UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended December 31, 2020
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
For
the transition period from _______ to ________
Commission File
number 000-30262
KNOW LABS, INC.
(Exact
name of registrant as specified in charter)
Nevada
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90-0273142
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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500 Union Street, Suite
810, Seattle, Washington USA
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98101
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(Address
of principal executive offices)
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(Zip
Code)
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206-903-1351
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(Registrant's
telephone number, including area code)
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(Former
name, address, and fiscal year, if changed since last
report)
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Securities
registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes ☒
No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such
files). Yes ☒
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule 12b-2
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer (Do not check if a smaller reporting company)
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☐
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Smaller
reporting company
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☒
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Emerging growth
company
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☐
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If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐
No ☒
The number of shares of common
stock, $.001 par value, issued and outstanding as of February
16, 2021: 26,301,354
shares.
TABLE
OF CONTENTS
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Page
Number
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PART
I
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FINANCIAL
INFORMATION
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3
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3
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4
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5
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6
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7
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23
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31
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32
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PART
II
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OTHER
INFORMATION
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33
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44
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45
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48
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ITEM
1.
FINANCIAL STATEMENTS
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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ASSETS
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CURRENT
ASSETS:
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Cash
and cash equivalents
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$2,927,234
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$4,298,179
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Total
current assets
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2,927,234
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4,298,179
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PROPERTY AND
EQUIPMENT, NET
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117,004
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128,671
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OTHER
ASSETS
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Intangible
assets
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57,781
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101,114
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Other
assets
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25,181
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25,180
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Operating lease
right of use asset
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96,672
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129,003
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TOTAL
ASSETS
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$3,223,872
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$4,682,147
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT
LIABILITIES:
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Accounts payable -
trade
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$573,224
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$487,810
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Accounts payable -
related parties
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7,559
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5,687
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Accrued
expenses
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480,403
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401,178
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Accrued
expenses - related parties
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613,641
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591,600
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Convertible notes
payable
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5,044,558
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3,967,578
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Note
payable
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226,170
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226,170
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Simple
Agreements for Future Equity
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840,000
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785,000
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Current
portion of operating lease right of use liability
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84,537
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108,779
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Total
current liabilities
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7,870,092
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6,573,802
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NON-CURRENT
LIABILITIES:
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Operating lease
right of use liability, net of current portion
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14,602
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23,256
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Total
non-current liabilities
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14,602
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23,256
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COMMITMENTS AND
CONTINGENCIES (Note 14)
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-
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-
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STOCKHOLDERS'
DEFICIT
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Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
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outstanding at
12/31/2020 and 9/30/2020 respectively
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-
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-
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Series
C Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
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1,785,715 shares
issued and outstanding at 12/31/2020 and 9/30/2020,
respectively
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1,790
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1,790
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Series
D Convertible Preferred stock - $0.001 par value, 1,016,014 shares
authorized,
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1,016,004 shares
issued and outstanding at 12/31/2020 and 9/30/2020,
respectively
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1,015
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1,015
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Common
stock - $0.001 par value, 100,000,000 shares authorized, 25,370,224
and 24,804,874
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shares
issued and outstanding at 12/31/2020 and 9/30/2020,
respectively
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25,372
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24,807
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Additional paid in
capital
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56,576,613
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54,023,758
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Accumulated
deficit
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(61,265,612)
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(55,966,281)
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Total
stockholders' deficit
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(4,660,822)
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(1,914,911)
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TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
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$3,223,872
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$4,682,147
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The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
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REVENUE
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$-
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$117,393
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COST OF
SALES
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-
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65,935
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GROSS
PROFIT
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-
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51,458
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RESEARCH AND
DEVELOPMENT EXPENSES
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966,861
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491,138
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SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
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2,598,732
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920,551
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OPERATING
LOSS
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(3,565,593)
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(1,360,231)
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OTHER
INCOME (EXPENSE):
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Interest
expense
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(1,733,738)
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(1,679,490)
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Other
income
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-
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24,708
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Total other
(expense), net
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(1,733,738)
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(1,654,782)
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LOSS
BEFORE INCOME TAXES
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(5,299,331)
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(3,015,013)
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Income
tax expense
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-
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-
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NET
LOSS
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$(5,299,331)
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$(3,015,013)
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Basic
and diluted loss per share
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$(0.21)
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$(0.16)
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Weighted average
shares of common stock outstanding- basic and diluted
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25,208,726
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18,409,902
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The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
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$
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$
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$
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Balance as of October 1,
2019
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1,785,715
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$1,790
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1,016,004
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$1,015
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18,366,178
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$18,366
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$39,085,179
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$(42,403,640)
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$(3,297,290)
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Stock compensation expense -
employee options
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-
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-
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-
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-
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-
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-
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175,442
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-
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175,442
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Stock option
exercise
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-
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-
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-
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-
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73,191
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73
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(73)
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-
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-
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Beneficial conversion
feature
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-
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-
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-
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-
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-
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-
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330,082
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-
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330,082
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Issuance of warrants to debt
holders
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-
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-
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-
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-
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-
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-
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168,270
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-
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168,270
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Issuance of warrants for services
related to debt offering
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-
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-
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-
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-
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-
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-
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160,427
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-
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160,427
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Issuance of common stock for
exercise of warrants
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-
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-
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-
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-
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28,688
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29
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(29)
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-
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-
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Net loss
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-
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-
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-
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-
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-
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-
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-
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(3,015,013)
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(3,015,013)
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Balance as of December 31,
2019
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1,785,715
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1,790
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1,016,004
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1,015
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18,468,057
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18,468
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39,919,298
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(45,418,653)
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(5,478,082)
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Balance as of October 1,
2020
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1,785,715
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1,790
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1,016,004
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1,015
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24,804,874
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24,807
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54,023,758
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(55,966,281)
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(1,914,911)
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Stock compensation expense -
employee options
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-
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-
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-
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-
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-
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-
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175,442
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-
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175,442
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Conversion of debt offering and
accrued interest (Note 9 and 11)
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-
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-
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-
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-
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561,600
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562
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561,038
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-
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561,600
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Issuance of warrant for services to
related party
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-
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-
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-
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-
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-
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-
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1,811,691
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-
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1,811,691
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Issuance of common stock for
exercise of warrants
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-
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-
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-
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-
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3,750
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4
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4,684
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-
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4,688
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Net loss
|
-
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-
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-
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-
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-
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-
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-
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(5,299,331)
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(5,299,331)
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Balance as of December 31,
2020
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1,785,715
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$1,790
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1,016,004
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$1,015
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25,370,224
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$25,372
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$56,576,613
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$(61,265,612)
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$(4,660,822)
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The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$(5,299,331)
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$(3,015,013)
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Adjustments to
reconcile net loss to net cash (used in)
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operating
activities
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Depreciation and
amortization
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64,633
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60,316
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Stock
based compensation- warrants
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1,811,691
|
-
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Stock
based compensation- stock option grants
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175,442
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399,897
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Amortization of
debt discount
|
1,596,980
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1,567,047
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Right
of use, net
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(565)
|
458
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Provision on loss
on accounts receivable
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-
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40,000
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Changes
in operating assets and liabilities:
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Accounts
receivable
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-
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23,049
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Prepaid
expenses
|
-
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1,243
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Inventory
|
-
|
7,103
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Accounts payable -
trade and accrued expenses
|
230,150
|
91,575
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(1,421,000)
|
(824,325)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Purchase of
research and development equipment
|
(9,633)
|
(15,357)
|
NET
CASH (USED IN) INVESTING ACTIVITIES:
|
(9,633)
|
(15,357)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
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Proceeds from
convertible notes payable
|
-
|
520,000
|
Proceeds from
Simple Agreements for Future Equity
|
55,000
|
-
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Payments for
issuance costs from notes payable
|
-
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(78,845)
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Proceeds from
issuance of common stock for warrant exercise
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4,688
|
-
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
59,688
|
441,155
|
|
|
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NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(1,370,945)
|
(398,527)
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
4,298,179
|
1,900,836
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$2,927,234
|
$1,502,309
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$-
|
Taxes
paid
|
$-
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$-
|
$330,082
|
Issuance of
warrants to debt holders
|
$-
|
$168,270
|
Issuance of
warrants for services related to debt offering
|
$-
|
$160,427
|
Cashless warrant
exercise (fair value)
|
$-
|
$7,172
|
Cashless stock
options exercise (fair value)
|
$-
|
$18,298
|
Conversion of debt
offering
|
$520,000
|
$-
|
Conversion of
accrued interest
|
$41,599
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Know Labs, Inc, formerly Visualant,
Incorporated (“the Company”, “us,” “we,” or “our”) in accordance
with U.S. generally accepted accounting principles (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the fiscal periods presented have been
included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended September 30, 2020,
filed with the Securities and Exchange Commission (“SEC”) on
December 29, 2020. The results of operations for the three months
ended December 31, 2020 are not necessarily indicative of the
results expected for the full fiscal year, or for any other fiscal
period.
1.
