately before the Merger (1,000 shares)
was cancelled and the Company issued 2,000,000 shares of the
Company’s common stock. As a result, the Company issued
2,000,000 shares of its common stock to Phillip A. Bosua, formerly
the sole stockholder of RAAI. The consideration for the Merger was
determined through arms-length bargaining by the Company and RAAI.
The Merger was structured to qualify as a tax-free reorganization
for U.S. federal income tax purposes. As a result of the Merger,
the Company received certain intellectual property, related to
RAAI.
RAAI
had no outstanding indebtedness or assets at the closing of the
Merger. The 2,000,000 shares of the Company’s common stock
issued for RAAI’s shares were recorded at the fair value at
the date of the merger at $520,000 and the value assigned to the
technology acquired with RAAI.
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.
Merger with Know Labs, Inc.
On
May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated on
April 3, 2018, and our wholly-owned subsidiary, merged with and
into the Company pursuant to an Agreement and Plan of Merger dated
May 1, 2018. In connection with the merger, our Articles of
Incorporation were effectively amended to change our name to Know
Labs, Inc. by and through the filing of Articles of Merger. This
parent-subsidiary merger was approved by us, the parent, in
accordance with Nevada Revised Statutes Section 92A.180.
Stockholder approval was not required. This amendment was filed
with the Nevada Secretary of State and became effective on May 1,
2018.
8. ACCOUNTS PAYABLE
Accounts
payable were $810,943 and $1,512,617 as of September 30, 2019
and 2018, 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 do not include options to renew. These operating leases
are listed as separate line items on the Company's September 30,
2019 Consolidated Balance Sheet, 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, 2019
Consolidated Balance Sheet. 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, 2019, the
Company had one lease expire and recognized the rent payments as an
expense in the current period. As of September 30, 2019, total
right-of-use assets and operating lease liabilities for remaining
long term lease was approximately $246,000. In the year ended
September 30, 2019, the Company recognized approximately $133,996
in total lease costs for the lease.
F-12
Because the rate
implicit in each lease is not readily determinable, the Company
uses its incremental borrowing rate to determine the present value
of the lease payments.
Information related
to the Company's operating right-of-use assets and related lease
liabilities as of and for the year ended September 30, 2019 were as
follows:
Cash
paid for ROU operating lease liability
$135,828
Weighted-average
remaining lease term 2-3 years
Weighted-average
discount rate 7 %
The minimum future
lease payments as of September 30, 2019 are as
follows:
|
Year
|
$
|
|
2019
|
$-
|
|
2020
|
133,996
|
|
2021
|
111,492
|
|
2022
|
24,520
|
|
2023
|
-
|
|
|
270,008
|
|
Imputer
interest
|
(23,872)
|
|
Total lease
liability
|
$246,136
|
10. CONVERTIBLE NOTES PAYABLE
Convertible
notes payable as of September 30, 2019 and September 30, 2018
consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
As of September 30, 2019, the Company owes Clayton
A. Struve $1,071,000 under convertible promissory or OID notes. The
Company recorded accrued interest of $62,171 as of September 30,
2019. 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 March 31, 2020. Mr. Struve also invested
$1,000,000 in the May 2019 debt offering described
below.
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.
Debt
Offering
On May 28, 2019,
the Company closed additional rounds of a debt offering and
received gross proceeds of $4,242,490 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.
F-13
The Convertible
Notes have a principal amount of $4,242,490 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”). They are due and payable
(in Common Stock) on the earlier of (a) mandatory and automatic
conversion of the Convertible Notes into a financing that yields
gross proceeds of at least $10,000,000 (a “Qualified
Financing”) or (b) on the one-year anniversary of the
Convertible Notes (the “Maturity Date”). Investors will
be required to convert their Convertible Notes into Common Stock in
any Qualified Financing at a conversion price per share equal to
the lower of (i) $1.00 per share or (ii) a 25% discount to the
price per share paid by investors in the Qualified Financing. If
the Convertible Notes have not been paid or converted prior to the
Maturity Date, the outstanding principal amount of the Convertible
Notes will be automatically converted into shares of Common Stock
at the lesser of (a) $1.00 per share or (b) any adjusted price
resulting from the application of a “most favored
nations” provision, which requires the issuance of additional
shares of Common Stock to investors if the Company issues certain
securities at less than the then-current conversion
price.
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 4,242,490 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. During the year ended
September 30, 2019, amortization of $1,584,293 of the beneficial
conversion feature was recognized as interest expense in the
consolidated statements of operations.
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, 2019, amortization of the warrants was $767,801
and is presented as interest expense in the consolidated statements
of operations.
F-14
The Convertible
Notes as of September 30, 2019 and 2018 are summarized
below:
|
|
September
30,
2019
|
September
30,
2018
|
|
Convertible
Redeemable Note – Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
|
Convertible
Redeemable Note – J3E2A2Z LP
|
1,184,066
|
1,184,066
|
|
2019 Convertible
Notes
|
4,242,490
|
-
|
|
|
6,497,556
|
2,255,066
|
|
|
|
|
|
less debt discount
– beneficial conversion feature
|
(1,273,667)
|
-
|
|
less debt discount
– warrants
|
(616,729)
|
-
|
|
less debt discount
– warrants issued for services related to debt
offering
|
(652,919)
|
-
|
|
|
$3,954,241
|
$2,255,066
|
11.
NOTES PAYABLE, CAPITALIZED LEASES AND LONG-TERM DEBT
Notes
payable, capitalized leases and long-term debt as of September 30,
2019 and 2018 consisted of the following:
|
|
September
30,
|
September
30,
|
|
|
2019
|
2018
|
|
|
|
|
|
Capital Source
Business Finance Group
|
$-
|
$145,186
|
|
Total
debt
|
-
|
145,186
|
|
Less current
portion of long term debt
|
-
|
(145,186)
|
|
Long term
debt
|
$-
|
$-
|
Capital
Source Business Finance Group
On March 12, 2019,
Capital Source cancelled the Loan and Security Agreement and
Capital Source Credit Facility with TransTech. TransTech repaid the
remaining $15,165 due on the Secured Credit Facility. On March 27,
2019, the Company received notice that the UCC Financing Statement
filed by Capital Source to secure a parent Company guarantee was
terminated and cancelled by the State of Nevada.
