NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Know Labs, Inc. (the “Company”) was incorporated under
the laws of the State of Nevada in 1998. The Company has
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
The Company is focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. The Company
call these our “Bio-RFID™” and
“ChromaID™” technologies.
Historically, the Company focused on the development of our
proprietary ChromaID technology. Using light from low-cost LEDs
(light emitting diodes) the ChromaID technology maps the color of
substances, fluids and materials. With the Company’s
proprietary processes we can authenticate and identify based upon
the color that is present. The color is both visible to the Company
as humans but also outside of the humanly visible color spectrum in
the near infra-red and near ultra-violet and beyond. The
Company’s ChromaID scanner sees what we like to call
“Nature’s Color Fingerprint.” Everything in
nature has a unique color identifier and with ChromaID the Company
can see, and identify, and authenticate based upon the color that
is present. The Company’s ChromaID scanner is capable of
uniquely identifying and authenticating almost any substance or
liquid using light to record, detect and identify its unique color
signature. Today the Company is focused upon extensions and new
inventions that are derived from and extend beyond the
Company’s ChromaID technology. The Company calls this new
technology “Bio-RFID.” The rapid advances made with the
Company’s Bio-RFID technology in our laboratory have caused
us to move quickly into the commercialization phase as the Company
works to create revenue generating products for the marketplace.
Today, the sole focus of the Company is on its Bio-RFID technology
and its commercialization.
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle, Inc., a Nevada corporation. The Company is the sole
shareholder as of the date of incorporation. Particle is now a
direct, majority owned subsidiary of the Company. Particle shall
utilize the same corporate offices as the Company and shall focus
on the development and commercialization of our extensive
intellectual property relating to electromagnetic energy outside of
the medical diagnostic arena which remains the parent
company’s singular focus with its Bio-RFID technology and its
initial application , the non-invasive measurement of blood
glucose
On June 1, 2020, the Company approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with our
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain of our patents and trademarks, in exchange the Company
shall receive: (i) a one-time fee of $250,000 upon a successful
financing of Particle, and (ii) a quarterly royalty payment equal
to the greater of 5% of the Gross Sales, net of returns, from
Particle or $5,000.
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct
to our business. Operating as an independent subsidiary, TransTech
was a distributor of products for employee and personnel
identification and authentication. TransTech historically provided
substantially all of the Company’s revenues. The financial
results from our TransTech subsidiary had been diminishing as
vendors of their products increasingly moved to the Internet and
direct sales to their customers. TransTech closed on June
30, 2020.
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $13,562,641 and $7,612,316 for the
years ended September 30, 2020 and 2019, respectively. Net cash
used in operating activities was $3,913,803 and $3,104,035 for the
years ended September 30, 2020 and 2019, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of September 30, 2020, the
Company’s accumulated deficit was $55,966,281. The
Company has limited capital resources. These conditions raise
substantial doubt about our ability to continue as a going concern.
The audit report prepared by the Company’s independent
registered public accounting firm relating to our consolidated
financial statements for the year ended September 30, 2020 includes
an explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company believes that its cash on hand will be sufficient to fund
our operations until September 30, 2021. The Company may need additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities and our
operations and financial condition may be materially adversely
affected.
3.
|
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
|
Basis of Presentation – The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these unaudited condensed consolidated financial
statements were prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”).
Principles of Consolidation – The consolidated financial statements
include the accounts of the Company, its wholly owned subsidiaries,
TransTech Systems, Inc. and RAAI Lighting, Inc., and majority-owned
subsidiary, Particle, Inc. Inter-Company items and transactions
have been eliminated in consolidation. The ownership of Particle not owned by the Company
at September 30, 2020 is not material and thus no non-controlling
interest is recognized.
Cash and Cash Equivalents – The Company classifies highly liquid
temporary investments with an original maturity of three months or
less when purchased as cash equivalents. The Company maintains cash
balances at various financial institutions. Balances at US banks
are insured by the Federal Deposit Insurance Corporation up to
$250,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk for
cash on deposit. At September 30,
2020, the Company had uninsured
deposits in the amount of $4,048,719.
Accounts Receivable and Revenue – The Company
recognizes revenue in accordance with ASC Topic 606, Revenue from
Contracts with Customers, which requires the application of the
five-step-principles-based-accounting-model for revenue
recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. For
TransTech, the Company extends thirty day terms to some customers.
Accounts receivable were reviewed periodically for
collectability.
TransTech Systems Inc. sold products directly to customers. the
products were typically sold pursuant to purchase orders placed by
our customers, and our terms and conditions of sale did not require
customer acceptance. We accounted for a contract with a customer
when there is a legally enforceable contract, which could be the
customer’s purchase order, the rights of the parties are
identified, the contract has commercial terms, and collectability
of the contract consideration is probable. The majority of our
contracts had a single performance obligation to transfer products
and are short term in nature, usually less than one year. Our
revenue was measured based on the consideration specified in the
contract with each customer in exchange for transferring products
that is generally based upon a negotiated, formula, list or fixed
price. Revenue is recognized when control of the promised goods is
transferred to our customer, which is either upon shipment from our
dock, receipt at the customer’s dock, or removal from
consignment inventory at the customer’s location, in an
amount that reflects the consideration we expected to be entitled
to receive in exchange for those goods. The Company shut
down TransTech on June 30, 2020.
Allowance for Doubtful Accounts - We maintain an allowance for uncollectible
accounts receivable. It is our practice to regularly review and
revise, when deemed necessary, our estimates of uncollectible
accounts receivable, which are based primarily on actual historical
return rates. We record estimated uncollectible accounts receivable
as selling, general and administrative expense. As of September 30,
2020 and 2019, there was a reserve for sales returns of $0 and
$40,000, respectively, which is minimal based upon our historical
experience. The Company shut down TransTech on June 30,
2020.
Inventories – Inventories
consisted primarily of printers and consumable supplies, including
ribbons and cards, badge accessories, capture devices, and access
control components held for resale and are stated at the lower of
cost or market on the first-in, first-out (“FIFO”)
method. Inventories are considered available for resale
when drop shipped and invoiced directly to a customer from a
vendor, or when physically received by TransTech. The
Company records a provision for excess and obsolete inventory
whenever an impairment has been identified. There is a $0 and
$28,000 reserve for impaired inventory as of September 30, 2020 and
2019, respectively.
Equipment – Equipment
consists of machinery, leasehold improvements, furniture and
fixtures and software, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 2-10 years, except for
leasehold improvements which are depreciated over 5
years.
Long-Lived Assets – The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Research and Development Expenses – Research and
development expenses consist of the cost of employees, consultants
and contractors who design, engineer and develop new products and
processes as well as materials, supplies and facilities used in
producing prototypes.
The Company’s current research and development efforts are
primarily focused on improving our Bio-RFID technology, extending
its capacity and developing new and unique applications for this
technology. As part of this effort, the Company conducts on-going
laboratory testing to ensure that application methods are
compatible with the end-user and regulatory requirements, and that
they can be implemented in a cost-effective manner. The Company
also is actively involved in identifying new applications. The
Company’s current internal team along with outside
consultants has considerable experience working with the
application of the Company’s technologies and their
applications. The Company engages third party experts as required
to supplement our internal team. The Company believes that
continued development of new and enhanced technologies is essential
to our future success. The Company incurred expenses of
$2,033,726 and
$1,257,872 for the years
ended September 30, 2020 and
2019, respectively, on development activities.
