NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Know Labs, Inc, formerly Visualant,
Incorporated (“the Company”, “us,”
“we,” or “our”) in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the fiscal periods presented have been
included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended September 30, 2017,
filed with the Securities and Exchange Commission
(“SEC”) on December 29, 2017. The results of operations
for the nine months ended June 30, 2018 are not necessarily
indicative of the results expected for the full fiscal year, or for
any other fiscal period.
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 $(2,333,673), $(3,901,232) and
$(1,746,495) for the nine months ended June 30, 2018 and for the
years ended September 30, 2017 and 2016, respectively. Net cash
used in operating activities was $(842,373), $(1,264,324) and
$(2,746,333) for the nine months ended June 30, 2018 and for the
years ended September 30, 2017 and 2016, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of June 30, 2018, the Company’s
accumulated deficit was $33,867,400. 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,
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 financial
statements for the year ended September 30, 2017 includes an
explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
We
believe that our cash on hand will be sufficient to fund our
operations until September 30, 2018.
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, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
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.
Since 2007, the Company has been focused primarily on the
development of a proprietary technology, which is capable of
uniquely identifying and authenticating almost any substance using
electromagnetic energy to detect the unique digital
“signature” of the substance. The Company calls its
technology “ChromaID™” and
“Bio-RFID.”
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct
to its business. TransTech is a distributor of products for
employee and personnel identification. TransTech currently provides
substantially all of the Company’s revenues.
The Company is in the process of commercializing its
ChromaID™ and Bio-RFID™ technology. To date, the
Company has entered into License Agreements with Sumitomo Precision
Products Co., Ltd. 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 its ChromaID
and Bio-RFID products. The Company is currently not profitable.
Even if the Company succeeds in introducing the ChromaID and
Bio-RFID technology and related products to its target markets, the
Company may not be able to generate sufficient revenue to achieve
or sustain profitability.
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 twelve patents. The Company
also has 20 patents pending. The Company possesses all right, title
and interest to the issued patents. Ten of the pending patents are
licensed exclusively to the Company in perpetuity by the
Company’s strategic partner, Allied
Inventors.
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, 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 converted into the right to receive
2,000 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.
Appointment of Director
On April 10, 2018, the Board increased the size of the Board from
three to four members and Phillip A. Bosua was appointed as a
member of the Board. Mr. Bosua’s term of office expire at the
next annual meeting of our stockholders. On May 24, 2018, the Board
of Directors increased the size of the Board from four to five
members and appointed (Ret.) Admiral William Owens as a member of
the Board. Admiral Owen’s term of office expires at the next
annual meeting of our stockholders.
Appointment of 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. 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.
On April 10, 2018, the Company entered into an Employment Agreement
with Mr. Bosua reflecting Mr. Bosua’s 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. 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 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.
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 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.
Closing of Financing on June 25, 2018
On June 25, 2018, the Company closed a private placement and
received gross proceeds of $1,750,000 in exchange for issuing
7,000,000 shares of common stock and warrants to purchase 3,500,000
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 the warrants expire
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.
|
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.
Accounts Receivable and Allowance for Doubtful Accounts
– Accounts receivable consist
primarily of amounts due to the Company from normal business
activities. The Company maintains an allowance for doubtful
accounts to reflect the expected non-collection of accounts
receivable based on past collection history and specific risks
identified within the portfolio. If the financial condition of the
customers were to deteriorate resulting in an impairment of their
ability to make payments, or if payments from customers are
significantly delayed, additional allowances might be
required.
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. The Company records a provision for excess and
obsolete inventory whenever an impairment has been identified.
There is a $35,000 reserve for impaired inventory as of June 30,
2018 and September 30, 2017, 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 2-3
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.
Fair Value Measurements and Financial Instruments
–
ASC Topic 820,
Fair Value Measurement and Disclosures
,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
|
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
|
|
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
|
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of June 30, 2018 and September 30, 2017 are based
upon the short-term nature of the assets and
liabilities.
Derivative Financial Instruments -
The Company evaluates 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.
Revenue Recognition
–
Know Lab and TransTech revenue are derived from products and
services. Revenue is considered realized when the products or
services have been provided to the customer, the work has been
accepted by the customer and collectability is reasonably
assured. Furthermore, if an actual measurement of revenue cannot be
determined, the Company defers all revenue recognition until such
time that an actual measurement can be determined. If during the
course of a contract management determines that losses are expected
to be incurred, such costs are charged to operations in the period
such losses are determined. Revenues are deferred when cash has
been received from the customer but the revenue has not been
earned.