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.
The Company has
authorized to issue up to 100,000,000 shares of common stock with a
par value of $0.001. As of September 30, 2019, the Company had
18,366,178 shares of common stock issued and outstanding, held by
116 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 us. 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) and are issuable
upon conversion of convertible debentures of $6,497,581. 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 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 may not be redeemed
without the consent of the holder.
F-15
On September 23,
2018, a holder of Series A Preferred Stock converted 3,334 shares
into 3,334 shares of common stock.
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.
Series
C Preferred Stock and Warrants
On August 11, 2016, the Company filed a
Certificate of Designations, Preferences, and Rights of Series C
Convertible Preferred Stock. On August 14, 2017, the price
of the Series C Preferred Stock
were adjusted to $0.25 per share pursuant to the documents governing such
instruments. The Certificate designated 1,785,715 shares as Series
C Convertible Preferred Stock at a par value of $.001 per share
that is currently convertible into common stock at $0.25 per share,
with certain adjustments as set forth in the
Certificate. The Series C Preferred stock has a yield
of 8% if and when dividends are declared and an ownership blocker
of 4.99%.
As of September 30, 2019, the Company has
1,785,715 shares of Series C Preferred Stock outstanding,
which could potentially be converted into 5,000,000 shares of
common stock. In addition, a corresponding number of
five-year warrants to acquire 1,785,715 shares of common stock at
$0.25 per share were issued in conjunction with the Series C
Preferred Shares and remain outstanding.
Series
D Preferred Stock and Warrants
The Company
authorized the designation of 1,016,014 shares as Series D
Convertible Preferred Stock (“Series D Preferred”).
On August 14, 2017, the price
of the Series D Preferred Stock
was adjusted to $0.25 per share pursuant to the documents governing such
instruments. On May 8, 2017, the Company applied with the
State of Nevada for approval of the Certificate of Designations,
Preferences, and Rights of Series D Convertible Preferred Stock.
On July 17, 2018, the Company filed
with the State of Nevada a second Amended and Restated Certificate
of Designation of Preferences, Powers, and Rights of the Series D
Convertible Preferred Stock to decrease the number of authorized
Series D Shares from 3,906,250
to 1,016,014.
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.
In
conjunction with Series D Preferred Stock we authorized Series F
Common Stock Warrants, which are exercisable for a term of five
years at strike price of $0.25. The underlying common stock upon
the conversion of the Series D Preferred and Series F Common Stock
Warrants issued were required to be included in a registration
statement as filed by the Company.
As of September 30,
2019, the Company has 1,016,004 shares of Series D Preferred Stock
outstanding, which could be potentially be converted into 3,108,356
shares of common stock shares if the underlying conversion price
remains $0.25, and there are 3,984,000 Series F warrant
shares.
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”). 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.
F-16
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 1,785,715
outstanding shares of Series C Preferred Stock, 1,016,004
outstanding shares Series D Preferred Stock that adjust below $0.25
per share pursuant to the documents governing such instruments. In
addition, the conversion price of a Convertible Note Payable of
$2,255,066 (9,020,264 common shares at the current price of $0.25
per share) and the exercise price of additional outstanding
warrants to purchase 12,838,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
The conversion price of
Convertible Note
Payable of $4,242,490 (4,242,490 common shares at the
current price of $1.00 per share) would adjust below $1.00 per
share pursuant to the documents governing such instruments.
Warrants totaling 2,663,359 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. Unless
Registered on Form S-1, all issuances to accredited and
non-accredited investors were structured to comply with the
requirements of the safe harbor afforded by Rule 506 of Regulation
D, including limiting the number of non-accredited investors to no
more than 35 investors who have sufficient knowledge and experience
in financial and business matters to make them capable of
evaluating the merits and risks of an investment in our
securities.
The
following equity issuances occurred during the 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.
The
following equity issuances occurred during the year ended September
30, 2018:
The
Company issued 779,676 shares of common stock to Named Executive
Officers, directors, employees and consultants and for services
during the year ended September 30, 2018. The Company expensed
$273,068.
On April 10, 2018,
the Company issued 2,000,000 shares of our common stock to Phillip
A. Bosua under the terms of the Merger Agreement with RAAI common
stock. The shares were valued at the fair market value of $520,000
or $0.26 per share.
On
June 25, 2018, the Company closed a private placement and received
gross proceeds of $1,750,000 ($1,710,000 as of June 30, 2018) in
exchange for issuing 7,000,000 (6,840,000 as of June 30, 2018)
shares of common stock and warrants to purchase 3,500,000
(3,420,000 as of June 30, 2018) shares of common stock in a private
placement to accredited investors pursuant to a series of
substantially identical subscription agreements. The initial
exercise price of the warrants described above is $0.25 per share,
subject to certain adjustments, and they expired five years after
their issuance. The shares and the warrants described above 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. On June 25, 2018,
the Company issued 500,000 shares of our common stock to Phillip A.
Bosua under the terms of an Employment agreement dated April 10,
2018. The shares were valued at the fair market value of $165,000
or $0.33 per share.
During
the year ended September 30, 2018, the Company closed debt
conversions and issued 1,600,000 shares of common stock in exchange
for the conversion of $464,000, 230,000 shares in exchange for
$48,300 in legal services and 605,000 shares in for $199.935 in
preexisting debt owed by the Company to certain service providers,
all of whom are accredited investors. These shares were issued in
transactions that were not registered under 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.
During
the year ended September 30, 2018, the Company issued 158,000
shares of our common stock related to warrant exercises that were
valued at $80,128.
F-17
On
September 23, 2018, the Company issued 3,334 shares of our common
stock related to the conversion of Series A Preferred Stock for
$834.
Warrants to Purchase Common Stock
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.
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.
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 recorded as Debt Discount (with an
offset to APIC) on the date of issuance and amortized over the
one-year term of the Convertible Notes. See Note 10 for more
information on allocation and fair value of Warrants.