Advertising – Advertising
costs are charged to selling, general and administrative expenses
as incurred. Advertising and marketing costs for the years ended
September 30, 2020 and 2019 were $230,844 and $0,
respectively.
Fair Value Measurements and Financial Instruments
– ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
Level 1
– Quoted prices in active markets for identical assets and
liabilities;
|
Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
|
Level 3 - Inputs to the valuation methodology are unobservable
and significant to the fair value measurement.
The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities as of September 30, 2020 and 2019 are based upon the
short-term nature of the assets and liabilities.
The
Company has a money market account which is considered a level 1
asset. The balance as of September 30, 2020 and 2019 was $4,252,959
and $1,901,278, respectively.
The
following table represents a roll-forward of the fair value of the
Simple Agreement for Future Equity (“SAFE”) for which
fair value is determined by Level 3 inputs:
Balance
as of October 1, 2019
|
$-
|
Proceeds
from issuance of SAFE
|
785,000
|
Fair
value adjustment
|
-
|
Balance
as of September 30, 2020
|
$785,000
|
Fair
value of the SAFE on issuance was determined to be equal to the
proceeds received (see Note 11). There were no transfers among
Level 1, Level 2, or Level 3 categories in the periods
presented.
Derivative Financial Instruments –Pursuant to ASC 815
“Derivatives and Hedging”, the Company evaluates all of
its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. The Company then determines if embedded derivative
must bifurcated and separately accounted for. For derivative
financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and
is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses a
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months
of the balance sheet date.
The
Company determined that the conversion features for purposes
of bifurcation within its currently outstanding convertible notes
payable were immaterial and there was no derivative liability to be
recorded as of September 30, 2020 and
2019.
Stock Based Compensation - The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit.
Convertible Securities – Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities. We will evaluate our contracts
based upon the earliest issuance date. In the event partial
reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
Net Loss per Share –
Under the provisions of ASC 260, “Earnings Per Share,”
basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. As of
September 30, 2020, there were options outstanding for the purchase
of 4,805,000 common shares (including unearned stock option grants
totaling 2,630,000 shares related to performance targets), warrants
for the purchase of 20,016,367 common shares, and
8,108,356 shares of the Company’s common stock issuable
upon the conversion of Series C and Series D Convertible Preferred
Stock. In addition, the Company currently has 14,659,764 common
shares (9,020,264 common shares at the current price of $0.25 per
share and 5,639,500 common shares at the current price of $1.00 per
share) and are issuable upon conversion of convertible debentures
of $7,894,566. All of which could potentially dilute future
earnings per share but excluded from the September 30, 2020
calculation of net loss per share because their impact is
antidilutive.
As of
September 30, 2019, there were options outstanding for the purchase
of 4,532,668 common shares (including unearned stock option grants
totaling 2,410,000 and excluding certain stock option grants for a
cancelled kickstarter program), warrants for the purchase of
17,747,090 common shares, and 8,108,356 shares of the
Company’s common stock issuable upon the conversion of Series
C and Series D Convertible Preferred Stock. In addition, the
Company currently has 13,262,779 common shares (9,020,264 common
shares at the current price of $0.25 per share and 4,242,490 common
shares at the current price of $1.00 per share) that are issuable
upon conversion of convertible debentures of $6,497,581. Issuance
of more shares could potentially dilute future earnings per share
but are excluded from the September 30, 2019 calculation of net
loss per share because their impact is antidilutive.
Comprehensive loss – Comprehensive loss is defined as
the change in equity of a business during a period from non-owner
sources. There were no differences between net loss for the years
ended September 30, 2020 and 2019 and comprehensive loss for those
periods.
Dividend Policy – The
Company has never paid any cash dividends and intends, for the
foreseeable future, to retain any future earnings for the
development of our business. Our future dividend policy will be
determined by the board of directors on the basis of various
factors, including our results of operations, financial condition,
capital requirements and investment
opportunities.
Use of Estimates – The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic
842), which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. The new standard
establishes a right-of-use (“ROU”) model that requires
a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months.
Leases are now classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the statement of operations.
The
Company adopted the new standard on October 1, 2019 using the
modified retrospective method and the transition relief guidance
provided by the FASB in ASU
2018-11, Leases (Topic 842): Targeted Improvements.
Consequently, the Company did not update financial information or
provide disclosures required under the new standard for dates and
periods prior to October 1, 2019. The Company elected the package
of practical expedients and did not reassess prior conclusions on
whether contracts are or contain a lease, lease classification, and
initial direct costs. In addition, the Company adopted the lessee
practical expedient to combine lease and non-lease components for
all asset classes and elected to not recognize ROU assets and lease
liabilities for leases with a term of 12 months or
less.
In
August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40).
The amendment is meant to simplify the accounting for convertible
instruments by removing certain separation models in subtopic
470-20 for convertible instruments. The amendment also
changed the method used to calculate dilutes EPS for convertible
instruments and for instruments that may be settled in cash. The
amendment is effective
for years beginning after December 15, 2021, including interim
periods for those fiscal years. We are currently evaluating the
impact of adoption this standard on the Company’s consolidated financial statements
and related disclosures.
Based
on the Company’s review of accounting standard updates issued
since the filing of the 2020 Form 10-K, there have been no other
newly issued or newly applicable accounting pronouncements that
have had, or are expected to have, a significant impact on the
Company’s consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on
the Company’s consolidated financial statements upon
adoption.
4. ACCOUNTS RECEIVABLE
Accounts receivable were $0 and $63,049, net of allowance, as of
September 30, 2020 and 2019, respectively. The Company has a total
allowance for bad debt in the amount of $0 and $40,000 as of
September 30, 2020 and 2019, respectively. The decrease
is due to the shutdown of TransTech on June 30, 2020.
5. INVENTORIES
Inventories were $0 and $7,103 as of September 30, 2020 and 2019,
respectively. Inventories consisted primarily of printers and
consumable supplies, including ribbons and cards, badge
accessories, capture devices, and access control components held
for resale related to our TransTech business which shut down on
June 30, 2020. There was a $0 and $28,000 reserve for impaired
inventory as of September 30, 2020 and 2019,
respectively.
6. FIXED ASSETS
Property and equipment as of September 30, 2020 and 2019 was
comprised of the following:
|
Estimated
|
|
|
|
Useful Lives
|
|
|
Machinery
and equipment
|
2-10
years
|
$355,271
|
$412,238
|
Leasehold
improvements
|
2-3
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
2-3
years
|
26,855
|
58,051
|
Software
and websites
|
3-
7 years
|
-
|
35,830
|
Less:
accumulated depreciation
|
|
(257,067)
|
(379,259)
|
|
$128,671
|
$130,472
|
Total depreciation expense was $69,655 and $86,016 for the year ended September 30, 2020
and 2019, respectively. All equipment
is used for selling, general and administrative purposes and
accordingly all depreciation is classified in selling, general and
administrative expenses.