ORGANIZATION
Know Labs, Inc. (the “Company”) was incorporated
under the laws of the State of Nevada in 1998. The Company
has authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $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.
Particle, Inc. was
incorporated April 30, 2020 and to date has engaged in activities
consisting primarily of research and development on threaded light bulbs that have a warm white
light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, the
Company approved and ratified entry into an intercompany Patent
License Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received an exclusive non-transferrable license
to use certain patents and trademarks of the Company, in exchange
the Company shall receive: (i) a one-time fee of $250,000 upon a
successful financing of Particle, and (ii) a quarterly royalty
payment equal to the greater of 5% of the Gross Sales, net of
returns, from Particle or $5,000. As of December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivating
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus that
causes COVID-19.
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 June 30, 2020.
2.
GOING CONCERN
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $5,299,331, $13,562,641 and
$7,612,316 for the three months ended December 31, 2020 and the
years ended September 30, 2020 and 2019, respectively. Net cash
used in operating activities was $1,421,000, $3,913,803 and
$3,104,035 the three months ended December 31, 2020 and 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 December 31, 2020, the Company’s
accumulated deficit was $61,265,612. 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 July 31, 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 December 31, 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 December 31, 2020, the Company had uninsured deposits in the amount
of $2,677,234.
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 2-5 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 $966,861, $2,033,726 and
$1,257,872 for the three months
ended December 31, 2020 and 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 three months ended December 31, 2020 and
2019 were $118,750 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 December 31, 2020 and September 30, 2020 are
based upon the short-term nature of the assets and
liabilities.
The
Company has a money market account which is considered a level 1
asset. The balance as of December 31, 2020 and September 30, 2020
was $2,853,419 and $4,252,959, 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
|
Proceeds
from issuance of SAFE
|
55,000
|
Fair
value adjustment
|
-
|
Balance
as of December 31, 2020
|
$840,000
|
Fair
value of the SAFE on issuance was determined to be equal to the
proceeds received (see Note 8). There were no transfers among Level
1, Level 2, or Level 3 categories in the periods
presented.
Derivative Financial Instruments
–Pursuant to ASC 815 “Derivatives and Hedging”, the Company
evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as
embedded derivatives. The Company then determines if embedded
derivative must bifurcated and separately accounted for. For
derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its
fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the consolidated statements
of operations. For stock-based derivative financial instruments,
the Company uses a Black-Scholes-Merton option pricing model to
value the derivative instruments at inception and on subsequent
valuation dates. The classification of derivative instruments,
including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not
net-cash settlement of the derivative instrument could be required
within twelve months of the balance sheet date.
The
Company determined that the conversion features for purposes
of bifurcation within its currently outstanding convertible notes
payable were immaterial and there was no derivative liability to be
recorded as of December 31, 2020 and
September 30, 2020.
Stock Based Compensation - The Company has share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options and warrants to
purchase shares of Company common stock at the fair market value at
the time of grant. Stock-based compensation cost to employees is
measured by the Company at the grant date, based on the fair value
of the award, over the requisite service period under ASC 718. For
options issued to employees, the Company recognizes stock
compensation costs utilizing the fair value methodology over the
related period of benefit.
Convertible Securities
– Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities. We will evaluate our contracts
based upon the earliest issuance date. In the event partial
reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
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 December 31, 2020, the Company had
25,370,224 shares of common
stock issued and outstanding. As of December 31, 2020, there were
options outstanding for the purchase of 12,936,955 common shares (including
unearned stock option grants totaling 10,625,745 shares related to
performance targets), warrants for the purchase of 22,016,367
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
14,189,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,169,500 common shares at the current
price of $1.20 per share) reserved and are issuable upon conversion
of convertible debentures of $7,424,566. All of which could
potentially dilute future earnings per share but are excluded from
the December 31, 2020 calculation of net loss per share because
their impact is antidilutive.
As of
December 31, 2019, there were options outstanding for the purchase
of 4,812,668 common shares (including unearned stock option grants
totaling 2,680,000 and excluding certain stock option grants for a
cancelled kickstarter program), warrants for the purchase of
18,044,490 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 13,782,779 common shares (9,020,264 common shares at
the current price of $0.25 per share and 4,762,515 common shares at
the current price of $1.00 per share) and are issuable upon
conversion of convertible debentures of $7,017,581. All of which
could potentially dilute future earnings per share.
Comprehensive loss – Comprehensive loss
is defined as the change in equity of a business during a period
from non-owner sources. There were no differences between net loss
for the three months ended December 31, 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
Based
on the Company’s review of accounting standard updates issued since
the filing of the 2020 Form 10-K, there have been no other newly
issued or newly applicable accounting pronouncements that have had,
or are expected to have, a significant impact on the Company’s
consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on
the Company’s consolidated financial statements upon
adoption.
4. FIXED
ASSETS
Property
and equipment as of December 31, 2020 and September 30, 2020 was
comprised of the following:
|
Estimated
|
|
|
KNWN-
|
Useful Lives
|
|
|
Machinery
and equipment
|
2-3
years
|
$361,020
|
$355,272
|
Leasehold
improvements
|
5
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
5
years
|
26,855
|
26,855
|
Software
and websites
|
|
-
|
-
|
Less:
accumulated depreciation
|
|
(278,044)
|
(257,068)
|
|
$113,443
|
$128,671
|
Total depreciation expense was $21,300 and $16,983
for the three months ended December 31, 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.
5. INTANGIBLE
ASSETS
Intangible
assets as of December 31, 2020 and September 30, 2020 consisted of
the following:
|
Estimated
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(462,219)
|
(418,886)
|
Intangible
assets, net
|
|
$57,781
|
$101,114
|
Total
amortization expense was $43,333 for the three months ended
December 31, 2020 and 2019.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, the Company entered into an Agreement and Plan of
Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
acquired all the outstanding shares of RAAI’s capital stock through
a merger of Merger Sub with and into RAAI (the “Merger”), with RAAI
surviving the Merger as a wholly owned subsidiary of the
Company.
The
fair value of the intellectual property associated with the assets
acquired was $520,000 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
6. LEASES
The
Company has entered into operating leases for office and
development facilities. These leases have terms which range from
two to three years and include options to renew. These operating
leases are listed as separate line items on the Company's December
31, 2020 and September 30, 2020
Consolidated Balance Sheets and represent the Company’s right to
use the underlying asset for the lease term. The Company’s
obligation to make lease payments are also listed as separate line
items on the Company's December 31, 2020 and September 30, 2020 Consolidated Balance
Sheets. Based on the present value of the lease payments for the
remaining lease term of the Company's existing leases, the Company
recognized right-of-use assets and lease liabilities for operating
leases of approximately $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 three
months ended December 31, 2020 and September 30, 2020, the Company had one
lease expire and recognized the rent payments as an expense in the
current period. As of December 31, 2020 and September 30, 2020, total right-of-use
assets and operating lease liabilities for remaining long term
lease was approximately $99,000
and $132,000, respectively. In
the three months ended December 31, 2020 and the year ended
September 30, 2020, the Company
recognized approximately $37,612 and $136,718, 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 period ended December 31, 2020 was as
follows:
Cash paid for ROU
operating lease liability $34,813
Weighted-average
remaining lease term 1.2 years
Weighted-average
discount rate 7%
The
minimum future lease payments as of December 31, 2020 are as
follows:
Year
|
|
2021
|
$87,463
|
2022
|
17,917
|
Imputed
interest
|
(6,241)
|
Total
lease liability
|
$99,139
|
7. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible
notes payable as of December 31, 2020 and September 30, 2020
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 $73,452 and $71,562 as of December 31,
2020 and September 30, 2020,
respectively. On December 23, 2020, the Company signed
Amendments to the convertible promissory or OID notes, extending
the due dates to March 31, 2021. Mr. Struve also invested
$1,000,000 in the May 2019 Debt Offering.
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 $163,109 and $145,202 as of December 31, 2020 and
September 30, 2020, respectively. 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
Beginning in 2019,
the Company entered into series of debt offerings with similar and
consistent terms. The Company issued Subordinated Convertible Notes
and Warrants in a private placement to accredited investors,
pursuant to a series of substantially identical Securities Purchase
Agreements, Common Stock Warrants, and related documents. The notes
are convertible into one share of common stock for each dollar
invested in a Convertible Note Payable and automatically convert to
common stock after one year. The convertible notes contain
terms and conditions which are deemed to be a Beneficial Conversion
Feature (BCF). Warrants are issued to purchase common stock
with an exercise price of $1.20 per share and the number of
warrants are equal to 50% of the convertible note balance.
The Company compensates the placement agent with a cash fee and
warrants. Through December 31, 2020, the Company has raised
approximately $10 million through this offerings, of which $0 and
$520,000 were raised in the three months ended December 31, 2020
and 2019.
The
Convertible Notes are initially convertible into 520,000 shares of
Common Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 260,000 shares of Common
Stock.