The
following warrants were issued during the year ended September 30,
2018:
On
December 15, 2017, the Company received $250,000 and issued a
senior convertible exchangeable debenture with a principal amount
of $300,000 and a five year common stock purchase warrant to
purchase 1,200,000 shares of common stock in a private placement
dated December 12, 2017 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017. The initial
exercise price of the warrants described above is $0.25 per share,
also subject to certain adjustments. The warrants were valued at
$123,600 and the beneficial conversion feature was valued at
$93,174.
On
March 2, 2018, the Company received gross proceeds of $280,000 in
exchange for issuing a senior convertible redeemable debenture with
a principal amount of $336,000 and a five year warrant to purchase
1,344,000 shares of common stock in a private placement dated
February 28, 2018 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017. The initial
exercise price of the warrants described above is $0.25 per share,
also subject to certain adjustments. The warrants had an estimated
fair value of $348,096 and the beneficial conversion feature on the
debenture was valued at $252,932.
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 had an estimated value of
$60,820.
In addition,
effective as of January 31, 2018, Mr. Erickson was issued a warrant
to purchase up to 855,000 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 had an estimated
value of $49,726.
During the year ended September 30, 2018, The
Company issued placement agent warrants related to the issuance of
senior convertible redeemable debentures and Series D Preferred
Stock to purchase up to 538,400 shares of common stock for a
period of five years. The initial
exercise price of the warrants described above is $0.25 per share,
also subject to certain adjustments. The estimated fair value was
$134,600.
F-18
On
June 25, 2018, the Company closed a private placement and received
gross proceeds of $1,750,000 ($1,710,000 as of June 30, 2018) in
exchange for issuing 7,000,000 (6,840,000 as of June 30, 2018)
shares of common stock and warrants to purchase 3,500,000
(3,420,000 as of June 30, 2018) shares of common stock in a private
placement to accredited investors pursuant to a series of
substantially identical subscription agreements. The initial
exercise price of the warrants described above is $0.25 per share,
subject to certain adjustments, and they expired five years after
their issuance. The shares and the warrants described above 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.
The
Company issued warrants to purchase 1,229,000 shares of common
stock to Named Executive Officers, directors, employees and
consultants and for services during the year ended September 30,
2018. The Company expensed $121,710.
During
the year ended September 30, 2018, the Company issued 158,000
shares of our common stock related to warrant exercises that were
valued at $80,128.
During
the year ended September 30, 2018, warrants for the purchase of
544,998 shares of common stock valued at $136,250
expired.
The conversion
price of the Series A, C and D Shares and related warrants is
currently $0.250 per share, subject to certain
adjustments.
A summary of the warrants issued as of September
30, 2019 were as follows:
|
|
September
30,
2019
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Shares
|
Price
|
|
Outstanding
at beginning of period
|
15,473,398
|
$0.326
|
|
Issued
|
2,853,359
|
1.179
|
|
Exercised
|
(509,656)
|
(0.250)
|
|
Forfeited
|
-
|
-
|
|
Expired
|
(70,011)
|
(3.083)
|
|
Outstanding
at end of period
|
17,747,090
|
$0.455
|
|
Exerciseable
at end of period
|
17,747,090
|
|
A
summary of the status of the warrants outstanding as of September
30, 2019 is presented below:
|
|
September
30, 2019
|
|||
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
Average
|
Average
|
|
Average
|
|
Number
of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
|
Warrants
|
Life
( In Years)
|
Price
|
Exerciseable
|
Price
|
|
13,417,286
|
3.02
|
$0.250
|
13,417,286
|
$0.250
|
|
714,286
|
-
|
0.700
|
714,286
|
0.700
|
|
882,159
|
2.12
|
1.000
|
882,159
|
1.000
|
|
2,713,359
|
4.45
|
1.20-1.50
|
2,713,359
|
1.20-1.50
|
|
20,000
|
4.42
|
2.34-4.08
|
20,000
|
2.34-4.08
|
|
|
|
|
|
|
|
17,747,090
|
3.44
|
$0.455
|
17,747,090
|
$0.455
|
F-19
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the year ended September 30,
2019 were as follows:
|
Dividend
yield
|
0%
|
|
Expected
life
|
5
years
|
|
Expected
volatility
|
180%-182%
|
|
Risk
free interest rate
|
2.06%-2.52%
|
At
September 30, 2019, vested warrants totaling 17,677,091 shares had
an aggregate intrinsic value of $18,052,811.
13. STOCK INCENTIVE PLAN
On March 21, 2013,
an amendment to the Stock Option Plan was approved by the
stockholders of the Company, increasing the number of shares
reserved for issuance under the Plan to 93,333 shares. On April 10, 2018, 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 93,333 to 1,200,000. On August 7, 2018, 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 1,200,000 to 2,000,000 to common shares. 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.
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, 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
vest quarterly over three years. Grants totaling 125,000 common
shares vest quarterly over four years, with no vesting during the
first six months.
F-20
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 grants 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 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.
The
Company had the following stock option transactions during the year
ended September 30, 2018:
A former employee forfeited stock option grants
for 10,668 shares of common stock at $14.719 per
share.
During the year ended September 30, 2018, four
employee and two consultants were granted options to purchase
1,180,000 shares of common stock at an exercise price of
$2.024 per share. The stock option grants vest quarterly over four
years (none during the first six months) and are exercisable for 5
years. The stock option grants were valued at an average of $2.38
per share.
On July 30, 2018, Mr. Bosua was awarded a stock
option grant for 1,000,000 shares of common stock that was awarded
at $1.28 per share and was valued at the black scholes value of
$1.22 per share. The stock option grant vests
quarterly over four years and is exercisable for 5
years.
There
are currently 4,532,668 options to purchase common stock at an
average exercise price of $2.025 per share outstanding as of
September 30, 2019 under the 2011 Stock Incentive Plan. The Company
recorded $1,141,674 and $50,899 of compensation expense, net of
related tax effects, relative to stock options for the year ended
September 30, 2019 and 2018 and in accordance with ASC 718. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.060) and ($0.010) per share, respectively. As of
September 30, 2019, there is approximately $631,026, 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 3.70
years. Stock option grants totaling 2,410,000 shares of common
stock are performance stock option grants and are not vested until
the performance is achieved.