The
Company retired assets at TransTech with a net book value of $4,358
as of June 30, 2020. TransTech was shut down on June 30,
2020.
7. INTANGIBLE ASSETS
Intangible assets as of September 30, 2020 and 2019 consisted of
the following:
|
Estimated
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(418,886)
|
(245,554)
|
Intangible
assets, net
|
|
$101,114
|
$274,446
|
Total amortization expense was $173,332 and $173,331 for the years
ended September 30, 2020 and 2019, respectively.
Merger with RAAI Lighting, Inc.
On April 10, 2018, the Company entered into an Agreement and Plan
of Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
The fair value of the intellectual property associated with the
assets acquired was $520,000 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
8. ACCOUNTS PAYABLE
Accounts payable were $487,810 and $810,943 as of September
30, 2020 and 2019, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases and technology
development, external audit, legal and other expenses incurred by
the Company.
9. LEASES
The
Company has entered into operating leases for office and
development facilities. These leases have terms which range from
two to three years and include options to renew. These operating
leases are listed as separate line items on the Company's September
30, 2020 and September 30, 2019 Consolidated Balance Sheets and
represent the Company’s right to use the underlying asset for
the lease term. The Company’s obligation to make lease
payments are also listed as separate line items on the Company's
September 30, 2020 and 2019 Consolidated Balance Sheets. Based on
the present value of the lease payments for the remaining lease
term of the Company's existing leases, the Company recognized
right-of-use assets and lease liabilities for operating leases of
approximately $250,000 on October 1, 2018. Operating lease
right-of-use assets and liabilities commencing after October 1,
2018 are recognized at commencement date based on the present value
of lease payments over the lease term. During the year ended
September 30, 2020 and 2019, the Company had one lease expire and
recognized the rent payments as an expense in the current period.
As of September 30, 2020 and 2019, total right-of-use assets and
operating lease liabilities for remaining long term lease was
approximately $132,000 and $246,000, respectively. In the year
ended September 30, 2020 and 2019, the Company recognized
approximately $136,718 and $133,996, respectively in total lease
costs for the leases.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the year ended September 30, 2020
was as follows:
Cash paid for ROU
operating lease liability $136,738
Weighted-average
remaining lease term 1.3 years
Weighted-average
discount rate 7%
The
minimum future lease payments as of September 30, 2020 are as
follows:
Year
|
|
2021
|
$113,553
|
2022
|
23,968
|
Imputed
interest
|
(5,486)
|
Total
lease liability
|
$132,035
|
10. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of September 30, 2020 and 2019
consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve $1,071,000 under convertible
promissory or OID notes. The Company recorded accrued interest of
$71,562 and $62,171 as of September 30, 2020 and 2019, respectively. On May 8, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to September 30, 2019. On November
26, 2019, the Company signed Amendments to the convertible
promissory or OID notes, extending the due dates to June 30, 2020.
Mr. Struve also invested $1,000,000 in the May 2019 Debt Offering.
On May 11, 2020, the Company signed Amendments to the convertible
promissory or OID notes, extending the due dates to September 30,
2020. On December 23, 2020, the Company signed Amendments to the
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On
March 16, 2018, the Company entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020. On May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 2020. On December
8, 2020, the Company signed Amendment 4 to the convertible
promissory or OID notes, extending the due dates to March 31,
2021.
Convertible Debt Offering which Closed May 28, 2019
On May
28, 2019, the Company closed additional rounds of a debt offering
and received gross proceeds of $4,242,515 in exchange for issuing
Subordinated Convertible Notes (the “Convertible
Notes”) and Warrants (the “Warrants”) in a
private placement to 54 accredited investors, pursuant to a series
of substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents. The Convertible Notes will
be automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
The
Convertible Notes had an original principal amount of $4,242,515
and bear annual interest of 8%. Both the principal amount and the
interest are payable on a payment-in-kind basis in shares of Common
Stock of the Company (the “Common Stock”).
The
Warrants were granted on a 1:0.5 basis (one-half Warrant for each
full share of Common Stock into which the Convertible Notes are
convertible). The Warrants have a five-year term and an exercise
price equal to 120% of the per share conversion price of the
Qualified Financing or other mandatory conversion.
The
Convertible Notes are initially convertible into 4,242,515 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 2,121,258 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $361,401
and warrants to purchase 542,102 shares of the Company’s
common stock, all based on 8-10% of gross proceeds to the Company.
The placement agent has also received a $25,000 advisory fee. The
warrants issued for these services had a fair value of $1,072,095
at the date of issuance. The fair value of the warrants was
recorded as debt discount (with an offset to APIC) and will be
amortized over the one-year term of the Convertible Notes. The
$361,401 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
As part
of the Purchase Agreement, the Company entered into a Registration
Rights Agreement, which grants the investors “demand”
and “piggyback” registration rights to register the
shares of Common Stock issuable upon the conversion of the
Convertible Notes and the exercise of the Warrants with the
Securities and Exchange Commission for resale or other disposition.
In addition, the Convertible Notes are subordinated to certain
senior debt of the Company pursuant to a Subordination Agreement
executed by the investors.
The
Convertible Notes and Warrants were issued in transactions that
were not registered under the Securities Act of 1933, as amended
(the “Act”) in reliance upon applicable exemptions from
registration under Section 4(a)(2) of the Act and/or Rule 506 of
SEC Regulation D under the Act.
In
accordance to ASC 470-20-30, Debt with Conversion and Other
Options, the guidance therein applies to both convertible debt and
other similar instruments, including convertible preferred shares.
The guidance states that “the allocation of proceeds shall be
based on the relative fair values of the two instruments at time of
issuance. When warrants are issued in conjunction with a debt
instrument as consideration in purchase transactions, the amounts
attributable to each class of instrument issued shall be determined
separately, based on values at the time of issuance. The debt
discount or premium shall be determined by comparing the value
attributed to the debt instrument with the face amount
thereof.
In
conjunction with the issuance of Convertible Notes and the
Warrants, the Company recorded a debt discount of $2,857,960
associated with a beneficial conversion feature on the debt, which
is being accreted using the effective interest method over the
one-year term of the Convertible Notes. Intrinsic value of the
beneficial conversion feature was calculated at the commitment date
as the difference between the conversion price and the fair value
of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible. In accordance to ASC 470-20-30, if the intrinsic value
of the beneficial conversion feature is greater than the proceeds
allocated to the convertible instrument, the amount of the discount
assigned to the beneficial conversion feature shall be limited to
the amount of the proceeds allocated to the convertible
instrument.
The
Warrants were indexed to our own stock and no down round provision
was identified. The Warrants were not subject to ASC 718.
Therefore, the Company concluded that based upon the conversion
features, the Warrants should not be accounted for as derivative
liabilities. The fair value of the Warrants was $1,384,530 and was
recorded as Debt Discount (with an offset to APIC) on the date of
issuance and amortized over the one-year term of the
notes.