The
fair value of the Warrants issued to debt holders was $168,270 on
the date of issuance and were 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 $78,845
and warrants to purchase 71,400 shares of the Company’s common
stock, all based on 8-10% of gross proceeds to the Company. The
warrants issued for these services had a fair value of $160,427 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 $78,845 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 $330,082 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 three months ended December 31, 2020, 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 2020. The Convertible Notes and interested
were automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on October 17, 2020.
During
the three months ended December 31, 2020, amortization related to
the 2020 debt offerings of $1,596,980 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 December 31, 2020 and September 30, 2020 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
|
4,242,490
|
Q1
2020 Convertible notes
|
520,000
|
520,000
|
Q2
2020 Convertible notes
|
195,000
|
195,000
|
Q3
2020 Convertible notes
|
4,924,500
|
4,924,500
|
Boustead
fee refund (originally booked as contra debt)
|
50,000
|
50,000
|
Less
conversions of 2019 and 2020 notes
|
(4,762,490)
|
(4,242,490)
|
Less
debt discount - BCF
|
(1,237,832)
|
(2,127,894)
|
Less
debt discount - warrants
|
(595,743)
|
(1,025,512)
|
Less
debt discount - warrants issued for services
|
(546,433)
|
(823,582)
|
|
$5,044,558
|
$3,967,578
|
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). As of December 31, 2020 and
September 30, 2020, the Company
recorded interest expense of $1,530
and $960, respectively. 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 March 31,
2021.
8.
|
SIMPLE AGREEMENTS FOR FUTURE EQUITY
|
In
July 2020, Particle entered into Simple Agreements for Future
Equity (“SAFE”) with twenty two accredited investors pursuant to
which Particle received $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.
In
October 2020, 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 68,750 shares of the Particle stock that
was initially valued at $0.80 per share. The Company paid $4,125 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.
9.
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.
As of
December 31, 2020, the Company had 25,370,224 shares of common stock issued
and outstanding, held by 125 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 December 31, 2020, there were options
outstanding for the purchase of 12,936,995 common shares (including
unearned stock option grants totaling 10,625,745 shares related to
performance targets), warrants for the purchase of 22,016,367
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
14,189,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,169,500 common shares at the current
price of $1.20 per share) reserved and are issuable upon conversion
of convertible debentures of $7,424,566. All of which could
potentially dilute future earnings per share but are excluded from
the December 31, 2020 calculation of net loss per share because
their impact is antidilutive.
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
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 December 31, 2020
and September 30, 2020 there are
1,785,715 Series C Preferred shares
outstanding.
As of December 31, 2020 and September 30, 2020, 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 December 31, 2020 and September 30, 2020, there are no
Series F shares outstanding.
Securities Subject to Price Adjustments
In the
future, if the Company sells its common stock at a price below
$0.25 per share, the exercise price of
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.
The
following equity issuances occurred during the three months ended
December 31, 2020:
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 2020. The Convertible
Notes and interested were automatically converted to Common Stock
at $1.00 per share on the one year anniversary starting on October
17, 2020.
The Company issued 3,750 shares of common stock at $1.25 per share related
to the exercise of warrants.
Warrants to Purchase Common Stock
The
following warrant transactions occurred during the three months
ended December 31, 2020:
On
December 15, 2020, the Company issued a fully vested warrant to
Ronald P. Erickson for 2,000,000 shares of common stock. The five
year warrant is convertible at $1.53 per share and was valued using
a Black-Scholes model at $1,811,691.
A
summary of the warrants outstanding as of December 31,
2020 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
20,016,367
|
$0.556
|
Issued
|
2,000,000
|
1.530
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
22,016,367
|
$0.644
|
Exerciseable
at end of period
|
22,016,367
|
|
The following table summarizes information about
warrants outstanding and exercisable as of December 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,133,286
|
1.52
|
$0.250
|
13,133,286
|
$0.250
|
714,286
|
0.58
|
0.700
|
714,286
|
0.700
|
882,159
|
0.87
|
1.000
|
882,159
|
1.000
|
7,191,636
|
4.25
|
1.20-1.50
|
7,191,636
|
1.20-1.50
|
95,000
|
3.94
|
2.00-4.08
|
95,000
|
2.34-4.08
|
|
|
|
|
|
22,016,367
|
3.27
|
$0.644
|
22,016,367
|
$0.644
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants issued during the three months ended
December 31, 2020 were as
follows:
Dividend
yield
|
0%
|
Expected
life
|
3
years
|
Expected
volatility
|
140%
|
Risk
free interest rate
|
0.4%
|
There were vested warrants of 22,016,367
with an aggregate intrinsic value of
$36,904,487.
10.
|
STOCK INCENTIVE PLANS
|
Know
Labs, Inc.
On
January 23, 2019, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 2,200,000 to 2,500,000 to
common shares. On May 22, 2019, the Compensation Committee
approved an amendment to its 2011 Stock Incentive Plan increasing
the number of shares of common stock reserved under the Incentive
Plan from 2,500,000 to 3,000,000 to common shares. 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.
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
three months ended December 31, 2020:
A
consultant exercised a stock option for 3,750 shares of common
stock for a vested stock option grant. The stock option grant had
an exercise price of $1.25 per share.
The
Compensation committee issued a stock option grant to an employee
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 two stock option grants to Ronald P. Erickson one for
1,865,675 shares and one for 1,865,675 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
On
December 15, 2020, the Company issued two stock option grants to Phillip A. Bosua one for
2,132,195 shares and one for 2,132,200 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
There are currently 12,936,995 (including unearned stock option
grants totaling 10,625,745 shares related to performance targets)
options to purchase common stock at an
average exercise price of $1.390 per share outstanding as of
December 31, 2020 under the 2011 Stock
Incentive Plan. The Company recorded $119,483 and 175,442 of
compensation expense, net of related tax effects, relative to stock
options for the three months ended December 31, 2020 and 2019 and
in accordance with ASC 718. As of December 31,
2020, there is approximately $505,996,
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 3.84
years.
Stock
option activity for the three months ended December 31, 2020 and
the years ended September 30, 2020 and 2019 were 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
|
Granted
|
8,135,745
|
1.525
|
12,407,090
|
Exercised
|
(3,750)
|
(1.250)
|
(4,688)
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
December 31, 2020
|
12,936,995
|
$1.390
|
$17,982,952
|
The following table summarizes information about
stock options outstanding and exercisable as of December 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
|
230,000
|
2.45
|
$0.250
|
129,375
|
$0.250
|
1.10-1.25
|
3,076,250
|
3.89
|
1.05
|
340,729
|
1.104
|
1.28-1.52
|
9,495,745
|
3.89
|
1.50
|
773,646
|
1.310
|
1.79-2.25
|
135,000
|
3.01
|
2.13
|
71,875
|
2.145
|
|
12,936,995
|
3.84
|
$1.390
|
1,315,625
|
$1.294
|
There
were in the money stock option grants of 12,936,995 shares as of
December 31, 2020 with an aggregate intrinsic value of
$11,794,416.
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
the three months ended September 30, 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 vested stock option grants for both Mr.
Bosua and Erickson were valued at $0.788 per share or
$394,000.
During
November 2020, Particle approved a stock option grant to a
consultant totaling 50,000 shares at an average of $0.80 per share.
The stock option grant vests quarterly over four years, with no
vesting in the first two quarters.
The Company recorded $55,959 and $0 of
compensation expense, net of related tax effects, relative to stock
options for the three months ended December 31, 2020 and 2019 and
in accordance with ASC 718. As of December 31,
2020, there is approximately
$802,445, 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 4.52
years.
The following table summarizes information about
Particle stock options outstanding and exercisable as of
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
5,100,000
|
4.51
|
$0.10
|
1,000,000
|
$0.10
|
0.80
|
200,000
|
4.77
|
$0.80
|
-
|
-
|
|
|
|
|
|
|
|
5,300,000
|
4.52
|
$4.52
|
1,000,000
|
$0.10
|
There were in the money stock option grants
of 1,000,000 shares as of
December 31, 2020 with an aggregate intrinsic value of
$673,585.
11.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Notes 7, 9, 10 and 12 for related party
transactions with Ronald P. Erickson.
Mr.
Erickson and/or entities with which he is affiliated also have
accrued compensation, travel and interest of approximately $619,218
and $597,177 as of December 31, 2020 and September 30, 2020,
respectively.
On
December 15, 2020, the Company issued a fully vested warrant to
Ronald P. Erickson for 2,000,000 shares of common stock. The five
year warrant is convertible at $1.53 per share and was valued using
a Black-Scholes model at $1,811,691.
On
December 15, 2020, the Company issued two stock option grants to Ronald P. Erickson, one for
1,865,675 shares and one for 1,865,675 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
Related Party Transaction with Phillip A. Bosua
See Notes 10 and 12 for related party transactions
with Phillip A. Bosua.
On
December 15, 2020, the Company issued two stock option grant to Phillip A. Bosua, one for
2,132,195 shares and one for 2,132,200 shares at an exercise price
of $1.53 per share. The stock option grants expire in five years.
The stock option grants vest when earned based on certain
performance criteria.
12. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
The
Company may from time to time become a party to various legal
proceedings arising in the ordinary course of our business. The
Company is currently not a party to any pending legal proceeding
that is not ordinary routine litigation incidental to our
business.
Employment
Agreement with Phillip A. Bosua, Chief Executive
Officer
See
the Employment Agreement for Phillip A. Bosua that was disclosed in
Form 10-K filed with the SEC on December 29, 2020. Phillip A.
Bosua.
Employment
Agreement with Ronald P. Erickson, Chairman of the Board and
Interim Chief Financial Officer
See
the Employment Agreement for Ronald P. Erickson that was disclosed
in Form 10-K filed with the SEC on December 29, 2020.
Properties
and Operating Leases
See
the Property Leases that were disclosed in Form 10-K filed with the
SEC on December 29, 2020.
13.
SEGMENT REPORTING
The
management of the Company considers the business to have two
operating segments (i) the development of the Bio-RFID™” and “ChromaID™” technologies; (ii)
Particle, Inc. technology; and (iii) TransTech, a distributor of products for employee
and personnel identification and authentication. TransTech has
historically provided substantially all of the Company’s revenues.
TransTech closed on June 30, 2020. Particle commenced operations in
the three months ended June 30, 2020.
The
reporting for the three months ended December 31, 2020 and 2019 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
Three
Months Ended December 31, 2020
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™” technologies
|
$-
|
$-
|
$(3,190)
|
$3,158
|
Particle,
Inc. technology
|
-
|
-
|
(375)
|
66
|
TransTech
distribution business
|
-
|
-
|
-
|
-
|
Total
segments
|
$-
|
$-
|
$(3,565)
|
$3,224
|
|
|
|
|
|
Three
Months Ended December 31, 2019
|
|
|
|
|
Development
of the Bio-RFID™” and “ChromaID™” technologies
|
$-
|
$-
|
$(1,393)
|
$2,077
|
TransTech
distribution business
|
117
|
51
|
32
|
18
|
Total
segments
|
$117
|
$51
|
$(1,361)
|
$2,095
|
During
the three months ended December 31, 2020 and 2019, the
Company incurred non-cash
expenses of $3,648,181 and
$2,067,718.
14.
SUBSEQUENT EVENTS
The
Company evaluated subsequent events, for the purpose of adjustment
or disclosure, up through the date the financial statements were
issued. Subsequent to December 31, 2020, there were the following
material transactions that require disclosure:
Stock Option Exercises and Issuances
On
January 14, 2021, the Company issued a warrant to purchase 50,000
shares of common stock to Financial Genetics LLC at $2.00 per
share. The warrants were issued for investor relation services. The
warrant expires on January 14, 2026.
On
January 14, 2021, the Company issued a stock option grant to
purchase 180,000 shares of common stock to an employee at $2.00 per
share. The stock option grant expires
in five years and vests quarterly over four years (none in the
first six months).
On
January 15, 2021, the Company issued 30,000 shares each to three
directors shares at an exercise price of $2.00 per
share.
On
January 15, 2021, the Company issued 20,000 warrants to purchase
common stock each to three directors shares at $2.00 per share. The
warrants expire on January 15, 2026.
On
February 4, 2021, the Company issued a stock option grant to
purchase 200,000 shares of common stock to an employee at $2.04 per
share. The stock option grant expires
in five years and vests quarterly over four years (none in the
first six months).
On
February 9, 2021, the Company issued stock option grants to seven employees and two
consultants for 1,350,000 shares at an exercise price of $2.35 per
share. The stock option grants expire in five years. The stock
option grants vest when earned based on certain performance
criteria.
On
February 4, 2021, Particle issued a stock option grant to purchase
500,000 shares of common stock to an employee at $0.80 per share.
The stock option grant expires in five
years and vests quarterly over four years (none in the first six
months).
On
February 9, 2021, Particle issued stock option grants to seven employees and one
consultant to purchase 1,900,000 shares at an exercise price of
$0.80 per share. The stock option grants expire in five years. The
stock option grants vest when earned based on certain performance
criteria.
On February
12, 2021, the Company issued 17,500 shares and received $21,000
related to the exercise of warrants.
On February
12, 2021, Particle entered into Simple Agreements for Future Equity
(“SAFE”) with accredited investors pursuant to which Particle
received $111,815 in cash in exchange for the providing the
investor the right to receive shares of the Particle
stock.
Transactions
with Clayton A. Struve
On
January 5, 2021, the Company extended the due date of the following
warrants with Clayton A. Struve, a major investor in the
Company:
Warrant
No./Class
|
Issue
Date
|
No. Warrant
Shares
|
Exercise
Price
|
Original
Expiration Date
|
Amended
Expiration Date
|
Clayton
Struve Warrant
Series
C Warrant W98
|
08-04-2016
|
1,785,715
|
$0.25
|
08-04-2021
|
08-04-2023
|
Clayton
Struve Warrant
Series
F Warrant F-1
|
11-14-2016
|
187,500
|
$0.25
|
11-13-2021
|
11-13-2023
|
Clayton
Struve Warrant
Series
F Warrant F-2
|
12-19-2016
|
187,500
|
$0.25
|
12-18-2021
|
12-18-2023
|
On
January 28, 2021, Clayton A. Struve exercised warrants on a
cashless basis for 889,880 shares of common stock at $0.25 per
share, including 187,500 and 187,500 that were just extended as
discussed above.
Particle Test Results
The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus that
causes COVID-19.
Appointment
of Financial Expert
On
February 12, 2021, the Audit Committee appointed William A. Owens
as “audit committee financial expert” as defined by the Securities
and Exchange Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking
statements in this report reflect the good-faith judgment of our
management and the statements are based on facts and factors as we
currently know them. Forward-looking statements are subject to
risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute
to such differences in results and outcomes include, but are not
limited to, those discussed below as well as those discussed
elsewhere in this report (including in Part II, Item 1A (Risk
Factors)). Readers are urged not to place undue reliance on these
forward-looking statements because they speak only as of the date
of this report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this
report.
BACKGROUND AND CAPITAL STRUCTURE
Know Labs, Inc. was incorporated under the laws of
the State of Nevada in 1998. Since 2007, we have been
focused primarily on research and development of proprietary
technologies which can be used to authenticate and diagnose a wide variety of
organic and non-organic substances and materials. Our Common
Stock trades on the OTCQB Exchange under the symbol
“KNWN.”
BUSINESS
We
are focused on the development, marketing and sales of proprietary
technologies which are capable of uniquely identifying or
authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these our
“Bio-RFID™” and “ChromaID™” technologies.
Historically,
we have focused on the development of our proprietary ChromaID
technology. Using light from low-cost LEDs (light emitting diodes)
the ChromaID technology maps the color of substances, fluids and
materials. With our proprietary processes we can authenticate and
identify based upon the color that is present. The color is both
visible to us as humans but also outside of the humanly visible
color spectrum in the near infra-red and near ultra-violet and
beyond. Our ChromaID scanner sees what we like to call “Nature’s
Color Fingerprint.” Everything in nature has a unique color
identifier and with ChromaID we can see, and identify, and
authenticate based upon the color that is present. Our ChromaID
scanner is capable of uniquely identifying and authenticating
almost any substance or liquid using light to record, detect and
identify its unique color signature. More recently, we have focused
upon extensions and new inventions that are derived from and extend
beyond our ChromaID technology. We call this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID technology in
our laboratory have caused us to move quickly into the
commercialization phase of our Company as we work to create revenue
generating products for the marketplace. Today, our sole focus of
the Company is on its Bio-RFID technology and its
commercialization.
Particle, Inc. was
incorporated April 30, 2020 and to date has engaged in activities
consisting primarily of research and development on threaded light bulbs that have a warm white
light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received an exclusive non-transferrable license
to use certain patents and trademarks of the Company, in exchange
the Company shall receive: (i) a one-time fee of $250,000 upon a
successful financing of Particle, and (ii) a quarterly royalty
payment equal to the greater of 5% of the Gross Sales, net of
returns, from Particle or $5,000. As of December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus that
causes COVID-19.
In 2010, we acquired TransTech Systems, Inc. as an
adjunct to our business. TransTech is a distributor of products for
employee and personnel identification and authentication. TransTech
has historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary have
been diminishing as vendors of their products increasingly move to
the Internet and direct sales to their customers. While it does
provide our current revenues, it is not central to our current
focus as a Company. Moreover, we have written down any goodwill
associated with its historic acquisition. We shut down
TransTech on June 30, 2020.
The Know Labs Technology
We
have internally and under contract with third parties developed
proprietary platform technologies to uniquely identify or
authenticate almost any material and substance. Our technology
utilizes electromagnetic energy along the electromagnetic spectrum
to perform analytics which allow the user to identify and
authenticate substances and materials depending upon the user’s
unique application and field of use. The Company’s proprietary
platform technologies are called Bio-RFID and
ChromaID.