Stock
option activity for the years ended September 30, 2019 and 2018 was
as follows:
|
|
Weighted
Average
|
||
|
|
Options
|
Exercise
Price
|
$
|
|
Outstanding as of
September 30, 2017
|
15,404
|
$14.68
|
$226,059
|
|
Granted
|
2,180,000
|
1.683
|
3,668,500
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(12,736)
|
14.764
|
(188,040)
|
|
Outstanding as of
September 30, 2018
|
2,182,668
|
1.698
|
3,706,519
|
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
|
Outstanding as of
September 30, 2019
|
4,532,668
|
$2.025
|
$9,180,369
|
F-21
The
following table summarizes information about stock options
outstanding and exercisable as of September 30, 2019:
|
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
|
Average
|
Average
|
|
Average
|
|
Range
of
|
Number
|
Remaining
Life
|
Exercise
Price
|
Number
|
Exercise
Price
|
|
Exercise
Prices
|
Outstanding
|
In
Years
|
Outstanding
|
Exerciseable
|
Exerciseable
|
|
$0.250
|
530,000
|
0.50
|
$0.250
|
165,625
|
$0.25
|
|
1.28-1.50
|
1,860,000
|
3.83
|
1.35
|
360,000
|
1.28
|
|
11.79-1.90
|
60,000
|
4.56
|
1.85
|
12,083
|
1.84
|
|
3.03-4.2
|
2,080,000
|
4.08
|
3.08
|
20,000
|
4.20
|
|
13.5-15.00
|
2,668
|
0.50
|
14.25
|
1,334
|
13.50
|
|
|
4,532,668
|
3.70
|
$2.025
|
559,042
|
$1.122
|
There
were stock option grants of 1,980,000 shares as of September 30,
2019 with an aggregate intrinsic value of $826,720.
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
January 16, 2018, Mr. Erickson was issued 100,000 of restricted
common stock at the grant date market value of $0.21 per
share. 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 January 25,
2018, the Company entered into amendments to two demand promissory
notes, totaling $600,000 with Mr. Erickson, our former Chief
Executive Officer and current chairman of the board and/or entities
in which Mr. Erickson has a beneficial interest. The amendments
extend the due date from December 31, 2017 to September 30, 2018
and continue to provide for interest of 3% per annum and a third
lien on company assets if not repaid by September 30, 2018 or
converted into convertible debentures or equity on terms acceptable
to the Holder. On March 16, 2018, the demand promissory notes and
accrued interest were converted into convertible notes
payable.
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 July 9, 2018, the Company repaid a $199,935
Business Loan Agreement with Umpqua Bank from funds previously
provided by an entity affiliated with Ronald P. Erickson,
our Chairman of the Board. The Company paid $27,041 and
issued 800,000 shares of common stock
in exchange for the conversion of this debt. Mr. Erickson is an
accredited investor. These shares were issued in transactions that
were not registered under 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.
Mr.
Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $657,551
as of September 30, 2018.
Mr.
Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $487,932
as of September 30, 2019.
F-22
Related Party Transaction with Phillip A. Bosua
On February 7,
2018, the Company issued 50,000 shares of our common stock to
Phillip A. Bosua under the terms of a consulting agreement dated
July 6, 2017. The fair value of the shares issued was
$12,000.
On April 10, 2018,
the Company issued 2,000,000 shares of our common stock to Phillip
A. Bosua under the terms of the Merger Agreement with RAAI common
stock. The fair value of the shares issued was
$520,000.
On June 25, 2018,
we issued 500,000 shares of our common stock to Phillip A. Bosua
under the terms of an Employment agreement dated April 10, 2018.
The fair value of the shares issued was $165,000.
On June 25, 2018,
we closed a debt conversion with an
entity controlled by Phillip A. Bosua and issued 255,000 shares of
common stock in exchange for the conversion of $63,750 in
preexisting debt owed by the Company to this
entity.
On
July 30, 2018, Mr. Bosua was awarded a stock option grant for
1,000,000 shares of our common stock that was awarded at $1.28 per
share and was valued at the black scholes value of $0.96 per
share.
Stock
Issuances to Named Executive Officers and Directors
During
January to May 2018, the Company issued 275,000 shares of
restricted common stock to one Named Executive Officer and two
directors for services during 2018. The shares were issued in
accordance with the 2011 Stock Incentive Plan and were valued at
$0.246 per share, the market price of our common
stock.
Stock
Option Grant Cancellations
During
the year ended September 30, 2019, two directors voluntarily
forfeited stock option grants for 100,000 shares of common stock
with an exercise price of $3.03 per share.
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
On
April 10, 2018, the Company appointed Mr. Bosua as Chief Executive
Officer of the Company, replacing Ronald P. Erickson, who remains
Chairman of the Company. Mr. 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 2003 and was
Chairman of the Board from August 2004 until May 2011.
Phillip
A. Bosua was appointed the Company’s CEO 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 will be 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.” On March 5, 2019, Mr. Bosua’s annual
compensation was increased to $240,000.
F-23
Employment
Agreement with Ronald P. Erickson, Chairman of the Board and
Interim Chief Financial Officer
On August 4, 2017,
the Board of Directors approved an Employment Agreement with Ronald
P. Erickson pursuant to which we engaged Mr. Erickson as our Chief
Executive Officer through September 30, 2018. 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. On March 5,
2019, Mr. Erickson’s annual compensation was increased to
$195,000.
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.
Properties
and Operating Leases
The
Company is obligated under the following leases for its various
facilities.
Corporate Offices
On
April 13, 2017, the Company leased its executive office located at
500 Union Street, Suite 810, Seattle, Washington, USA, 98101. The
Company leases 943 square feet and the net monthly payment is
$2,672. The monthly payment increases approximately 3% each year
and the lease expires on May 31, 2022.
Lab Facilities and Executive Offices
On February 1,
2019, the Company leased its lab facilities and executive offices
located at 915 E Pine Street, Suite 212, Seattle, WA 98122. The
Company leases 2,642 square feet and the net monthly payment is
$8,256. The monthly payment increases approximately 3% on July 1,
2019 and annually thereafter. The lease expires on June 30, 2021
and can be extended.