During the year ended September 30, 2020, the Company issued
4,581,917 shares of common
stock related to the automatic conversion of Convertible
Notes and interest from a private placement to accredited investors
in 2019. The Convertible Notes and interested were automatically
converted to Common Stock at $1.00 per share on the one year
anniversary starting on February 15, 2020.
Convertible Debt Offering during the year ended September 30,
2020
During
the year ended September 30, 2020, the Company closed additional
rounds of a debt offering and received gross proceeds of $5,639,500
in exchange for issuing Subordinated Convertible Notes and Warrants
in a private placement to accredited investors, pursuant to a
series of substantially identical Securities Purchase Agreements,
Common Stock Warrants, and related documents.
The
Convertible Notes are initially convertible into 5,639,500 shares
of Common Stock, subject to certain adjustments, and the Warrants
are initially exercisable for 2,819,750 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
The
fair value of the Warrants issued to debt holders was $1,824,998 on
the date of issuance and will be amortized over the one-year term
of the Convertible Notes.
In
connection with the debt offering, the placement agent for the
Convertible Notes and the Warrants received a cash fee of $529,965
and warrants to purchase 615,675 shares of the Company’s
common stock, all based on 6.3-8%% of gross proceeds to the
Company. The warrants issued for these services had a fair value of
$1,016,797 at the date of issuance. The fair value of the warrants
was recorded as debt discount (with an offset to APIC) and will be
amortized over the one-year term of the Convertible Notes. The
$529,965 cash fee was recorded as issuance costs and will be
amortized over the one-year term of the related Convertible
Notes.
The
Company recorded a debt discount of $3,766,074 associated with a
beneficial conversion feature on the debt, which is being accreted
using the effective interest method over the one-year term of the
Convertible Notes.
During
the year ended September 30, 2020, amortization related to the 2019
and 2020 debt offerings of $5,662,690 of the beneficial conversion
feature, warrants issued to debt holders and placement agent was
recognized as interest expense in the consolidated statements of
operations.
Convertible
notes payable as of September 30, 2020 and 2019 are summarized
below:
|
|
|
Convertible
note- Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
Convertible
note- Ronald P. Erickson and affiliates
|
1,184,066
|
1,184,066
|
2019
Convertible notes
|
4,242,490
|
4,242,515
|
Q1
2020 Convertible notes
|
520,000
|
-
|
Q2
2020 Convertible notes
|
195,000
|
-
|
Q3
2020 Convertible notes
|
4,924,500
|
-
|
Bousted
fee refund (originally booked as contra debt)
|
50,000
|
-
|
Less
conversions of 2019 notes
|
(4,242,490)
|
-
|
Less
debt discount - BCF
|
(2,127,894)
|
(1,273,692)
|
Less
debt discount - warrants
|
(1,025,512)
|
(616,719)
|
Less
debt discount - warrants issued for services
|
(823,582)
|
(652,919)
|
|
$3,967,578
|
$3,954,251
|
Note Payable
On April 30, 2020, the Company received $226,170 under the
Paycheck Protection Program of the U.S. Small Business
Administration’s 7(a) Loan Program pursuant to the
Coronavirus, Aid, Relief and Economic Security Act (CARES
Act), Pub. Law 116-136, 134 Stat. 281 (2020). During the year ended
September 30, 2020, the Company recorded interest expense of $960.
The Company is utilizing the funds in accordance with the legal
requirements and expects this loan to be forgiven. Until the loan
is legally forgiven, the loan balance will outstanding. The Company
expects to start the application for the loan forgiveness during
the three months ended December 31, 2020.
11.
|
SIMPLE AGREEMENTS FOR FUTURE EQUITY
|
In July 2020, Particle entered into Simple Agreements for Future
Equity (“SAFE”) with twenty two accredited investors
pursuant to which Particle received $785,000 in cash in exchange
for the providing the investor the right to receive shares of the
Particle stock. The Company expects to issue 981,250 shares of the
Particle stock that was initially valued at $0.80 per share. The
Company paid $47,100 in broker fees which were expensed as business
development expenses. The SAFE contained a number of conversion and
redemption provisions, including settlement upon liquidity or dissolution events.
The final price and shares are not known until settlement upon
liquidity or dissolution events conditions are achieved. The
Company elected the fair value option of accounting for the
SAFE.
12. EQUITY
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
Authorized Capital Stock
The
Company authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
As of
September 30, 2020, the Company had 24,804,874 shares of common
stock issued and outstanding, held by 123 stockholders of record.
The number of stockholders, including beneficial owners holding
shares through nominee names, is approximately 2,300. Each share of
common stock entitles its holder to one vote on each matter
submitted to the stockholders for a vote, and no cumulative voting
for directors is permitted. Stockholders do not have any
preemptive rights to acquire additional securities issued by the
Company. As of September 30, 2020, there were options
outstanding for the purchase of 4,805,000 common shares (including
unearned stock option grants totaling 2,630,000 shares related to
performance targets), warrants for the purchase of 20,016,367
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and are issuable upon conversion of
convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share.
Voting Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of
preferred stock with a par value of $0.001.
Series A Preferred Stock
There are 23,334 shares of Series A Preferred shares authorized.
Series A Preferred is entitled to the number of votes equal to the
number of whole shares of common stock into which the shares of
Series A Preferred held by such holder are then convertible as of
the applicable record date. The Series A Preferred was not be
redeemable without the consent of the holder.
On January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock. There are no
Series A Preferred Stock outstanding as of January 29,
2019.
On December 14, 2020, the Company cancelled the Certificate of
Designations for the Series A Preferred Stock.
Series C and D Preferred Stock and Warrants
On
August 5, 2016, the Company closed a Series C Preferred Stock and
Warrant Purchase Agreement with Clayton A. Struve, an accredited
investor for the purchase of $1,250,000 of preferred stock with a
conversion price of $0.70 per share. The preferred stock has a
yield of 8% and an ownership blocker of 4.99%. In addition, Mr.
Struve received a five-year warrant to acquire 1,785,714 shares of
common stock at $0.70 per share. On
August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per
share pursuant to the documents
governing such instruments. On September 30, 2020
and September 30, 2019 there are
1,785,715 Series C Preferred shares
outstanding.
As of September 30, 2020, and
September 30, 2019, the Company has 1,016,014 of Series D Preferred Stock outstanding
with Clayton A. Struve, an accredited investor. On August 14, 2017, the price of the
Series D Stock were adjusted to
$0.25 per share pursuant to the
documents governing such instruments.
The
Series D Preferred Stock is convertible into shares of common stock
at a price of $0.25 per share or by multiplying the number of
Series D Preferred Stock shares by the stated value and dividing by
the conversion price then in effect, subject to certain diluted
events, and has the right to vote the number of shares of common
stock the Series D Preferred Stock would be issuable on conversion,
subject to a 4.99% blocker. The
Preferred Series D has an annual yield of 8% The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% if and when dividends are
declared.