Our
latest technology platform is called Bio-RFID. Working in our lab
over the last two years, we have developed extensions and new
inventions derived in part from our ChromaID technology which we
refer to as Bio-RFID technology. We are rapidly advancing the
development of this technology. We have announced over the past
year that we have successfully been able to non-invasively
ascertain blood glucose levels in humans. We are building the
internal and external development team necessary to commercialize
this newly discovered technology as well as make additional patent
filings covering the intellectual property created with these new
inventions. The first applications of our Bio-RFID technology will
be in a product marketed as a Glucose Monitor. It will provide the
user with real time information on their blood glucose levels. This
product will require US Food and Drug Administration approval prior
to its introduction to the market.
We
have also announced the results of laboratory-based comparison
testing between our Bio-RFID technology and the leading continuous
glucose monitors from Abbott Labs (Freestyle Libre®) and DexCom
(G5®). These results provide evidence of a high degree of
correlation between our Bio-RFID based technology and the current
industry leaders and their continuous glucose monitors. Our
technology is fundamentally differentiated from these industry
leaders as our technology completely non-invasively monitors blood
glucose levels.
We
expect to begin the process of obtaining US Food and Drug
Administration (FDA) approval of our non-invasive blood glucose
monitoring device during calendar year 2021.To guide us in that
undertaking we previously announced the hiring of a Chief Medical
Officer and formed a Medical and Regulatory Advisory Board to guide
us through the FDA process. We are unable, however, to estimate the
time necessary for such approval nor the likelihood of success in
that endeavor.
Our
ChromaID patented technology utilizes light at the photon
(elementary particle of light) level through a series of emitters
and detectors to generate a unique signature or “fingerprint” from
a scan of almost any solid, liquid or gaseous material. This
signature of reflected or transmitted light is digitized, creating
a unique ChromaID signature. Each ChromaID signature is comprised
of from hundreds to thousands of specific data points.
The
ChromaID technology looks beyond visible light frequencies to areas
of near infra-red and ultraviolet light and beyond that are outside
the humanly visible light spectrum. The data obtained allows us to
create a very specific and unique ChromaID signature of the
substance for a myriad of authentication, verification and
identification applications.
Traditional
light-based identification technology, called spectrophotometry,
has relied upon a complex system of prisms, mirrors and visible
light. Spectrophotometers typically have a higher cost and utilize
a form factor (shape and size) more suited to a laboratory setting
and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific electromagnetic frequencies resulting in a
more accurate, portable and easy-to-use solution for a wide variety
of applications. The ChromaID technology not only has significant
cost advantages as compared to spectrophotometry, it is also
completely flexible is size, shape and configuration. The ChromaID
scan head can range in size from endoscopic to a scale that could
be the size of a large ceiling-mounted florescent light
fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. We call this the ChromaID Reference Data
Library. The scan head can then scan similar materials to identify,
authenticate or diagnose them by comparing the new ChromaID digital
signature scan to that of the original or reference ChromaID
signature or scan result. Over time, we believe the ChromaID
Reference Libraries can become a significant asset of the Company,
providing valuable information in numerous fields of use. The
Reference Data Libraries for our newly developed Bio-RFID will have
a similar promise regarding their utility and value.
Bio-RFID and ChromaID: Foundational Platform
Technologies
Our
Bio-RFID and ChromaID technologies provide a platform upon which a
myriad of applications can be developed. As platform technologies,
they are analogous to a smartphone, upon which an enormous number
of previously unforeseen applications have been developed. Bio-RFID
and ChromaID technologies are “enabling” technologies that bring
the science of electromagnetic energy to low-cost, real-world
commercialization opportunities across multiple industries. The
technologies are foundational and, as such, the basis upon which
the Company believes significant businesses can be
built.
As
with other foundational technologies, a single application may
reach across multiple industries. The Bio-RFID technology can
non-invasively identity the presence and quantity of glucose in the
human body. By extension, there may be other molecular structures
which this same technology can identity in the human body which,
over time, the Company will focus upon. They may include the
monitoring of drug usage or the presence of illicit drugs. They may
also involve identifying hormones and various markers of
disease.
Similarly,
the ChromaID technology can, for example effectively differentiate
and identify different brands of clear vodkas that appear identical
to the human eye. By extension, this same technology could identify
pure water from water with contaminants present. It could provide
real time detection of liquid medicines such as morphine that have
been adulterated or compromised. It could detect if jet fuel has
water contamination present. It could determine when it is time to
change oil in a deep fat fryer. These are but a few of the
potential applications of the ChromaID technology based upon
extensions of its ability to identify different
liquids.
The
cornerstone of a company with a foundational platform technology is
its intellectual property. We have pursued an active intellectual
property strategy and have been granted 13 patents. We currently
have a number of patents pending and continue, on a regular basis
the filing of new patents. We possess all right, title and interest
to the issued patents. Nine issued and pending patents are licensed
exclusively to us in perpetuity by our strategic partner, Allied
Inventors, a spin-off entity of Intellectual Ventures, an
intellectual property fund.
Our Patents and Intellectual Property
We
believe that our 14 patents, patent applications, registered
trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets. Our issued
patents will expire at various times between 2027 and 2039. Pending
patents, if and when issued, may have expiration dates that extend
further in time. The duration of our trademark registrations varies
from country to country. However, trademarks are generally valid
and may be renewed indefinitely as long as they are in use and/or
their registrations are properly maintained.
The
issued patents cover the fundamental aspects of the Know Labs
ChromaID technology and a number of unique applications. We have
filed patents on the fundamental aspects of our Bio-RFID technology
and growing number of unique applications. We will continue to
expand the Company’s patent portfolio. Particle has applied for
three patents related to its light technology.
Additionally,
significant aspects of our technology are maintained as trade
secrets which may not be disclosed through the patent filing
process. We intend to be diligent in maintaining and securing our
trade secrets.
The
patents that have been issued to Know Labs and their dates of
issuance are:
On
August 9, 2011, we were issued US Patent No. 7,996,173 B2 entitled
“Method, Apparatus and Article to Facilitate Distributed Evaluation
of Objects Using Electromagnetic Energy,” by the United States
Office of Patents and Trademarks. The patent expires August 24,
2029.
On
December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of Patents and
Trademarks. The patent expires November 7, 2028.
On
December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy” by the United States Office
of Patents and Trademarks. The patent expires July 28,
2030.
On
October 9, 2012, we were issued US Patent No. 8,285,510 B2 entitled
“Method, Apparatus, and Article to Facilitate Distributed
Evaluation of Objects Using Electromagnetic Energy” by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On
February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy by the United States Office of
Patents and Trademarks. The patent expires July 31,
2027.
On
November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate Distributed
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On
November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States Office
of Patents and Trademarks. The patent expires February 7, 2033.
This patent describes using ChromaID to see what we call invisible
bar codes and other identifiers.
On
March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of Objects
Using Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires July 31,
2027.
On
May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic Energy” by
the United States Office of Patents and Trademarks. The patent
expires March 12, 2033. This patent describes a ChromaID fluid
sampling devices.
On
April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires March 12,
2033. This patent describes an enhancement to the foundational
ChromaID technology.
On
April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy.” The patent expires July
2027. This patent pertains to the use of ChromaID technology for
the identification and analysis of biological tissue. It has many
potential applications in medical, industrial and consumer
markets.
On
May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled
“Systems for Fluid Analysis Using Electromagnetic Energy that is
reflected a Number of Times through a Fluid Contained within a
Reflective Chamber.” This patent expires approximately in
approximately March 2034. This patent pertains to a method for the
use of the Company’s technology analyzing fluids.
On
April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled
“Device for Evaluation of Fluids Using Electromagnetic Energy.” The
patent expires in approximately April 2033. This patent pertains to
the use of ChromaID technology for evaluating and analyzing fluids
such as those following through an IV drip in a hospital or water,
for example.
On
February 4, 2020, we were issued US Patent No. 10,548,503 B2,
entitled “Health Related Diagnostics Employing Spectroscopy in
Radio/Microwave Frequency Band. The patent expires in approximately
May 2039. This patent pertains to the use of Bio-RFID technology
for medical diagnostics.
We
continue to pursue a patent strategy to expand our unique
intellectual property in the United States and other
countries.
Product Strategy
We
are currently undertaking internal development work on potential
products for the consumer marketplace. We have announced the
development of our non-invasive glucose monitor and our desire to
obtain US Food and Drug Administration approval for the marketing
of this product to the diabetic and pre-diabetic population. We
have also announced the engagement of a manufacturing partner we
will work with to bring this product to market. We will make
further announcements regarding this product as development,
manufacturing and regulatory approval work progresses.
Currently
we are focusing our efforts on productizing our Bio-RFID technology
as we move it out of our research laboratory and into the
marketplace.
Research and Development
Our
current research and development efforts are primarily focused on
improving our Bio-RFID technology, extending its capacity and
developing new and unique applications for this technology. As part
of this effort, we conduct on-going laboratory testing to ensure
that application methods are compatible with the end-user and
regulatory requirements, and that they can be implemented in a
cost-effective manner. We are also actively involved in identifying
new applications. Our current internal team along with outside
consultants have considerable experience working with the
application of our technologies and their application. We engage
third party experts as required to supplement our internal team. We
believe that continued development of new and enhanced technologies
is essential to our future success. We incurred expenses of
$966,861 and $491,138 for the three months ended December 31, 2020
and 2019, respectively, on development activities.