Terminated Leases
On
May 1, 2018, the Company leased its lab facilities and executive
offices located at 304 Alaskan Way South, Suite 102, Seattle,
Washington, USA, 98101. The Company leases 2,800 square feet and
the net monthly payment is $4,000. The lease expired on April 30,
2019.
TransTech
was located at 12142 NE Sky Lane, Suite 130, Aurora, OR 97002.
TransTech terminated this lease effective May 31,
2019.
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 $2,834,000
for the year ended September 30, 2019.
Pretax losses
arising from United States operations were approximately $1,609,000
for the year ended September 30, 2018.
The Company has net
operating loss carryforwards of approximately $32,083,000, which
expire in 2022-2037. 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 $6,930,000 was established as of September 30,
2019. 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.
F-24
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 2012 through 2019.
For
the year ended September 30, 2019, 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.
U.S. Tax Reform
On December 22,
2017, the U.S. government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform
Act). The Tax Reform Act significantly revises the future ongoing
federal income tax by, among other things, lowering U.S. corporate
income tax rates effective January 1, 2018. The Company has
calculated a blended U.S. federal income tax rate of approximately
21% for the fiscal year ending September 30, 2019 and 21.0% for
subsequent fiscal years. Remeasurement of the Company’s
deferred tax balance under the Tax Reform Act resulted in a
non-cash tax benefit reduction of approximately $2.3 million for
the year ended September 30, 2018.
The changes
included in the Tax Reform Act are broad and complex. The final
transition impacts of the Tax Reform Act may differ from the above
estimate due to, among other things, changes in interpretations of
the Tax Reform Act, any legislative action to address questions
that arise because of the Tax Reform Act and any changes in
accounting standards for income taxes or related interpretations in
response to the Tax Reform Act.
The
principal components of the Company’s deferred tax assets at
September 30, 2019 and 2018 are as follows:
|
|
2019
|
2018
|
|
U.S. operations
loss carry forward at statutory rate of 21%
|
$6,737,300
|
$6,142,138
|
|
Deferred tax assets
related to timing differences-accruals
|
192,897
|
-
|
|
Total
|
6,930,197
|
6,142,138
|
|
Less Valuation
Allowance
|
(6,930,197)
|
(6,142,138)
|
|
Net Deferred Tax
Assets
|
-
|
-
|
|
Change in Valuation
allowance
|
$(788,059)
|
$(337,853)
|
A
reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended September
30, 2019 and 2018 are as follows:
|
Federal Statutory
Rate
|
-21.0%
|
-21.0%
|
|
Increase in Income
Taxes Resulting from:
|
|
|
|
Change
in Valuation allowance
|
21.0%
|
21.0%
|
|
Effective Tax
Rate
|
0.0%
|
0.0%
|
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.and (ii)
TransTech, a distributor of products
for employee and personnel identification and authentication.
TransTech has historically provided substantially all of the
Company’s revenues. The financial results from our TransTech
subsidiary have been diminishing as vendors of their products
increasingly move to the Internet and direct sales to their
customers. While it does provide our current revenues, it is not
central to our current focus as a Company. Moreover, we have
written down any goodwill associated with its historic acquisition.
We continue to closely monitor this subsidiary and expect it to
wind down completely in the near future.
F-25
During the year
ended September 30, 2019, the Company began to report both entities
as segments. The reporting for the year ended September 30, 2019
and 2018 was as follows:
|
|
|
|
Segment
|
|
|
|
|
Gross
|
Net
|
Segment
|
|
Segment
|
Revenue
|
Margin
|
Loss
|
Assets
|
|
Year
Ended September 30, 2019
|
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(7,534,739)
|
$2,882,194
|
|
TransTech
distribution business
|
1,804,960
|
426,547
|
(77,577)
|
57,439
|
|
Total
segments
|
$1,804,960
|
$426,547
|
$(7,612,316)
|
$2,939,633
|
|
|
|
|
|
|
|
Year
Ended September 30, 2018
|
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(3,294,707)
|
$1,311,134
|
|
TransTech
distribution business
|
4,303,296
|
821,623
|
37,110
|
791,814
|
|
Total
segments
|
$4,303,296
|
$821,623
|
$(3,257,597)
|
$2,102,948
|
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, 2019, there were the following
material transactions that require disclosure:
Convertible Promissory Notes with Clayton A. Struve
As of September 30, 2019, the Company owes Clayton
A. Struve $1,071,000 under convertible promissory or OID
notes. On November 26, 2019, the Company signed Amendments
to the convertible promissory or OID notes, extending the due dates
to March 31, 2020.
Convertible
Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On March 16, 2018,
the Company entered into a Note and Account Payable Conversion
Agreement pursuant to which (a) all $664,233 currently owing under
the J3E2A2Z Notes was converted to a Convertible Redeemable
Promissory Note in the principal amount of $664,233, and (b) all
$519,833 of the J3E2A2Z Account Payable was converted into a
Convertible Redeemable Promissory Note in the principal amount of
$519,833. On November 26, 2019, the Company signed Amendment 2 to
the convertible promissory or OID notes, extending the due dates to
March 31, 2020.
Convertible
Notes Dated October 17, 2019
On October 17,
2019, the Company closed funding on Convertible Notes totaling
principal amount of $385,000 which bear annual interest of 8%. Both
the principal amount of and the interest are payable on a
payment-in-kind basis in shares of Common Stock of the Company (the
“Common Stock”). They are due and payable (in Common
Stock) on the earlier of (a) mandatory and automatic conversion of
the Convertible Notes into a financing that yields gross proceeds
of at least $10,000,000 (a “Qualified Financing”) or
(b) on the one-year anniversary of the Convertible Notes (the
“Maturity Date”). Investors will be required to convert
their Convertible Notes into Common Stock in any Qualified
Financing at a conversion price per share equal to the lower of (i)
$1.00 per share or (ii) a 25% discount to the price per share paid
by investors in the Qualified Financing. If the Convertible Notes
have not been paid or converted prior to the Maturity Date, the
outstanding principal amount of the Convertible Notes will be
automatically converted into shares of Common Stock at the lesser
of (a) $1.00 per share or (b) any adjusted price resulting from the
application of a “most favored nations” provision,
which requires the issuance of additional shares of Common Stock to
investors if we issue certain securities at less than the
then-current conversion price.
