Report of Independent Registered Public Accounting
Firm
To the Board of
Directors and Stockholders of
Know Labs, Inc. and
subsidiaries
Opinion
on the Financial Statements
We have audited the
accompanying consolidated balance sheets of Know Labs, Inc. and
subsidiaries (the Company) as of September 30, 2020 and 2019, and
the related consolidated statements of operations,
stockholders’ deficit, and cash flows for each of the two
years in the period ended September 30, 2020 and the related notes
(collectively referred to as the consolidated financial
statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company as of September 30, 2020 and 2019, and the results of
its operations and its cash flows for each of the two years in the
period ended September 30, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Going Concern Uncertainty
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements,
the Company has sustained a net loss from operations and has an
accumulated deficit since inception. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans in this regard are
also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis
for Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our
audit. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ BPM
LLP
BPM LLP
We
served as the Company’s auditor since October
2019
Walnut
Creek, California
December
29, 2020
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$4,298,179
|
$1,900,836
|
Accounts
receivable, net of allowance of $0 and $40,000,
respectively
|
-
|
63,049
|
Prepaid
expenses
|
-
|
6,435
|
Inventories,
net
|
-
|
7,103
|
Total current
assets
|
4,298,179
|
1,977,423
|
|
|
|
PROPERTY AND
EQUIPMENT, NET
|
128,671
|
130,472
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets
|
101,114
|
274,446
|
Other
assets
|
25,180
|
13,766
|
Operating lease
right of use asset
|
129,003
|
243,526
|
|
|
|
TOTAL
ASSETS
|
$4,682,147
|
$2,639,633
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable -
trade
|
$487,810
|
$810,943
|
Accounts payable -
related parties
|
5,687
|
7,048
|
Accrued
expenses
|
401,178
|
460,055
|
Accrued expenses -
related parties
|
591,600
|
458,500
|
Convertible notes
payable
|
3,967,578
|
3,954,241
|
Note
payable
|
226,170
|
-
|
Simple Agreements
for Future Equity
|
785,000
|
-
|
Current portion of
operating lease right of use liability
|
108,779
|
124,523
|
Total current
liabilities
|
6,573,802
|
5,815,310
|
|
|
|
NON-CURRENT
LIABILITIES:
|
|
|
Operating lease
right of use liability, net of current portion
|
23,256
|
121,613
|
Total non-current
liabilities
|
23,256
|
121,613
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 14)
|
-
|
-
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
Preferred stock -
$0.001 par value, 5,000,000 shares authorized, 0 shares issued
and
|
|
|
outstanding at
9/30/2020 and 9/30/2019 respectively
|
-
|
-
|
Series C
Convertible Preferred stock - $0.001 par value, 1,785,715 shares
authorized,
|
|
|
1,785,715 shares
issued and outstanding at 9/30/2020 and 9/30/2019,
respectively
|
1,790
|
1,790
|
Series D
Convertible Preferred stock - $0.001 par value, 1,016,014 shares
authorized,
|
|
|
1,016,004 shares
issued and outstanding at 9/30/2020 and 9/30/2019,
respectively
|
1,015
|
1,015
|
Common stock -
$0.001 par value, 100,000,000 shares authorized, 24,804,874 and
18,366,178
|
|
|
shares issued and
outstanding at 9/30/2020 and 9/30/2019, respectively
|
24,807
|
18,366
|
Additional paid in
capital
|
54,023,758
|
39,085,179
|
Accumulated
deficit
|
(55,966,281)
|
(42,403,640)
|
Total stockholders'
equity (deficit)
|
(1,914,911)
|
(3,297,290)
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$4,682,147
|
$2,639,633
|
The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
REVENUE
|
$121,939
|
$1,804,960
|
COST OF
SALES
|
69,726
|
1,378,413
|
GROSS
PROFIT
|
52,213
|
426,547
|
RESEARCH AND
DEVELOPMENT EXPENSES
|
2,033,726
|
1,257,872
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
4,844,415
|
4,181,687
|
OPERATING
LOSS
|
(6,825,928)
|
(5,013,012)
|
|
|
|
OTHER INCOME
(EXPENSE):
|
|
|
Interest
expense
|
(6,094,682)
|
(2,945,312)
|
Other
income
|
65,769
|
(9,561)
|
(Loss) gain on debt
settlements
|
(707,800)
|
355,569
|
Total other
(expense), net
|
(6,736,713)
|
(2,599,304)
|
|
|
|
LOSS BEFORE INCOME
TAXES
|
(13,562,641)
|
(7,612,316)
|
|
|
|
Income tax
expense
|
-
|
-
|
|
|
|
NET
LOSS
|
$(13,562,641)
|
$(7,612,316)
|
|
|
|
Basic and diluted
loss per share
|
$(0.62)
|
$(0.42)
|
|
|
|
Weighted average
shares of common stock outstanding- basic and diluted
|
21,791,058
|
18,053,848
|
The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1,
2018
|
20,000
|
$11
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
17,531,522
|
$17,531
|