Series F Preferred Stock
On August 1, 2018, the Company filed with the State of Nevada a
Certificate of Designation establishing the Designations,
Preferences, Limitations and Relative Rights of Series F Preferred
Stock. The Designation authorized 500 shares of Series F Preferred
Stock. The Series F Preferred Stock shall only be issued to the
current Board of Directors on the date of the Designation’s
filing and is not convertible into common stock. As set forth in
the Designation, the Series F Preferred Stock has no rights to
dividends or liquidation preference and carries rights to vote
100,000 shares of common stock per share of Series F upon a Trigger
Event, as defined in the Designation. A Trigger Event includes
certain unsolicited bids, tender offers, proxy contests, and
significant share purchases, all as described in the Designation.
Unless and until a Trigger Event, the Series F shall have no right
to vote. The Series F Preferred Stock shall remain issued and
outstanding until the date which is 731 days after the issuance of
Series F Preferred Stock (“Explosion Date”), unless a
Trigger Event occurs, in which case the Explosion Date shall be
extended by 183 days. As of September 30, 2020 and September 30,
2019, there are no Series F shares outstanding.
Securities Subject to Price Adjustments
In the
future, if the Company sells its common stock at a price below
$0.25 per share, the exercise price of
8,108,356 outstanding shares of Series C and D Preferred Stock that
adjust below $0.25 per share pursuant to the documents governing
such instruments. In addition, the conversion price of Convertible
Notes Payable of $7,894,566 or 14,659,764 common shares (9,020,264
common shares at the current price of $0.25 per share and 5,639,500
common shares at the current price of $1.00 per share) and the exercise price of additional outstanding
warrants to purchase 12,588,286 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments. Warrants totaling 5,191,636 would adjust below $1.20
per share pursuant to the documents governing such
instruments.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants. The stock option grant
had an exercise price of $0.25 per share.
During the year ended September 30, 2020, the Company issued
550,000 shares of restricted common stock for services. The shares
were issued were valued at $1.90 per share, the market price of our
common stock, or $1,045,000.
During the year ended September 30, 2020, the Company issued
4,581,917 shares of common
stock related to the automatic conversion of Convertible
Notes and interest from a private placement to accredited investors
in 2019. The Convertible Notes and interested were automatically
converted to Common Stock at $1.00 per share on the one year
anniversary starting on February 15, 2020.
During the year ended September 30, 2020, the Company issued
733,588 shares of common stock at
$0.889 per share related to the exercise of
warrants.
On July 1, 2020, the Company entered into a Settlement Agreement
and General Mutual Release with a shareholder of the Company. On
July 6, 2020, the shareholder paid $125,000 us and we issued
500,000 shares of common stock. We accrued for the loss on debt
settlement of $825,000 as of June 30, 2020 which represents the
difference between the fair market value of the stock and $125,000
paid by the shareholder.
The following equity issuances occurred during the year ended
September 30, 2019:
During the year ended September 30, 2019, the Company issued
509,656 shares of common stock at $0.25 per share to consultants
and investors related to the cashless exercise of
warrants.
During the year ended September 30, 2019, the Company issued
145,000 shares of common stock for services provided by two
consultants. The common stock was valued at the daily trading price
of totaling $246,900 or $1.703 per share.
On January 2, 2019, the Company issued 100,000 shares of common
stock for services provided to Ronald P. Erickson. The shares were
valued at $102,000 or $1.02 per share.
On
January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock.
Warrants to Purchase Common Stock
The following warrant transactions occurred during the year ended
September 30, 2020:
During the year ended September 30, 2020, the Company issued
733,588 shares of common stock at
$0.952 per share and cancelled warrants to purchase 507,560
shares of common stock at $$1.120 per
share to related to the exercise of warrants.
During the year ended September 30, 2020, the Company issued
75,000 shares of common stock at $1.95
per share. The warrant was valued at $1.770 per
share.
Convertible Debt Offering Warrants
The
Warrants issued for the 2020 convertible Debt Offering were granted
on a 1:0.5 basis (one-half Warrant for each full share of Common
Stock into which the Convertible Notes are convertible). The
Warrants have a five-year term and an exercise price equal to 120%
of the per share conversion price of the Qualified Financing or
other mandatory conversion.
Warrants
issued in connection with 2020 convertible debt offering are
initially exercisable for 2,819,750 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
In
connection with the 2020 convertible debt offering, the placement
agent for the Convertible Notes and the Warrants received warrants
to 615,675 shares of the Company’s common stock, all based on
8% of gross proceeds to the Company.
The following warrants were issued during the year ended September
30, 2019:
The Company cancelled warrants to purchase 70,011 shares of common
stock at $3.08 per share to consultants and investors related to
the cashless exercise of warrants or expiration of
warrants.
The Company issued warrants to purchase 70,000 shares of common
stock at $1.61 to $2.72 per share to three consultants. The
warrants were valued at $30,325 or $1.989 per share. The warrants
expire during the first quarter of 2024.
The Company increased warrants by 120,000 shares at $0.25 per
shares related to the June 28, 2019 exercise of warrants by
a holder of Series A Preferred Stock.
Private Placement Warrants
The
Warrants issued for the private placements discussed above were
granted on a 1:0.5 basis (one-half Warrant for each full share of
Common Stock into which the Convertible Notes are convertible). The
Warrants have a five-year term and an exercise price equal to 120%
of the per share conversion price of the Qualified Financing or
other mandatory conversion.
Warrants
are initially exercisable for 2,121,258 shares of Common Stock at
an exercise price of $1.20 per share of Common Stock, also subject
to certain adjustments.
In
connection with the private placement, the placement agent for the
Convertible Notes and the Warrants received warrants to purchase
542,102 shares of the Company’s common stock, all based on
8-10% of gross proceeds to the Company.
A
summary of the warrants outstanding as of September 30,
2020 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
Issued
|
3,510,425
|
1.216
|
Exercised
|
(733,588)
|
(0.952)
|
Forfeited
|
(507,560)
|
(1.120)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
20,016,367
|
$0.556
|
Exerciseable
at end of period
|
20,016,367
|
|
The following table summarizes information about warrants
outstanding and exercisable as of September 30,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,133,286
|
1.76
|
$0.250
|
13,133,286
|
$0.250
|
714,286
|
0.83
|
0.700
|
714,286
|
0.700
|
882,159
|
1.12
|
1.000
|
882,159
|
1.000
|
5,191,636
|
4.12
|
1.20-1.50
|
5,191,636
|
1.20-1.50
|
95,000
|
4.19
|
2.00-4.08
|
95,000
|
2.34-4.08
|
|
|
|
|
|
20,016,367
|
3.04
|
$0.556
|
20,016,367
|
$0.556
|
|
|
|
|
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the year ended September
30, 2020 were as
follows:
|
|
Dividend
yield
|
0%
|
Expected
life
|
5 years
|
Expected
volatility
|
176%-177%
|
Risk
free interest rate
|
1.51%-1.71%
|
There were vested and in the money warrants of 19,996,367
with an aggregate intrinsic value of
$35,329,983.
13.
|
STOCK INCENTIVE PLANS
|
Know Labs, Inc.
On
January 23, 2019, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 2,200,000 to 2,500,000 to
common shares. On May 22, 2019, the Compensation Committee
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 2,500,000 to 3,000,000 to common shares. See Note 18 for
increase in option pool subsequent to September 30,
2020.