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 385,000 shares of Common
Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 192,500 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
F-26
In connection with
the private placement, the placement agent for the Convertible
Notes and the Warrants received a cash fee of $36,800 and warrants
to purchase 55,200 shares of our common stock, all based on 8-10%
of gross proceeds to the Company.
As part of the
Purchase Agreement, we 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.
Stock
Option Exercise and Cancellation
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. The former employee forfeited stock option grants
206,250 at an exercise price of $0.25 per share and 150,000 at an
exercise price of $1.28 per share.
Stock Option Cancellations
On
October 4, 2019, Ronald P. Erickson and Philip A. Bosua, named
executive officers, each voluntarily cancellated stock option
grants totaling for 1,000,000 shares with an exercise price of
$3.03 per share. The grants were related to performance and were
not vested.
On
October 4, 2019, an employee voluntarily cancellated a stock option
grant totaling 80,000 shares with an exercise price of $4.20 per
share.
Stock Option Issuances
On
December 19, 2019, the Board of Directors approved the following
stock option grants:
Stock
option grants to two directors, 2 employees and two consultants
totaling 315,000 shares with an exercise price of $1.12 per share.
The stock option grants expire in five years. The stock option
grants have various vesting terms and expire during the fourth
quarter of 2024.
Stock
option grant to Philip A. Bosua, a named executive officer, for
1,200,000 shares with an exercise price of $1.10 per share. The
performance grant expires November 4, 2019 and vests upon FDA
approval of the UBAND blood glucose monitor.
Stock
option grant to Ronald P. Erickson, a named executive officer, for
1,200,000 shares with an exercise price of $1.10 per share. The
performance grant expires November 4, 2019 and vests upon uplisting
to NASDAQ or NYSE exchanges.
F-27
PROSPECTUS
KNOW LABS, INC.
500 Union Street, Suite 810
Seattle, WA 98101
4,242,515 shares of common stock issuable upon conversion of the
Principal of the Notes;
339,401 shares of common stock issuable upon conversion of Interest
on the Notes;
2,121,258 shares of common stock issuable upon exercise of
Investor Warrants;
542,102 shares of common stock issuable upon exercise of Placement
Agent Warrants;
3,108,356 shares of common stock issuable upon conversion of Series
D Preferred Stock; and
3,984,000 shares of common stock issuable upon exercise of Series F
Warrants
DEALER PROSPECTUS DELIVERY OBLIGATION
Until _______________, 2020, all dealers that effect
transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in
addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments
or subscriptions.
____________________, 2020
F-28
PART II—INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION.
The expenses payable by us in connection with the issuance and
distribution of the securities being registered other than
underwriting discounts and commissions, if any are set forth below.
Each item listed is estimated as follows:
|
Securities
and Exchange Commission registration fee
|
$1,157
|
|
Accountant's
fees and expenses
|
12,000
|
|
Legal
fees and expenses
|
15,000
|
|
Blue
Sky fees and expenses
|
5,000
|
|
Transfer
agent's fees and expenses
|
1,000
|
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Miscellaneous
|
7,843
|
|
|
|
|
Total
expenses
|
$42,000
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
Nevada
Revised Statutes, or NRS, Sections 78.7502 and 78.751 provide
us with the power to indemnify any of our directors and officers.
The director or officer must have conducted himself/herself in good
faith and reasonably believe that his/her conduct was in, or not
opposed to, our best interests. In a criminal action, the director,
officer, employee or agent must not have had reasonable cause to
believe his/her conduct was unlawful.
Under
NRS Section 78.751, advances for expenses may be made by
agreement if the director or officer affirms in writing that he/she
believes he/she has met the standards and will personally repay the
expenses if it is determined such officer or director did not meet
the standards.
Our
articles of incorporation include an indemnification provision
under which we have the power to indemnify our directors, officers,
employees and other agents of the company to the fullest extent
permitted by applicable law.
We have a directors’ and officers’ liability insurance
policy in place pursuant to which its directors and officers are
insured against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended and the Securities and
Exchange Act of 1934, as amended.
The
underwriting agreement we will enter into in connection with the
offering of common stock and warrants being registered hereby
provides that the underwriters will indemnify, under certain
conditions, our directors and officers (as well as certain other
persons) against certain liabilities arising in connection with
such offering.
ITEM 15. RECENT SALES OF UNREGISTERED
SECURITIES.
In the three years preceding the filing of this Registration
Statement, we have issued the following securities that were not
registered under the Securities Act.
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. We have not employed any
underwriters in connection with any of the below transactions, and
the individuals and entities to whom we issued securities are not
affiliated with us. Except as noted below, none of the holders of
the securities have any contractual rights to have such securities
registered with the Securities and Exchange
Commission.
F-29
Year Ended September 30, 2017
On October 21, 2015, we entered into a Public Relations Agreement
with Financial Genetics LLC for public relation
services. On October 18, 2016, we entered into an Amendment to
Public Relations Agreement with Financial Genetics LLC. Under the
Agreements, Financial Genetics was issued 359,386 shares of our
common stock during the year ended September 30, 2017. We expensed
$271,309 during the year ended September 30, 2017.
On October 6, 2016, we entered into a Services Agreement with
Redwood Investment Group LLC for financial services. Under the
Agreement, Redwood was issued 200,000 shares of our common stock.
We expensed $140,000 during the year ended September 30,
2017.
We entered into Convertible Promissory Notes totaling $710,000 with
accredited investors during September 2015 to February 2016 to fund
short-term working capital. The Notes accrued interest at a rate of
8% per annum and became due September 2016 to February 2017 and
were convertible into common stock as part of our next financing.
On November 30, 2016, we converted $695,000 of the /Convertible
Promissory Notes and interest of $54,078 into 936,348 shares of
comment stock. We also issued warrants to purchase 936,348 shares
of our common stock. The five-year warrants are exercisable at
$1.00 per share, subject to adjustment.
On December 22, 2016, a supplier converted accounts payable
totaling $6,880 into 8,600 shares of common stock.