On
April 30, 2020, the Company approved and ratified the incorporation
of Particle. Particle is focused on the development and
commercialization of the Company’s extensive intellectual property
relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular focus.
Since incorporation, Particle has
engaged in research and development activities on threaded light
bulbs that have a warm white light and can inactivate germs,
including bacteria and viruses.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, we entered into an Agreement and Plan of Merger
with 500 Union Corporation, a Delaware corporation and a wholly
owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, we acquired
all the outstanding shares of RAAI’s capital stock through a merger
of Merger Sub with and into RAAI (the “Merger”), with RAAI
surviving the Merger as a wholly owned subsidiary of the
Company.
EMPLOYEES
As of December 31, 2020, we had seven full-time employees. Our senior
management and five other personnel are located in our Seattle,
Washington offices. We also utilize consulting firms and people to
supplement our workforce.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange
under the symbol “KNWN.” On May 1, 2018, we filed a corporate
action with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our name change
from Know Labs, Incorporated to Know Labs, Inc. and symbol change
from VSUL to KNWN was announced by FINRA declared effective
on the opening of trading as of May 25, 2018.
PRIMARY RISKS AND UNCERTAINTIES
We
are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part II, Item
1A.
CORPORATE INFORMATION
We
were incorporated under the laws of the State of Nevada on October
8, 1998. Our executive offices are located at 500 Union Street,
Suite 810, Seattle, WA 98101. Our telephone number is (206)
903-1351 and its principal website address is located at
www.knowlabs.co. The information on our website is not incorporated
as a part of this Form 10-Q.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We
file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.knowlabs.co that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-Q.
RESULTS OF OPERATIONS
We
are focused on the development, marketing and sales of proprietary
technologies which are capable of uniquely identifying or
authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. We call these our
“Bio-RFID™” and “ChromaID™” technologies.
Historically,
we have focused on the development of our proprietary ChromaID
technology. Using light from low-cost LEDs (light emitting diodes)
the ChromaID technology maps the color of substances, fluids and
materials. With our proprietary processes we can authenticate and
identify based upon the color that is present. The color is both
visible to us as humans but also outside of the humanly visible
color spectrum in the near infra-red and near ultra-violet and
beyond. Our ChromaID scanner sees what we like to call “Nature’s
Color Fingerprint.” Everything in nature has a unique color
identifier and with ChromaID we can see, and identify, and
authenticate based upon the color that is present. Our ChromaID
scanner is capable of uniquely identifying and authenticating
almost any substance or liquid using light to record, detect and
identify its unique color signature. Today we are focused upon
extensions and new inventions that are derived from and extend
beyond our ChromaID technology. We call this new technology
“Bio-RFID.” The rapid advances made with our Bio-RFID technology in
our laboratory have caused us to move quickly into the
commercialization phase of our Company as we work to create revenue
generating products for the marketplace. Today, the sole focus of
the Company is on its Bio-RFID technology and its
commercialization.
Particle, Inc. was
incorporated April 30, 2020 and to date has engaged in activities
consisting primarily of research and development on threaded light bulbs that have a warm white
light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received an exclusive non-transferrable license
to use certain patents and trademarks of the Company, in exchange
the Company shall receive: (i) a one-time fee of $250,000 upon a
successful financing of Particle, and (ii) a quarterly royalty
payment equal to the greater of 5% of the Gross Sales, net of
returns, from Particle or $5,000. As of December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus that
causes COVID-19.
In 2010, we acquired TransTech Systems, Inc. as an
adjunct to our business. Operating as an independent subsidiary,
TransTech was a distributor of products for employee and personnel
identification and authentication. TransTech historically provided
substantially all of the Company’s revenues. The financial results
from our TransTech subsidiary had been diminishing as vendors of
their products increasingly moved to the Internet and direct sales
to their customers. TransTech closed on June 30,
2020.
The
following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in
thousands)
|
Three Months
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$-
|
$117
|
$(117)
|
-100.0%
|
Cost of
sales
|
-
|
66
|
(66)
|
100.0%
|
Gross
profit
|
-
|
51
|
(51)
|
-100.0%
|
Research and
development expenses
|
967
|
491
|
476
|
-96.9%
|
Selling, general
and administrative expenses
|
2,598
|
921
|
1,677
|
-182.1%
|
Operating
loss
|
(3,565)
|
(1,361)
|
(2,204)
|
-161.9%
|
Other
(expense) income:
|
|
|
|
|
Interest
expense
|
(1,734)
|
(1,679)
|
(55)
|
-3.3%
|
Other
income (expense)
|
-
|
25
|
(25)
|
-100.0%
|
Total
other income (expense)
|
(1,734)
|
(1,654)
|
(80)
|
-4.8%
|
(Loss)
before income taxes
|
(5,299)
|
(3,015)
|
(2,284)
|
-75.8%
|
Income
taxes - current (benefit)
|
-
|
-
|
-
|
0.0%
|
Net
(loss)
|
$(5,299)
|
$(3,015)
|
$(2,284)
|
-75.8%
|
THREE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2019
Sales
Revenue for the three months ended December 31,
2020 decreased $117,000 to $0 as compared to $$117,000 for the
three months ended December 30, 2019. TransTech closed June
30, 2020.
Cost of Sales
Cost of sales for the three months ended December
31, 2020 decreased $66,000 to $0 as compared to $66,000 for the
three months ended December 30, 2019. TransTech closed June
30, 2020.
Research and Development Expenses
Research and development expenses for the three
months ended December 31, 2020 increased $476,000 to $967,000 as
compared to $491,000 for the three months ended December 30, 2019.
The increase was due to increased personnel, use of
consultant and expenditures related to
the development of our Bio-RFID™ and Particle
technologies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the three months ended December 31, 2020 increased
$1,678,000 to $2,599,000 as
compared to $921,000 for the three months ended December 30,
2019.
The increase primarily was due to (i) decreased
professional fees of $84,000; (ii) increased stock based
compensation of $1,587,000; (iii) increased other expenses of
$146,000; and increased Particle expenses of $375,000 (primarily
payroll); offset by (iv) decreased TransTech expenses of $20,000
(primarily salaries and rent). As part of the selling, general and
administrative expenses for the three months ended December 31,
2020 and 2019, we recorded $60,000 and $40,000,
respectively, of investor
relation expenses and business development
expenses.
Other (Expense), Net
Other
expense, net for the three months ended December 31, 2020 was
$1,734,000 as compared to other expense, net of $1,679,000 for the
three months ended December 30, 2019. The other expense, net for
the three months ended December 31, 2020 included interest expense
of $1,734,000 related to convertible notes payable and the
amortization of the beneficial conversion feature.
The
other expense for the three months ended December 31, 2019 included
(i) interest expense of $1,679,000; offset by (ii) other income of
$25,000. The interest expense related to convertible notes payable
and the amortization of the beneficial conversion
feature.
Net Loss
Net loss for the three months ended December 31,
2020 was $5,299,000 as compared
to $3,015,000 for the three months ended December 30, 2019. The net
loss for the three months ended December 31, 2020 included
non-cash expenses of $3,648,000. The
non-cash items include (i) depreciation and amortization of
$65,000; (ii) stock based compensation- warrants of $1,812,000;
(iii) stock based compensation- stock options of $175,000; and (iv)
amortization of debt discount as interest expense of $1,596,000. On
December 15, 2020, we issued a warrant to Ronald P. Erickson for
2,000,000 shares of common stock. The five year warrant is
convertible at $1.53 per share and was valued using a
“Black-Scholes” model at $1,812,000.
The net loss for the three months ended December
31, 2019 included non-cash
items of $2,068,000. The non-cash items include (i) depreciation
and amortization of $60,000; (ii) stock based compensation of
$400,000; (iii) amortization of debt discount of $1,567,000; and
(iv) other of $41,000. TransTech’s net income from operations was $57,000
for the three months ended December 31, 2019.
We expect losses to continue as we commercialize
our ChromaID™ and Bio-RFID™ technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the
ability of a company to generate funds to support its current and
future operations, satisfy its obligations, and otherwise operate
on an ongoing basis. Significant factors in the management of
liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital
expenditures.
We had cash of approximately $2,927,000 and net
working capital of approximately $187,000 (net of convertible notes
payable and right of use asset and liabilities) as of
December 31, 2020. We have
experienced net losses since inception and we expect losses to
continue as we commercialize our ChromaID™ technology. As of
December 31, 2020, we had an
accumulated deficit of $61,266,000 and net losses in the amount of
$5,299,000, $13,563,000, and $7,612,000 for the three months ended
December 31, 2020 and the years ended 2020 and 2019,
respectively. During the three months ended December 31,
2020, the Company incurred non-cash expenses of $3,648,000.