Determining Fair Value under ASC 718
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had the following stock option transactions during the
year ended September 30, 2020:
During the year ended September 30, 2020, the Company granted stock
option grants to executives, directors and consultants for
3,085,000 shares with a weighted
average exercise price of $1.142 per share. The grants expire in
five years and generally vest quarterly over four years. Stock
option grants totaling 2,630,000 shares of common stock are performance stock
option grants and are not vested until the performance is
achieved.
During the year ended September 30, 2020, executives and employees
voluntarily cancelled stock option grants for 2,739,477
shares with a weighted average
exercise price of $2.593 per share.
On
November 9, 2019, a former employee exercised stock option grants
on a cashless basis. The former employee received 73,191 shares of
common stock for vested stock option grants totaling 93,750 shares.
The stock option grant had an exercise price of $0.25 per
share.
There are currently 4,805,000 (including unearned stock option
grants totaling 2,630,000 shares related to performance targets)
options to purchase common stock at an
average exercise price of $1.161 per share outstanding as of
September 30, 2020 under the 2011
Stock Incentive Plan. The Company recorded $868,314
and $1,141,674 of compensation
expense, net of related tax effects, relative to stock options for
the years ended September 30, 2020 and 2019 and in accordance with ASC 718. As
of September 30, 2020, there is
approximately $361,947, net of
forfeitures, of total unrecognized costs related to employee
granted stock options that are not vested. These costs are expected
to be recognized over a period of approximately 3.67
years.
The Company had the following stock option transactions during the
year ended September 30, 2019:
On
October 31, 2018, the Board awarded stock option grants to two
directors to acquire 50,000 shares each of the Company’s
common stock. The grants had an exercise price of $3.03 per share
and expire on October 31, 2023. The grants vested
immediately.
On
October 31, 2018, the Board awarded Phillip A. Bosua a stock option
grant to acquire 1,000,000 shares of the Company’s common
which vests upon approval of the Company’s blood glucose
measurement technology by the U.S. Food and Drug Administration.
The grants had an exercise price of $3.03 per share and expire on
October 31, 2023.
On
October 31, 2018, the Board awarded Ronald P Erickson a stock
option grant to acquire 1,000,000 shares of the Company’s
common which vests upon the Company’s successful listing of
its Common Stock on NASDAQ or the New York Stock Exchange
(including the NYSE American Market). The grant had an exercise
price of $3.03 per share and expires on October 31,
2023.
On
March 26, 2019, the Board awarded two employees stock option grants
totaling 260,000 shares of the Company’s common which vests
upon approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grant had
an exercise price of $1.50 per share and expires on March 26,
2024.
During
April 2019, the Board awarded stock option grants to two employees
and a consultant to acquire 185,000 shares of the Company’s
common stock. The grants had an exercise price from $1.39 per share
to $1.90 per share and expire during April 2024. Grants totaling
10,000 common shares vested immediately and grants totaling 50,000
vests quarterly over three years. Grants totaling 125,000 common
shares vest quarterly over four years, with no vesting during the
first six months.
On
April 15, 2019, the Board awarded an employee was granted a stock
option grant to acquire 50,000 shares of the Company’s common
which vests upon approval of the Company’s blood glucose
measurement technology by the U.S. Food and Drug Administration.
The grants had an exercise price of $1.50 per share and expire on
April 15, 2024.
During
July and August of 2019, the Board awarded stock option grants to
four consultants to acquire 275,000 shares of the Company’s
common stock. The grants have an exercise price from $1.34 per
share to $1.40 per share and expire during July and August 2024.
Grants totaling 10,000 common shares vested immediately and grants
totaling 50,000 vest quarterly over three years. Grants totaling
15,000 common shares vest monthly over six months. A grant of
100,000 shares of common stock vests quarterly over four years,
with no vesting during the first six months. A grant for 100,000
shares of common stock vests quarterly over four years, with no
vesting during the first six months. A grant for 100,000 shares of
common stock vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration.
During
the year ended September 30, 2019, the Board four employees a stock
option grants to acquire 125,000 shares of the Company’s
Common stock for each $1,000,000 raised by the Company in revenue
generated in a planned Kickstarter campaign at a price range for
$1.50 to $3.03 per share. During the year ended September 30, 2019,
the Company recently decided that it would not undertake a
Kickstarter campaign. Options are expected to be cancelled or have
alternative Company milestones.
During the year ended September 2019, stock option grants for
520,000 shares of common stock with an exercise price ranging from
$3.03 to $4.20 per share were forfeited.
Stock option activity for the years ended September 30, 2020 and
2019 was as follows:
|
|
|
|
|
|
|
|
Outstanding as of
September 30, 2018
|
2,182,668
|
$1.698
|
$3,706,519
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
Outstanding as of
September 30, 2019
|
4,532,668
|
2.025
|
9,180,369
|
Granted
|
3,085,000
|
1.142
|
3,522,400
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,739,477)
|
(2.593)
|
(7,103,921)
|
Outstanding as of
September 30, 2020
|
4,805,000
|
$1.161
|
$5,580,550
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable as of September 30,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
|
230,000
|
2.71
|
$0.250
|
129,375
|
$0.250
|
1.10-1.25
|
2,940,000
|
4.10
|
1.10
|
306,250
|
1.103
|
1.28-1.52
|
1,500,000
|
4.10
|
1.33
|
695,313
|
1.310
|
1.79-2.25
|
135,000
|
3.75
|
1.37
|
66,250
|
1.961
|
|
4,805,000
|
3.67
|
$1.161
|
1,197,188
|
$1.158
|
There were in the money stock option grants of 4,805,000
shares as of September 30, 2020 with
an aggregate intrinsic value of $5,446,854.
Particle, Inc.
On May
21, 2020, Particle approved a 2020 Stock Incentive Plan and
reserved 8,000,000 shares under the Plan. The Plan requires vesting
annually over four years, with no vesting in the first two
quarters.
During
July 2020, Particle approved stock option grants to non-executive
employees and consultants totaling 2,250,000 shares at an average
of $0.147 per share. The stock option grants vest annually over
four years, with no vesting in the first two quarters.
On July
2, 2020, Particle approved stock option grants for 1,500,000 shares
at $0.10 per share to both Phillip A. Bosua and Ronald P. Erickson.
The stock option grants vest (i) 33.3% upon issuance; (ii) 33.3%
after the first sale; and (iii) 33.4% after one million in sales
are achieved. The 500,000 vests stock option grants for both Mr.
Bosua and Erickson were valued at $0.788 per share or
$394,000.
The Company recorded $833,771 and $0 of compensation expense, net of related tax
effects, relative to stock options for the years ended September
30, 2020 and 2019 and in
accordance with ASC 718. As of September 30,
2020, there is approximately
$840,729, net of forfeitures,
of total unrecognized costs related to employee granted stock
options that are not vested. These costs are expected to be
recognized over a period of approximately 3.77
years.
The following table summarizes information about Particle stock
options outstanding and exercisable as of September 30,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
5,100,000
|
4.76
|
$0.10
|
1,116,170
|
$0.10
|
0.80
|
150,000
|
5.00
|
$0.80
|
-
|
-
|
|
|
|
|
|
|
|
5,250,000
|
4.77
|
$0.12
|
1,116,170
|
$0.10
|
There were in the money stock option grants of 1,116,170
shares as of September 30, 2020 with
an aggregate intrinsic value of $758,996.