On the year ended September 30, 2017, we issued 795,000 shares of
restricted common stock to two Named Executive Officers employees,
two directors and six employees and consultants and for services
during 2015-2017. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $0.17 per share, the
market price of our common stock. We expensed $135,150 during the
year ended September 30, 2017.
Year Ended September 30, 2018
We issued 779,676 shares of common stock to Names Executive
Officers, directors, employees and consultants and for services
during the year ended September 30, 2018. We expensed
$273,068.
On
April 10, 2018, we issued 2,000,000 shares of our common stock to
Phillip A. Bosua under the terms of the Merger Agreement with RAAI
common stock. The shares were valued at the fair market value of
$520,000 or $0.26 per share.
On June 25, 2018, we closed a private placement and received gross
proceeds of $1,750,000 ($1,710,000 as of June 30, 2018) in exchange
for issuing 7,000,000 (6,840,000 as of June 30, 2018) shares of
common stock and warrants to purchase 3,500,000 (3,420,000 as of
June 30, 2018) shares of common stock in a private placement to
accredited investors pursuant to a series of substantially
identical subscription agreements. The initial exercise price of
the warrants described above is $0.25 per share, subject to certain
adjustments, and they expired five years after their issuance. The
shares and the warrants described above 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.
On June
25, 2018, we issued 500,000 shares of our common stock to Phillip
A. Bosua under the terms of an Employment agreement dated April 10,
2018. The shares were valued at the fair market value of $165,000
or $0.33 per share.
We closed debt conversions and issued 1,600,000 shares of common
stock in exchange for the conversion of $464,000, 230,000 shares in
exchange for $48,300 in legal services and 605,000 shares in for
$199.935 in preexisting debt owed by the Company to certain service
providers, all of whom are accredited investors. These shares were
issued in transactions that were not registered under 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.
F-30
During the year ended September 30, 2018, we issued 158,000 shares
of our common stock related to warrant exercises that were valued
at $80,128.
On September 23, 2018, we issued 3,334 shares of our common stock
related to the conversion of Series A Preferred Stock for
$834.
Year Ended September 30, 2019
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.
Three Months Ended December 31, 2019
Convertible
Notes Dated October 17, 2019
On October 17,
2019, the Company closed funding on Convertible Notes totaling
principal amount of $385,000 which bear annual interest of 8%. Both
the principal amount of and the interest are payable on a
payment-in-kind basis in shares of Common Stock of the Company (the
“Common Stock”). They are due and payable (in Common
Stock) on the earlier of (a) mandatory and automatic conversion of
the Convertible Notes into a financing that yields gross proceeds
of at least $10,000,000 (a “Qualified Financing”) or
(b) on the one-year anniversary of the Convertible Notes (the
“Maturity Date”). Investors will be required to convert
their Convertible Notes into Common Stock in any Qualified
Financing at a conversion price per share equal to the lower of (i)
$1.00 per share or (ii) a 25% discount to the price per share paid
by investors in the Qualified Financing. If the Convertible Notes
have not been paid or converted prior to the Maturity Date, the
outstanding principal amount of the Convertible Notes will be
automatically converted into shares of Common Stock at the lesser
of (a) $1.00 per share or (b) any adjusted price resulting from the
application of a “most favored nations” provision,
which requires the issuance of additional shares of Common Stock to
investors if we issue certain securities at less than the
then-current conversion price.
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.
F-31
The
Convertible Notes are initially convertible into
385,000 shares of Common Stock, subject to certain
adjustments, and the Warrants are initially exercisable for
192,500 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 a cash fee of
$36,800 and warrants to purchase 55,200
shares of our common stock, all based on 8-10% of
gross proceeds to the Company. The placement agent has also
received a $25,000 advisory fee.
As part of the
Purchase Agreement, we 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.
Stock
Option Exercise and Cancellation
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. The former employee forfeited stock option grants
206,250 at an exercise price of $0.25 per share and 150,000 at an
exercise price of $1.28 per share.
Stock Option Cancellations
On
October 4, 2019, Ronald P. Erickson and Philip A. Bosua, named
executive officers, each voluntarily canceled stock option grants
totaling for 1,000,000 shares with an exercise price of $3.03 per
share. The grants were related to performance and were not
vested.
On
October 4, 2019, an employee voluntarily cancellated a stock option
grant totaling 80,000 shares with an exercise price of $4.20 per
share.
Stock Option Issuances
On
December 19, 2019, the Board of Directors approved the following
stock option grants:
Stock
option grants to two directors, 2 employees and two consultants
totaling 315,000 shares with an exercise price of $1.12 per share.
The stock option grants expire in five years. The stock option
grants have various vesting terms and expire during the fourth
quarter of 2024.
Stock
option grant to Philip A. Bosua, a named executive officer, for
1,200,000 shares with an exercise price of $1.10 per
share.
Stock
option grant to Ronald P. Erickson, a named executive officer, for
1,200,000 shares with an exercise price of $1.10 per
share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
The
exhibits to the Registration Statement are listed in the Exhibit
Index attached hereto and incorporated by reference
herein.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during
any period in which offers or sales are being made, a
post-effective amendment to this Registration
Statement:
(i) To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the
purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from
registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination
of the offering.
(4) That, for the
purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution
of the securities: The undersigned registrant undertakes that in a
primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer
or sell such securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
F-32
(ii) Any
free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that, in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such
issue.
(5) For purposes of
determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(6) For the purpose of
determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
F-33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
S-1/A and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the
City of Seattle, State of Washington, on January 29,
2020.
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KNOW LABS, INC.
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By:
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/s/ Ronald P. Erickson
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Ronald P. Erickson
Chairman of the Board
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By:
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/s/ Ronald P. Erickson
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Interim Chief Financial Officer
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Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
Phillip
A. Bosua
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Chief
Executive Officer and Director
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January
29, 2020
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Phillip
A. Bosua
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(Principal
Executive Officer)
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/s/
Ronald
P. Erickson
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Chairman
of the Board and Interim Chief Financial
Officer
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January
29, 2020
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Ronald
P. Erickson
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(Principal
Financial/Accounting Officer)
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/s/
Jon
Pepper
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Director
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January
29, 2020
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Jon
Pepper
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/s/
Ichiro
Takesako
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Director
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January
29, 2020
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Ichiro
Takesako
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/s/
William
A. Owens
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Director
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January
29, 2020
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William
A. Owens
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F-34
Exhibit Index
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Exhibit
No.