We believe that our cash on hand including funding closed since
December 31, 2020 will be sufficient to fund our operations through
July 31, 2021.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2020 contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon raising capital
from financing transactions.
We need additional financing to implement our
business plan and to service our ongoing operations and pay our
current debts. There can be no assurance that we will be able to
secure any needed funding, or that if such funding is available,
the terms or conditions would be acceptable to us. If we are unable
to obtain additional financing when it is needed, we will need to
restructure our operations, and divest all or a portion of our
business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, or eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected.
We
have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale of common stock and the
exercise of warrants.
The
proceeds of warrants which are not expected to be cashless are
expected to generate potential proceeds of up to
$10,519,000.
Operating Activities
Net cash used in operating activities for the
three months ended December 31, 2020 was $1,421,000. This amount
was primarily related to (i) a net loss of $5,299,000; offset by
(ii) working capital changes of $230,000; and (iii) non-cash
expenses of $3,648,000. The non-cash items include (iv)
depreciation and amortization of $65,000; (v) stock based
compensation- warrants of $1,812,000; (vi) stock based
compensation- stock options of $175,000; and (vii) amortization of
debt discount as interest expense of $1,596,000. On December 15,
2020, we issued a warrant to Ronald P. Erickson for 2,000,000
shares of common stock. The five year warrant is convertible at
$1.53 per share and was valued using a “Black-Scholes” model at
$1,812,000.
Investing Activities
Net cash used in investing activities for the
three months ended December 31, 2020 and 2019 was $10,000 and $15,000. This amount was primarily
related to the investment in equipment for research and
development.
Financing Activities
Net cash provided by financing activities for the
three months ended December 31, 2020 and 2019 was $60,000 and $441,000. This amount was
primarily related to (i) issuance of Simple Agreements for future
Equity of $55,000; and (ii) issuance of common stock for warrant
exercises of $5,000.
Our contractual cash obligations as of
December 31, 2020 are summarized in
the table below:
|
|
|
|
|
|
Contractual Cash
Obligations (1)
|
|
|
|
|
|
Operating
leases
|
$99,038
|
$84,437
|
$14,601
|
$-
|
$-
|
Convertible notes
payable
|
7,424,566
|
7,424,566
|
-
|
-
|
-
|
|
$7,523,604
|
$7,509,003
|
$14,601
|
$-
|
$-
|
(1)
Convertible notes
payable includes $5,169,500
that converts into common stock at the maturity date during 2021
and $2,255,066 under various
convertible promissory notes as of December 31, 2020 including
$1,184,066 owed to entities
controlled by our chairman. Through
December 31, 2020, $840,000 has been raised through the sale of
SAFE instruments. The Company expects to issue 1,050,000 shares of
the Particle stock that was initially valued at $0.80 per
share. We expect to incur capital expenditures related to
the development of the “Bio-RFID™” and
“ChromaID™” technologies. None of the expenditures are contractual
obligations as of December 31, 2020.
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
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This
item is not applicable.
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (“Exchange Act”), means controls and other procedures of a
company that are designed to ensure that information required to be
disclosed by the company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
also include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including
its principal executive and principal financial officers, or
persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure. Based on this
evaluation, our principal executive and principal financial
officers concluded as of December 31, 2020 that our disclosure
controls and procedures were not effective at the reasonable
assurance level due to the material weaknesses in our internal
controls over financial reporting discussed immediately
below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do not employ a full time
Chief Financial Officer. Our Chairman serves as interim Chief
Financial Officer. We also utilize a consultant who is a qualified
Chief Financial Officer to assist with our financial reporting.
This consultant has increased his involvement in the
Company.
Audit Committee: While we have an audit committee, we lack a
financial expert. On February 12, 2021, the Audit Committee
appointed William A. Owens as “audit committee financial expert” as
defined by the Securities and Exchange Commission (“SEC”) and as
adopted under the Sarbanes-Oxley Act of
2002.
(b) Management's Report on Internal Control Over Financial
Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material
effect on the financial statements.
Management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2020. In
making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission in the 2013 Internal Control-Integrated
Framework. Based on
its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as
of December 31, 2020.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate. A control system, no matter
how well designed and operated can provide only reasonable, but not
absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
c) Changes in Internal Control over Financial
Reporting
During
the three months ended December 31, 2020, there were no changes in
our internal controls over financial reporting during this fiscal
quarter that materially affected, or is reasonably likely to have a
materially affect, on our internal control over financial
reporting.
PART II. OTHER
INFORMATION
We may
from time to time become a party to various legal proceedings
arising in the ordinary course of our business. We are currently
not a party to any pending legal proceeding that is not ordinary
routine litigation incidental to our business.
There are certain inherent risks which will have
an effect on the Company’s development in the future and the
most significant risks and uncertainties known and identified by
our management are described below.
RISK FACTORS
There are certain inherent risks which will have
an effect on the Company’s development in the future and the
most significant risks and uncertainties known and identified by
our management are described below.
Risks Related to Pandemics
The near-term effects of the recent COVID-19 coronavirus pandemic
are known, as they adversely affected our business. Longer term effects are not immediately known and
may adversely affect our business, results of operations, financial
condition, liquidity and cash flow.
Presently, the
impact of COVID-19 has had adverse effects on our business by
slowing down our ability to work with third parties outside of
Seattle on testing and validation. It is difficult to predict what
other adverse effects, if any, COVID-19 can have on our business,
or against the various aspects of same.
As of
the date of this Quarterly Report, COVID-19 coronavirus has been
declared a pandemic by the World Health Organization, has been
declared a National Emergency by the United States Government and
has resulted in several states being designated disaster zones.
COVID-19 coronavirus caused significant volatility in global
markets. The spread of COVID-19 coronavirus has caused public
health officials to recommend precautions to mitigate the spread of
the virus, especially as to travel and congregating in large
numbers. In addition, certain states and municipalities have
enacted, and additional cities are considering, quarantining and
“shelter-in-place” regulations which severely limit the ability of
people to move and travel and require non-essential businesses and
organizations to close. While some states have lifted certain
“shelter-in-place” restrictions and travel bans, as they are
removed there is no certainty that an outbreak will not occur and
additional restrictions imposed again in response. Additionally,
several states have lifted restrictions only to reimpose such
restrictions as the number of cases rise again.
It is
unclear how such restrictions, which will contribute to a general
slowdown in the global economy, will affect our business, results
of operations, financial condition and our future strategic
plans.
Shelter-in-place
and essential-only travel regulations could negatively impact our
employees, partners, and customers. In addition, we still could
experience significant supply chain disruptions due to
interruptions in operations at any or all of our suppliers’
facilities or downline suppliers. If we experience significant
delays in receiving our products, we will experience delays in
fulfilling orders and ultimately receiving payment, which could
result in loss of sales and a loss of customers, and adversely
impact our financial condition and results of operations. The
current status of COVID-19 coronavirus closures and restrictions
could also negatively impact our ability to receive funding from
our existing capital sources as each business is and has been
affected uniquely.
If any
of our employees, consultant, customers, or visitors were to become
infected we could be forced to close our operations temporarily as
a preventative measure to prevent the risk of spread which could
delay our progress and interfere with our ability to meet
obligations.
In
addition, our headquarters are located in Seattle, Washington which
has been the subject of large COVID-19 outbreak resulting in
restrictions on individuals and businesses. It is unclear at this
time how these restrictions will be continued and/or amended as the
pandemic evolves. We are hopeful that COVID-19 closures will have
only a limited effect on our operations and revenues.
General securities
market uncertainties resulting from the COVID-19
pandemic.
Since
the outset of the pandemic the United States and worldwide national
securities markets have undergone unprecedented stress due to the
uncertainties of the pandemic and the resulting reactions and
outcomes of government, business and the general population. These
uncertainties have resulted in declines in all market sectors,
increases in volumes due to flight to safety and governmental
actions to support the markets. As a result, until the pandemic has
stabilized, the markets may not be available to the Company for
purposes of raising required capital. Should we not be able
to obtain financing when required, in the amounts necessary to
execute on our plans in full, or on terms which are economically
feasible we may be unable to sustain the necessary capital to
pursue our strategic plan and may have to reduce the planned future
growth and/or scope of our operations.
Risks Relating to the Company Generally
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently
operating at a loss. We believe that our cash on hand will be
sufficient to fund our operations through July 31, 2021.
We may need additional financing to
implement our business plan and to service our ongoing operations,
pay our current debts (described below) and maintain ownership of
our intellectual property. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations and/or divest all or a
portion of our business. We, including our
wholly owned subsidiary Particle, are each seeking additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected. There can be no assurance that we
will be able to sell that number of shares, if
any.
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash
flows from operations, the audit report of our independent
registered public accountants on our consolidated financial
statements for the year ended September 30, 2020 contains an
explanatory paragraph stating that there is substantial doubt about
our ability to continue as a going concern. Factors
identified in the report include our historical net losses,
negative working capital, and the need for additional financing to
implement our business plan and service our debt repayments. If we
are not able to attain profitability in the near future our
financial condition could deteriorate further, which would have a
material adverse impact on our business and prospects and result in
a significant or complete loss of your investment. Further, we may
be unable to pay our debt obligations as they become due, which
include obligations to secured creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As
of December 31,
2020, we owe
approximately $2,874,284
and if we
do not satisfy these obligations, the lenders may have the right to
demand payment in full or exercise other
remedies.