14.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Notes 10, 13 and 15 for related party transactions with Ronald
P. Erickson.
On
March 16, 2018, the Company entered into a Note and Account Payable
Conversion Agreement pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020. On May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 2020. On December
8, 2020, the Company signed Amendment 4 to the convertible
promissory or OID notes, extending the due dates to March 31,
2021.
On January 2, 2019, Mr. Erickson was issued 100,000 shares of
restricted common stock at the grant date market value of $1.02 per
share.
On October 4, 2019, Ronald P. Erickson voluntarily cancelted a
stock option grant for 1,000,000 shares with an exercise price of
$3.03 per share. The grant was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Ronald P. Erickson for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon uplisting to the NASDAQ or NYSE exchanges.
On January 1, 2020, the Company issued 100,000 shares of restricted
common stock to Ronald P. Erickson. The shares were issued in
accordance with the 2011 Stock Incentive Plan and were valued at
$1.90 per share, the market price of the Company’s common
stock, or $190,000.
On June 1, 2020, Mr. Erickson received a salary of $10,000 per
month for work on Particle, Inc.
Mr. Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $597,177
and $487,932 as of September 30, 2020 and 2019,
respectively.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Ronald P. Erickson. The stock option grant
vests (i) 33.3% upon issuance; (ii) 33.3% after the first sale; and
(iii) 33.4% after one million in sales are achieved.
Related Party Transaction with Phillip A. Bosua
On October 4, 2019, Philip A. Bosua voluntarily cancelled a stock
option grant for 1,000,000 shares with an exercise price of $3.03
per share. The grants was related to performance and was not
vested.
On November 4, 2019, the Company granted a stock option grant to
Philip A. Bosua for 1,200,000 shares with an exercise price of
$1.10 per share. The performance grant expires November 4, 2024 and
vests upon FDA approval of the UBAND blood glucose
monitor.
On January 1, 2020, the Company issued 150,000 shares of restricted
common stock to Phillip A. Bosua. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$285,000.
On June 1, 2020, Mr. Bosua received a salary of $10,000 per month
for work on Particle, Inc.
On July
2, 2020, Particle issued a stock option grant for 1,500,000 shares
at $0.10 per share to Philip A.
Bosua. The stock option grant vests (i) 33.3% upon issuance;
(ii) 33.3% after the first sale; and (iii) 33.4% after one million
in sales are achieved.
Stock Issuances and Cancellations to Named Executive Officers and
Directors
During the year ended September 30, 2019, two directors voluntarily
forfeited stock option grants for 100,000 shares of common stock at
$3.03 per share.
On November 4, 2019, the Company granted stock option grants to two
directors totaling 105,000 shares with an exercise price of $1.10
per share. The stock option grants expire in five years. The stock
option grants vested immediately.
On January 1, 2020, the Company issued 120,000 shares of restricted
common stock to three directors. The shares were issued in accordance with the
2011 Stock Incentive Plan and were valued at $1.90 per share, the
market price of the Company’s common stock, or
$228,000.
15. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
The
Company may from time to time become a party to various legal
proceedings arising in the ordinary course of our business. The
Company is currently not a party to any pending legal proceeding
that is not ordinary routine litigation incidental to our
business.
Employment Agreement with Phillip A. Bosua, Chief Executive
Officer
Phillip A. Bosua was appointed our Chief Executive Officer on April
10, 2018. Previously, Mr. Bosua served as the Company’s Chief
Product Officer since August 2017. The Company entered into a
Consulting Agreement with Mr. Bosua’s company, Blaze Clinical
on July 7, 2017. From September 2012 to February 2015, Mr. Bosua
was the founder and Chief Executive Officer of LIFX Inc. (where he
developed and marketed an innovative “smart” light
bulb) and from August 2015 until February 2016 was Vice President
Consumer Products at Soraa (which markets specialty LED light
bulbs). From February 2016 to July 2017, Mr. Bosua was the founder
and CEO of RAAI, Inc. (where he continued the development of his
smart lighting technology). From May 2008 to February 2013 he was
the Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On April 10, 2018, the Company entered into an Employment Agreement
with Mr. Bosua reflecting his appointment as Chief Executive
Officer. The Employment Agreement is for an initial term of 12
months (subject to earlier termination) and will be automatically
extended for additional 12-month terms unless either party notifies
the other party of its intention to terminate the Employment
Agreement with at least ninety (90) days prior to the end of
the Initial Term or renewal term. Mr.
Bosua was paid a base salary of $225,000 per year, received 500,000
shares of common stock valued at $0.33 per share and may be
entitled to bonuses and equity awards at the discretion of the
Board or a committee of the Board. The Employment Agreement
provides for severance pay equal to 12 months of base salary if Mr.
Bosua is terminated without “cause” or voluntarily
terminates his employment for “good reason.”
From March 5, 2019 to May 1, 2020, the annual compensation
was $240,000, and from May 5, 2020 to September 30, 2020, the
annual compensation was $260,000. The Compensation Committee and the Board of Particle,
Inc. compensated Phillip A. Bosua with an annual salary of $120,000
from June 1, 2020.
Employment Agreement with Ronald P. Erickson, Chairman of the Board
and Interim Chief Financial Officer
On April 10, 2018, the Company entered into an Amended Employment
Agreement for Ronald P. Erickson which amends the Employment
Agreement dated July 1, 2017. The Agreement expires March 21,
2019. automatically be extended for additional one (1) year
periods unless either Party delivers written notice of such
Party’s intention to terminate this Agreement at least ninety
(90) days prior to the end of the Initial Term or renewal
term.
Mr.
Erickson’s annual compensation was $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus. From
October 1, 2018 to March 4, 2019,
from March 5, 2019 to May 1, 2020, the annual compensation
was $195,000, and from May 5, 2020 to September 30, 2020, the
annual compensation was $215,000. The Compensation Committee and the Board of Particle
Inc. compensated Ronald P. Erickson with an annual salary of
$120,000 from June 1, 2020.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by the Company to its senior executives
and management employees from time to time, subject to the terms
and conditions of such benefit plans, including any eligibility
requirements.
If the Company terminates Mr. Erickson’s employment at any
time prior to the expiration of the Term without Cause, as defined
in the Employment Agreement, or if Mr. Erickson terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
Properties and Operating Leases
The Company is obligated under the following leases for its various
facilities.
Corporate Offices
On April 13, 2017, the Company leased its executive office located
at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101.
The Company leases 943 square feet and the net monthly payment is
$2,672. The monthly payment increases approximately 3% each year
and the lease expires on May 31, 2022.
Lab Facilities and Executive Offices
On
February 1, 2019, the Company leased its lab facilities and
executive offices located at 915 E Pine Street, Suite 212, Seattle,
WA 98122. The Company leases 2,642 square feet and the net monthly
payment is $8,256. The monthly payment increases approximately 3%
on July 1, 2019 and annually thereafter. The lease expires on June
30, 2021 and can be extended.