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 to purchase
shares of Company common stock at the fair market value at the time
of grant. Stock-based compensation cost is measured by the Company
at the grant date, based on the fair value of the award, over the
requisite service period. For options issued to employees, the
Company recognizes 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 505.
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 or resulted in the
issuance of common stock that would then share in the income of the
Company, subject to anti-dilution limitations. The common stock
equivalents have not been included as they are anti-dilutive. As of
June 30, 2018, there were options outstanding for the purchase of
534,736 common shares, warrants for the purchase of 15,586,424
common shares, 4,914,405 shares of the Company’s common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock. In addition, the Company has an
unknown number of shares issuable upon conversion of convertible
debentures of $2,390,066. All of which could potentially dilute
future earnings per share.
As of June 30, 2017, there were options outstanding for the
purchase of 50,908 common shares, warrants for the purchase of
5,127,416 common shares, 2,825,053 shares of our common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock and up to 332,940 shares of our common
stock issuable upon the exercise of placement agent warrants, all
of which could potentially dilute future earnings per share.
T
otal outstanding common stock equivalents at June 30,
2017 were 6,527,268.
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
A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and
various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined
whether implementation of such proposed standards would be material
to the Company’s consolidated financial
statements.
4.
ACCOUNTS RECEIVABLE/CUSTOMER
CONCENTRATION
Accounts receivable were $430,460 and $693,320, net of allowance,
as of June 30, 2018 and September 30, 2017, respectively. The
Company had one customer in excess of 10% (30.2%) of the
Company’s consolidated revenues for the nine months ended
June 30, 2018. The Company had two customers (41.7% and 13.2%) with
accounts receivable in excess of 10% as of June 30, 2018. The
Company has a total allowance for bad debt in the amount of $60,000
as of June 30, 2018.
5.
INVENTORIES
Inventories were $170,734 and $225,909 as of June 30, 2018 and
September 30, 2017, 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 $35,000 reserve for impaired inventory
as of June 30, 2018 and September 30, 2017,
respectively.
6. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was $114,539 and
$133,204 as of June 30, 2018 and September 30, 2017, respectively.
Accumulated depreciation was $654,257 and $662,855 as of June 30,
2018 and September 30, 2017, respectively. Total depreciation
expense was $43,982 and $28,788 for the nine months ended June 30,
2018 and 2017, 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 June 30, 2018 was comprised of the
following:
|
|
Estimated
|
|
|
|
Useful
Lives
|
|
|
|
|
Machinery
and equipment
|
2-10
years
|
$
260,094
|
$
42,681
|
$
302,775
|
|
Leasehold
improvements
|
2-3
years
|
276,112
|
-
|
276,112
|
|
Furniture
and fixtures
|
2-3
years
|
59,059
|
95,020
|
154,079
|
|
Software
and websites
|
3-
7 years
|
35,830
|
-
|
35,830
|
|
Less:
accumulated depreciation
|
|
(516,556
)
|
(137,701
)
|
(654,257
)
|
|
|
$
114,539
|
$
-
|
$
114,539
|
7.
INTANGIBLE ASSETS
Intangible assets as of June 30, 2018 and September 30, 2017
consisted of the following:
|
|
Estimated
|
|
|
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
Technology
|
5
years
|
$
520,000
|
$
-
|
|
Less:
accumulated amortization
|
|
-
|
-
|
|
Intangible
assets, net
|
|
$
520,000
|
$
-
|
Total amortization expense was $0 and for the period ended June 30,
2018 and the year ended September 30, 2017,
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, 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 converted into the right to receive
2,000 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.
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.
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 patent 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.
8.
DERIVATIVE INSTRUMENTS
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of these requirements can affect the accounting
for warrants and many convertible instruments with provisions that
protect holders from a decline in the stock price (or
“down-round” provisions). For example, warrants or
conversion features with such provisions are no longer recorded in
equity. Down-round provisions reduce the exercise price of a
warrant or convertible instrument if a company either issues equity
shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that
have a lower exercise price.
There
was no derivative liability as of
June
30, 2018
and
September 30,
2017.
For the year ended September 30, 2017, the Company
recorded non-cash loss of $217,828 related to the “change in
fair value of derivative” expense related to its derivative
instruments. The Company early adopted ASU 2017-11 and has
reclassified its financial instrument with down round features to
equity in the amount of $410,524 at September 30,
2017.
9. CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of June 30, 2018 and September 30,
2017 consisted of the following:
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 accrues interest at a rate of 10% per
annum and becomes due on March 30, 2017. The Note holder can
convert to 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. The Company recorded accrued interest of
$36,707 as of June 30, 2018.
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 pursuantto 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 investor, pursuant to which the Company has
agreed to grant a security interest to the investor in
substantially all the Company’s 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, the Company’s Chief Executive Officer,
entered into a Subordination Agreement with the investor pursuant
to which all debt owed by the Company to such entity is
subordinated to amounts owed by the Company to the investor 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.
In connection with the private placement, the placement agent for
the Debenture and the Warrant received a cash fee of $30,000 and
the Company expects to issue warrants to purchase shares of the
Company’s common stock to the placement agent based on 10% of
proceeds.
Under the terms of the Purchase Agreement, the investor 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 to an accredited investor 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 to an accredited investor 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.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
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. See Note 10 and 11 for additional details. 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 $14,988 as of
June 30, 2018.
|
10.
|
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
|
Notes payable, capitalized leases and long-term debt as of June 30,
2018 and September 30, 2017 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Source Business Finance Group
|
$
194,735
|
$
365,725
|
|
Note
payable to Umpqua Bank
|
199,935
|
199,935
|
|
Secured
note payable to J3E2A2Z LP - related party
|
-
|
600,000
|
|
Total
debt
|
394,670
|
1,165,660
|
|
Less
current portion of long term debt
|
(394,670
)
|
(1,165,660
)
|
|
Long
term debt
|
$
-
|
$
-
|
Capital Source Business Finance Group
Know
Labs, Inc. (the “Company”) finances its TransTech
operations from operations and a Secured Credit Facility with
Capital Source Business Finance Group. On June 15, 2018, TransTech
entered into a Fifth Modification to the Loan and Security
Agreement related to the $500,000 secured credit facility with
Capital Source to fund its operations. The Modification extended
the maturity to December 12, 2018. The secured credit facility
provides for a prime rate interest floor for prime interest of 4.5%
plus 2.5%. The eligible borrowing is based on 80% of eligible trade
accounts receivable, not to exceed $500,000. The secured credit
facility is collateralized by the assets of TransTech, with a
guarantee by Know Labs, including a security interest in all assets
of Know Labs. The remaining balance on the accounts receivable must
be repaid by the time the secured credit facility expires on
December 12, 2018, unless the Company renews by automatic extension
for the next successive term. The Company has $47,000 available as
of June 30, 2018.
Note Payable to Umpqua Bank
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.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
On January 25, 2018, the
Company entered into amendments to two demand promissory notes,
totaling $600,000 with Mr. Erickson, the Company’s Chief
Executive Officer and/or entities in which Mr. Erickson has a
beneficial interest. On March 16, 2018, the demand promissory notes
and accrued interest were converted into convertible notes payable.
See Note 9 for additional
details.
Authorized Capital Stock
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.
Voting Preferred Stock
Series D Preferred Stock and Warrants
On May 1, 2018, 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.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The following equity issuances occurred during the nine months
ended June 30, 2018:
The Company issued 708,240 shares of common stock to Names
Executive Officers, directors, employees and consultants and for
services during 2018. The Company expensed $183,881.
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.
The Company closed debt conversions and issued 835,000 shares of
common stock in exchange for the conversion of $247,950 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.
Warrants to Purchase Common Stock
The following warrants were issued during the nine months ended
June 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. See Note 9 for
additional details. The initial exercise price of the warrants
described above is $0.25 per share, also subject to certain
adjustments.
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 See Note 9 for
additional details. The initial exercise price of the warrants
described above is $0.25 per share, also subject to certain
adjustments.
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. See Note 9 for additional
details.
In
addition, effective as of January 31, 2018, 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. See Note 9 for additional details.
During the nine months ended June 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 498,400 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
$??
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 874,000 shares of common
stock to Named Executive Officers, directors, employees and
consultants and for services during 2018. The Company expensed
$232,255.