Mr. Erickson, our current chairman, and/or
entities with which he is affiliated also have accrued
compensation, travel and interest of approximately $619,218 as
of December 31, 2020.
We owe
$2,255,066 under various
convertible promissory notes as of December 31, 2020 including
$1,184,066 owed to entities
controlled by our chairman.
We may need additional financing, to service
and/or repay these debt obligations. If we raise additional capital
through borrowing or other debt financing, we may incur substantial
interest expense. If and when we raise more equity capital in the
future, it will result in substantial dilution to our current
stockholders.
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As
of December 31, 2020, we had an
accumulated deficit of $61,266,000 and net losses in the amount of
$5,299,000, $13,563,000, and $7,612,000 for the three months ended
December 31, 2020 and the years ended September 30, 2020 and 2019,
respectively. During the three
months ended December 31, 2020, we incurred non-cash
expenses of $3,648,000.
There can be no assurance that we will achieve or
maintain profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID and Bio-RFID and Particle businesses have produced minimal
revenues and may not produce significant revenues in the near term,
or at all, which would harm our ability to continue our operations
or obtain additional financing and require us to reduce or
discontinue our operations. You must consider our business and
prospects in light of the risks and difficulties we will encounter
as business with an early-stage technology in a new and rapidly
evolving industry. We may not be able to successfully address these
risks and difficulties, which could significantly harm our
business, operating results and financial
condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If
we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID and Bio-RFID technology and
related products to achieve or sustain profitability.
We
are in the early stages of commercializing our ChromaID and
Bio-RFID technology. Failure to develop and sell products
based upon our ChromaID and Bio-RFID technology, grant additional
licenses and obtain royalties or develop other revenue streams will
have a material adverse effect on our business, financial condition
and results of operations.
To date, we have generated minimal revenue from
sales of our ChromaID and Bio-RFID products. We believe that our
commercialization success is dependent upon our ability to
significantly increase the number of customers that are using our
products. In addition, demand for our products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We currently rely in part upon
external resources for engineering and product development
services. If we are unable to secure an engineering or product
development partner or establish satisfactory engineering and
product development capabilities, we may not be able to
successfully commercialize our ChromaID and Bio-RFID
technology.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID and
Bio-RFID technology or related products to meet customer
expectations could result in customers choosing to retain their
existing methods or to adopt systems other than ours.
We have
not historically had sufficient internal resources which can work
on engineering and product development matters. We have used third
parties in the past and will continue to do so. These resources are
not always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our technology.
We are in the early stages of commercialization and our ChromaID
and Bio-RFID technology and related products may never achieve
significant commercial market acceptance.
Our
success depends on our ability to develop and market products that
are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID and
Bio-RFID technology and related products are an attractive
alternative to existing light-based technologies. We will need to
demonstrate that our products provide accurate and cost-effective
alternatives to existing light-based authentication technologies.
Compared to most competing technologies, our technology is
relatively new, and most potential customers have limited knowledge
of, or experience with, our products. Prior to implementing our
technology and related products, some potential customers may be
required to devote significant time and effort to testing and
validating our products. In addition, during the implementation
phase, some customers may be required to devote significant time
and effort to training their personnel on appropriate practices to
ensure accurate results from our technology and products. Any
failure of our technology or related products to meet customer
expectations could result in customers choosing to retain their
existing testing methods or to adopt systems other than
ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our technology
and related products, acceptance and adoption of our products could
be slowed. In addition, if our products fail to gain significant
acceptance in the marketplace and we are unable to expand our
customer base, we may never generate sufficient revenue to achieve
or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30,
2020,
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Personnel: We do
not employ a full time Chief Financial Officer. Our Chairman serves
as interim Chief Financial Officer. We also utilize a consultant
who is a qualified Chief Financial Officer to assist with our
financial reporting. This consultant has increased his involvement
in the Company.
Audit
Committee: While we have an audit committee, we lack a financial
expert. On February 12, 2021, the Audit Committee appointed William
A. Owens as “audit committee financial expert” as defined by the
Securities and Exchange Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002.
If
these weaknesses continue, investors could lose confidence in the
accuracy and completeness of our financial reports and other
disclosures.
The Company’s TransTech subsidiary closed on June 30,
2020.
Transtech was not
able to successfully address their revenue which resulted in their
closure on June 30, 2020. The loss of the TransTech subsidiary
revenue will impact our top line revenues and our operating results
and may result in future expenses associated with its
closure.
The Company Particle, Inc. subsidiary was incorporated April 30,
2020 and has no operating history.
Particle, Inc. was
incorporated April 30, 2020 and to date has engaged in activities
consisting primarily of research and development on threaded light bulbs that have a warm white
light that can inactivate germs, including bacteria and
viruses. On June 1, 2020, we
approved and ratified entry into an intercompany Patent License
Agreement dated May 21, 2020 with Particle. Pursuant to the
Agreement, Particle received an exclusive non-transferrable license
to use certain patents and trademarks of the Company, in exchange
the Company shall receive: (i) a one-time fee of $250,000 upon a
successful financing of Particle, and (ii) a quarterly royalty
payment equal to the greater of 5% of the Gross Sales, net of
returns, from Particle or $5,000. As of December 31, 2020 the
operations of Particle have generated no sales and operations are
just commencing. The first product, the Particle bulb can be used
in households, businesses and other facilities to inactivate
bacteria and viruses. Through internal preliminary testing,
Particle personnel has confirmed the bulb’s efficacy in
inactivating common germs such as E. coli and Staphylococcus. A world renowned,
CDC-regulated biosafety level-4 laboratory is currently testing the
Particle bulb’s ability to inactivate SARS-CoV-2, the virus that
causes COVID-19.
To date, we have generated no revenue from
Particle. We may not generate revenues in the near future while
products are being developed. We believe that Particle’s
commercialization success is dependent upon its ability to develop
successful products to take to market. Further, Particle products are awaiting laboratory
testing for efficacy in killing certain germs and viruses; there
are no assurances the results of laboratory testing will be in our
favor. In addition, once developed, demand for its products may not
materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as
expected. Even if we succeed in introducing our technology
and related products to our target markets, we may not be able to
generate sufficient revenue to achieve or sustain
profitability.
We are dependent on key personnel.
Our success depends to a significant degree upon
the continued contributions of key management and other personnel,
some of whom could be difficult to replace, including Ronald P.
Erickson, our Chairman and Phil Bosua, our Chief Executive Officer.
We maintain key person life insurance on our Chief Executive
Officer, Phil Bosua. Our success will depend on the performance of
our officers, our ability to retain and motivate our officers, our
ability to integrate new officers into our operations, and the
ability of all personnel to work together effectively as a
team. Our failure to retain and recruit officers and
other key personnel could have a material adverse effect on our
business, financial condition and results of
operations. Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We
have limited directors’ and officers’ liability insurance and
commercial liability insurance policies. Claims by third parties
against us may exceed policy amounts and we may not have amounts to
cover these claims. Any significant claims would have a material
adverse effect on our business, financial condition and results of
operations. In addition, our limited directors’ and
officers’ liability insurance may affect our ability to attract and
retain directors and officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and
trade secret laws, confidentiality procedures and licensing
arrangements to protect our intellectual property rights.
Obtaining
and maintaining a strong patent position is important to our
business. Patent law relating to the scope of claims in the
technology fields in which we operate is complex and uncertain, so
we cannot be assured that we will be able to obtain or maintain
patent rights, or that the patent rights we may obtain will be
valuable, provide an effective barrier to competitors or otherwise
provide competitive advantages. Others have filed, and in the
future are likely to file, patent applications that are similar or
identical to ours or those of our licensors. To determine the
priority of inventions, or demonstrate that we did not derive our
invention from another, we may have to participate in interference
or derivation proceedings in the USPTO or in court that could
result in substantial costs in legal fees and could substantially
affect the scope of our patent protection. We cannot be assured our
patent applications will prevail over those filed by others. Also,
our intellectual property rights may be subject to other challenges
by third parties. Patents we obtain could be challenged in
litigation or in administrative proceedings such
as ex parte reexam, inter parties review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There
can be no assurance that:
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any
of our existing patents will continue to be held valid, if
challenged;
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patents
will be issued for any of our pending applications;
|
●
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any
claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
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our patents will be issued in the primary
countries where our products are sold in order to protect our
rights and potential commercial
advantage; or
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●
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any
of our products or technologies will not infringe on the patents of
other companies.
|
If
we are enjoined from selling our products, or if we are required to
develop new technologies or pay significant monetary damages or are
required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining
and maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could suffer.
Legal
actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In
recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. We
may receive notices that claim we have infringed upon the
intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with compar