On June
26, 2020, the Company leased temporary lab facilities located at
3131 Western Avenue, Suite A350, Seattle, WA 98121. The Company
leased 5,707 square feet and the net monthly payment is $11,414.
The lease was terminated August 31, 2020.
16. INCOME TAXES
The
Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise from United States
sources.
Pretax
losses arising from United States operations were approximately
$4,077,000 and $2,957,000 for the years ended September 30, 2020
and 2019.
The
Company has net operating loss carryforwards of approximately
$36,209,000 which expire in 2021-2038. Because it is not more
likely than not that sufficient tax earnings will be generated to
utilize the net operating loss carryforwards, a corresponding
valuation allowance of approximately $8,248,000 was established as
of September 30, 2020. Additionally, under the Tax Reform Act of
1986, the amounts of, and benefits from, net operating losses may
be limited in certain circumstances, including a change in
control.
Section 382
of the Internal Revenue Code generally imposes an annual limitation
on the amount of net operating loss carryforwards that may be used
to offset taxable income when a corporation has undergone
significant changes in its stock ownership. There can be no
assurance that the Company will be able to utilize any net
operating loss carryforwards in the future. The Company is subject
to possible tax examination for the years 2013 through
2020.
For the year ended September 30, 2020, the Company’s
effective tax rate differs from the federal statutory rate
principally due to net operating losses, interest expense and
warrants issued for services.
The principal components of the Company’s deferred tax assets
at September 30, 2020 and 2019 are as follows:
|
|
|
U.S. operations
loss carry forward at statutory rate of 21%
|
$6,536,413
|
$6,763,238
|
Deferred tax assets
related to timing differences-accruals
|
1,746,486
|
192,897
|
Total
|
8,282,899
|
6,956,135
|
Less Valuation
Allowance
|
(8,248,637)
|
(6,956,135)
|
|
|
|
Other
|
(34,263)
|
-
|
Deferred tax
liabilities
|
(34,263)
|
-
|
|
|
|
Net Deferred Tax
Assets
|
-
|
-
|
Change in Valuation
allowance
|
$(1,292,502)
|
$(813,996)
|
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended September
30, 2020 and 2019 are as follows:
|
|
|
Federal Statutory
Rate
|
21.0%
|
21.0%
|
State
Taxes
|
0.9%
|
0.0%
|
Meals
|
0.0%
|
0.0%
|
Warrants Int.
Exp.
|
-8.8%
|
0.0%
|
PY
True-up
|
-3.8%
|
0.0%
|
Increase in Income
Taxes Resulting from:
|
|
|
Change
in Valuation allowance
|
-9.3%
|
-21.0%
|
Effective Tax
Rate
|
0.0%
|
0.0%
|
As of
September 30, 2020, there were no uncertain tax positions.
Management does not anticipate any future adjustments in the next
twelve months which would result in a material change to its tax
position. For the years ended September 30, 2020 and 2019, the
Company did not have any interest and penalties.
17. SEGMENT REPORTING
The
management of the Company considers the business to have two
operating segments (i) the development of the Bio-RFID™” and
“ChromaID™” technologies; (ii) Particle, Inc.
technology; and (iii) TransTech, a distributor of products for employee
and personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s
revenues. TransTech was shut down on June 30, 2020. Particle
commenced operations in the three months ended June 30,
2020.
The
reporting for the year ended September 30, 2020 and 2019 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
Year
Ended September 30, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(5,481)
|
$4,360
|
Particle,
Inc. technology
|
-
|
-
|
(1,280)
|
322
|
TransTech
distribution business
|
122
|
70
|
(65)
|
-
|
Total
segments
|
$122
|
$70
|
$(6,826)
|
$4,682
|
|
|
|
|
|
Year
Ended September 30, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™”
technologies
|
$-
|
$-
|
$(4,935)
|
$2,882
|
TransTech
distribution business
|
1,805
|
427
|
(78)
|
58
|
Total
segments
|
$1,805
|
$427
|
$(5,013)
|
$2,940
|
During
years ended September 30, 2020 and 2019, the Company incurred non-cash expenses of
$2,990,072 and $1,867,379.
18. SUBSEQUENT EVENTS
The Company evaluated subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements were issued. Subsequent to September 30, 2020, there
were the following material transactions that require
disclosure:
Convertible Notes Dated October 17, 2019
The
Company issued 561,600
shares of common stock related
to the automatic conversion of Convertible Notes and interest from
a private placement to accredited investors in 2019. The
Convertible Notes and interested were automatically converted to
Common Stock at $1.00 per share on the one year
anniversary.
2011 Stock Incentive Plan
On
November 23, 2020, the Board of Directors increased the size of the
stock available under the Stock Option Plan by 9,750,000 shares.
This increase is based on an industry peer group
study.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On
December 8, 2020, the Company signed Amendment 4 to the $1,184,066
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
Convertible Promissory Notes with Clayton A. Struve
On
December 23, 2020, the Company signed Amendments to the $1,071,000
convertible promissory or OID notes, extending the due dates to
March 31, 2021.
Stock Option Exercises and Issuances
A
consultant exercised a stock option grants on a cashless basis. The
consultant received 3,750 shares of common stock for vested stock
option grants and forfeited 11,250 shares. The stock option grant
had an exercise price of $1.25 per share.
The compensation committee of Particle, Inc. issued a stock option
grant to a consultant for 50,000 shares of Particle common stock.
The stock option grant had an exercise price at $0.80 per share. The grant vests annually over
four years after a six month cliff vesting
period.
The Compensation committee issued a stock option grant to a consultant for 140,000
shares at an exercise price of $1.24 per share. The stock option
grant expires in five years. The stock option grant vests quarterly
over four years after a six month cliff vesting
period.
On
December 15, 2020, the Company issued 30,000 shares each to three
directors shares at an exercise price of $1.53 per
share.
On
December 15, 2020, the Company issued 20,000 warrants to purchase
common stock each to three directors shares at $1.53 per share. The
warrants expire on December 15, 2025.
On
December 15, 2020, the Company issued a warrant for to purchase
common stock for 2,000,000 shares to Ronald P. Erickson at $1.53
per share. The warrants were issued for the extension of loans and
deferral of other expenses. The warrant expires on December 15,
2025.
On
December 15, 2020, the Company stock
option grant to Ronald P. Erickson for 1,865,675 shares at an
exercise price of $1.53 per share. The stock option grant expires
in five years. The stock option grants vest when earned based on
certain performance criteria.
On
December 15, 2020, the Company stock
option grant to Phillip A. Bosua for 2,132,195 shares at an
exercise price of $1.53 per share. The stock option grant expires
in five years. The stock option grants vest when earned based on
certain performance criteria.
Simple Agreement for Future Equity
Particle entered into Simple Agreements for Future Equity
(“SAFE”) with two accredited investors pursuant to
which Particle received $55,000 in cash in exchange for the
providing the investor the right to receive shares of the Particle
stock. The Company expects to issue 44,000 shares of the Particle
stock that was initially valued at $0.80 per share. The Company
paid $1,800 in broker fees which were expensed as business
development expenses.