A
summary of the warrants outstanding as of
June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
6,900,356
|
$
0.428
|
|
Issued
|
9,231,066
|
0.250
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Expired
|
(544,998
)
|
(0.250
)
|
|
Outstanding
at end of period
|
15,586,424
|
$
0.328
|
|
Exerciseable
at end of period
|
15,586,424
|
|
A summary of the
status of the warrants outstanding as of
June 30, 2018
is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,929,123
|
4.27
|
$
0.250
|
13,929,123
|
$
0.250
|
|
714,286
|
3.08
|
0.700
|
714,286
|
0.700
|
|
936,348
|
3.37
|
1.000
|
936,348
|
1.000
|
|
6,667
|
0.50
|
30.000
|
6,667
|
30.000
|
|
15,586,424
|
3.84
|
$
0.328
|
15,586,424
|
$
0.328
|
The significant
weighted average assumptions relating to the valuation of the
Company’s warrants for the nine months ended
June 30, 2018
were as
follows:
|
Dividend yield
|
0%
|
|
Expected life
|
1-2 years
|
|
Expected volatility
|
125%-145%
|
|
Risk free interest rate
|
2.0%-2.14%
|
There were vested warrants of 14,643,409 as of June 30, 2018 with
an aggregate intrinsic value of $9,489,655.
Description of Stock Option 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.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had the following stock option transactions during the
nine months ended June 30, 2018.
A former employee forfeited stock option grants for 10,668 shares
of common stock at $14.719 per share.
On April 10, 2018, an employee was granted an option to purchase
300,000 shares of common stock
at an exercise price of
$0.250 per share. The stock option grant vests quarterly over four
years (none during the first six months) and is exercisable for 5
years. The stock option grant was valued at $27,000.
On June 15, 2018, an employee was granted an option to purchase
230,000 shares of common stock
at an exercise price of
$0.250 per share. The stock option grant vests quarterly over four
years (none during the first six months) and is exercisable for 5
years. The stock option grant was valued at $37,950
There are currently 534,736 options to purchase common stock at an
average exercise price of $0.377 per share outstanding as of June
30, 2018 under the 2011 Stock Incentive Plan. The Company recorded
$7,334 and $32,661 of compensation expense, net of related tax
effects, relative to stock options for the nine months ended June
30, 2018 and in accordance with ASC 505. Net loss per share (basic
and diluted) associated with this expense was approximately ($0.00)
and ($0.01) per share, respectively. As of June 30, 2018, there is
approximately $64,949 of total unrecognized costs related to
employee granted stock options that are not vested. These costs are
expected to be recognized over a period of approximately 4.83
years.
Stock option activity for the nine months ended June 30, 2018 and
for the years ended September 30, 2017 and 2016 was as
follows:
|
|
|
|
|
|
|
|
|
Outstanding
as of September 30, 2015
|
57,407
|
$
18.425
|
$
1,057,725
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(6,499
)
|
(21.403
)
|
(139,098
)
|
|
Outstanding
as of September 30, 2016
|
50,908
|
18.045
|
918,627
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(35,504
)
|
(19.507
)
|
(692,568
)
|
|
Outstanding
as of September 30, 2017
|
15,404
|
14.675
|
226,059
|
|
Granted
|
530,000
|
0.250
|
132,500
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(10,668
)
|
14.719
|
(157,020
)
|
|
Outstanding
as of June 30, 2018
|
534,736
|
$
0.377
|
$
201,539
|
The
following table summarizes information about stock options
outstanding and exercisable as of June 30,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25
|
530,000
|
4.86
|
$
0.250
|
-
|
$
-
|
|
13.500
|
1,334
|
0.50
|
13.50
|
1,334
|
13.50
|
|
15.000
|
3,402
|
0.79
|
15.00
|
2,068
|
15.00
|
|
|
534,736
|
4.83
|
$
0.377
|
3,402
|
$
14.41
|
There were stock option grants of 530,000 shares as of June 30,
2018 with an aggregate intrinsic value of $355,100.
|
13.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Transactions with Clayton Struve
See
Note 9 and 11 for Convertible Notes Payable and Series C and D
Preferred Stock and Warrants with Clayton Struve:
Related Party Transactions with Ronald P. Erickson
See Note 9 and 10 for Convertible Notes Payable and Notes Payable
with Ronald P. Erickson, our Chairman and/or entities in which Mr.
Erickson has a beneficial interest.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation and interest of approximately $567,785. The
Company owes Mr. Erickson, or entities with which he is affiliated,
$1,792,766 as of June 30, 2018.
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.
Stock Issuances to Named Executive Officers and
Directors
During January to May 2018,
the Company
issued 300,000 shares of restricted common stock
to two Named Executive Officers employees and two directors for
services during 2018. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $0.233 per share, the
market price of our common stock.
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.
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.
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.
On June
25, 2018, the Company
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.