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Description
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F-35
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F-36
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F-37
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F-38
Exhibit 5.1
Horwitz + Armstrong
A Professional Law Corporation
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14 Orchard, Suite 200
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Lake Forest, California 92630
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T: (949) 540-6540
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F: (949) 540-6578
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January 29, 2020
Know Labs, Inc.
500 Union Street, Suite 810
Seattle, WA 98101
Re: Registration
Statement on Form S-1
Gentleman:
This law firm has represented Know Labs, Inc., formerly known as
Visualant, Incorporated, a Nevada corporation (the
“Company”), in connection with the preparation and
filing with the Securities and Exchange Commission of a
Registration Statement on Form S-1 (the “Registration
Statement”) under the Securities Act of 1933, as amended (the
“Securities Act”) of up to 14,337,632 shares of the
Company’s common stock, consisting of:
(i)
up to 4,242,515 shares of common stock underlying the principal
amount of registrants 8% Unsubordinated Convertible Notes
(“Principal Shares”)
(ii) up to 339,401 shares of common stock
issuable by the registrant upon the conversion of interest accrued
under the 8% Unsubordinated
Convertible Notes (“Interest
Shares”)
(iii)
up to 2,121,258 shares (the "Investor Warrant Shares") of common
stock issuable upon the exercise of outstanding investor's warrants
at an exercise price of $1.20 that were previously issued to the
Selling Shareholders in connection with 8% Unsubordinated
Convertible Notes offering that closed in a series of closings
between February 15, 2019 and May 28, 2019.
(iv)
542,102 shares of our common stock issuable upon the exercise of
outstanding placement agent warrants (the “Placement Agent
Warrants”) at an exercise price of $1.20 per share that were
previously issued to Boustead Securities, LLC and its
assigns.
(v) up to 3,108,356 shares of common stock
underlying the outstanding Series D Convertible Preferred Stock which is convertible
at any time at an initial conversion price of $0.25 per share of
our common stock subject to adjustment for certain events
(“Series D Shares”). There are currently 3,108,356
common shares estimated to underlying the 1,016,004 issued and
outstanding Series D Shares.
(vi) up to 3,984,000 shares of common stock issuable upon conversion of
outstanding Series F Warrants at an exercise price of $0.25 per
share that were previously issued to one of the Selling
Shareholders in connection with Preferred Stock and Warrant
Purchase Agreement dated November 10, 2016 (“Series F Warrant
Shares”).
(collectively,
the “Shares” and “Warrant
Shares”)
This opinion is being delivered in accordance with the requirements
of Item 601(b)(5) of Regulation S-K under the Act.
In rendering this opinion, we have examined (i) the Registration
Statement and the exhibits thereto, (ii) the Company’s
Amended and Restated Certificate of Incorporation, and all
amendments thereto, including preferred stock designations, (iii)
the Bylaws of the Company and all amendments thereto, (iv) certain
resolutions of the board of directors of the Company, relating to
the issuance and sale of the Shares and the Series D Convertible
Preferred Stock, (v) Series F Warrants, (vi) the Principal and
Interest Shares, Investor Warrant Shares, and Placement Agent
Warrants and (vii) certificates of officers of the Company and of
public officials and other such records, instruments and documents
as we have deemed advisable in order to render this opinion. In
such examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the
authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us
as certified and conformed copies and the authenticity of the
originals of such documents.
Based on the foregoing, we are of the opinion that the Shares
covered by the Registration Statement are, upon issuance, validly
issued, fully paid and non-assessable.
We express no opinion as to the effect or application of any laws
or regulations other than those of the Nevada General Corporation
Law (including the statutory provisions and all applicable
provisions of the Nevada Constitution and the reported judicial
cases interpreting those laws currently in effect) and the federal
laws of the United States, in each case as currently in
effect.
The information set forth herein is as of the date hereof. We
assume no obligation to supplement this opinion letter if any
applicable law changes after the date hereof or if we become aware
of any fact that might change the opinion expressed herein after
the date hereof. Our opinion is expressly limited to the matters
set forth above, and we render no opinion, whether by implication
or otherwise, as to any other matters relating to the Company, the
Shares or Warrant Shares, the Registration Statement or the
prospectus included therein.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and being named in the prospectus
included in the Registration Statement under the heading
“Legal Matters”. In giving this consent, we do not
thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
|
|
Very
truly yours,
/s/ Horwitz + Armstrong
Horwitz
+ Armstrong, A Professional Law
Corporation
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Exhibit
21.1
SUBSIDIARIES
As of September 30,
2019, the following were the Registrant's significant operating
Subsidiaries:
Name: TransTech
Systems, Inc.
Country of
Organization: U.S.
Percent Ownership
by Registrant: 100.0% by Know Labs,
Inc.
Name: RAAI
Lighting, Inc.
Country of
Organization: U.S.
Percent Ownership
by Registrant: 100.0% by Know Labs,
Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We
consent to the use in this Registration Statement on Form S-1
Amendment No. 3 of (Know Lab, Inc. (formerly Visualant,
Incorporated), of our report dated December 21, 2018 to the
consolidated financial statements of Know Lab, Inc. as of September
30, 2018, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the year ended September
30, 2018. We also consent to the reference to our firm under the
heading “Experts” in this Registration
Statement.
/s/ SD Mayer and Associates, LLP
SD
Mayer and Associates, LLP
San
Francisco, CA
January
29, 2020
Exhibit
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We consent to the
use in this Registration Statement on Form S-1 (Amendment No. 3) of
Know Lab, Inc., of our report dated December 27, 2019 relating to
the consolidated financial statements (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding
the Company’s ability to continue as a going concern)
appearing in Know Labs, Inc. annual report on Form 10-K as of and
for the year ended September 30, 2019.
We also consent to
the reference to us under the caption “Experts” in this
Registration Statement.
/s/ BPM
LLP
BPM
LLP
Walnut Creek,
California
January 29,
2020