$32,163,386
|
$(34,791,324)
|
$(2,607,591)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,141,674
|
-
|
1,141,674
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
245,000
|
245
|
348,655
|
-
|
348,900
|
Conversion of Series A Preferred
Stock
|
(20,000)
|
(11)
|
-
|
-
|
-
|
-
|
80,000
|
80
|
(69)
|
-
|
-
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,857,960
|
-
|
2,857,960
|
Issuance of warrants to debt holders
(Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,384,530
|
-
|
1,384,530
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,072,095
|
-
|
1,072,095
|
Stock based compensation- warrant
issuances
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
117,458
|
-
|
117,458
|
Issuance of common stock for warrant
exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
509,656
|
510
|
(510)
|
-
|
(0)
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,612,316)
|
(7,612,316)
|
Balance as of September 30,
2019
|
-
|
-
|
1,785,715
|
1,790
|
1,016,004
|
1,015
|
18,366,178
|
18,366
|
39,085,179
|
(42,403,640)
|
(3,297,290)
|
Stock compensation expense -
employee options
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,702,085
|
-
|
1,702,085
|
Stock option
exercise
|
-
|
-
|
-
|
-
|
-
|
-
|
73,191
|
73
|
(73)
|
-
|
-
|
Conversion of debt offering and
accrued interest (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
4,581,917
|
4,585
|
4,591,952
|
-
|
4,596,537
|
Beneficial conversion feature (Note
10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,766,074
|
-
|
3,766,074
|
Issuance of warrants to debt holders
(Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,824,998
|
-
|
1,824,998
|
Issuance of warrants for services
related to debt offering (Note 10)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
975,326
|
-
|
975,326
|
Issuance of common stock for
services
|
-
|
-
|
-
|
-
|
-
|
-
|
550,000
|
550
|
1,044,450
|
-
|
1,045,000
|
Issuance of common stock for
exercise of warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
733,588
|
733
|
84,267
|
-
|
85,000
|
Issuance of shares related to
Settlement and Mutual Release and Subscription
Agreements
|
-
|
-
|
-
|
-
|
-
|
-
|
500,000
|
500
|
949,500
|
-
|
950,000
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,562,641)
|
(13,562,641)
|
|
-
|
$-
|
1,785,715
|
$1,790
|
1,016,004
|
$1,015
|
24,804,874
|
$24,807
|
$54,023,758
|
$(55,966,281)
|
$(1,914,911)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(13,562,641)
|
$(7,612,316)
|
Adjustments to
reconcile net loss to net cash (used in)
|
|
|
operating
activities
|
|
|
Depreciation and
amortization
|
242,987
|
259,347
|
Issuance of capital
stock for services and expenses
|
1,045,000
|
348,900
|
Stock based
compensation- warrants
|
-
|
117,458
|
Stock based
compensation- stock option grants
|
1,702,085
|
1,141,674
|
Amortization of
debt discount
|
5,662,690
|
2,771,270
|
Right of use,
net
|
422
|
2,610
|
Loss on sale of
assets
|
4,663
|
32,777
|
(Gain) on debt
settlement
|
(117,200)
|
(355,000)
|
Loss related to
issuance of shares for debt settlement
|
825,000
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
63,049
|
257,489
|
Prepaid
expenses
|
6,435
|
13,705
|
Inventory
|
7,103
|
196,479
|
Other
assets
|
(11,414)
|
(6,596)
|
Accounts payable -
trade and accrued expenses
|
218,018
|
(215,873)
|
Deferred
revenue
|
-
|
(55,959)
|
NET CASH
(USED IN) OPERATING ACTIVITIES
|
(3,913,803)
|
(3,104,035)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Purchase of
research and development equipment
|
(70,134)
|
(79,932)
|
NET CASH (USED IN)
INVESTING ACTIVITIES:
|
(70,134)
|
(79,932)
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Proceeds from notes
payable
|
226,170
|
-
|
Repayments on line
of credit
|
-
|
(92,094)
|
Proceeds from
convertible notes payable
|
5,639,500
|
4,242,490
|
Proceeds from
Simple Agreements for Future Equity
|
785,000
|
-
|
Payments for
issuance costs from notes payable
|
(479,965)
|
-
|
Proceeds from
issuance of common stock for warrant exercise
|
85,575
|
-
|
Proeeds from
issuance of shares related to debt settlement
|
125,000
|
-
|
NET CASH PROVIDED
BY FINANCING ACTIVITIES
|
6,381,280
|
4,150,396
|
|
|
|
NET INCREASE IN
CASH AND CASH EQUIVALENTS
|
2,397,343
|
966,429
|
|
|
|
CASH AND CASH
EQUIVALENTS, beginning of period
|
1,900,836
|
934,407
|
|
|
|
CASH AND CASH
EQUIVALENTS, end of period
|
$4,298,179
|
$1,900,836
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Interest
paid
|
$-
|
$22,521
|
Taxes
paid
|
$1,922
|
$-
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
Beneficial
conversion feature
|
$3,766,074
|
$2,857,960
|
Issuance of
warrants to debt holders
|
$1,824,998
|
$1,384,530
|
Issuance of
warrants for services related to debt offering
|
$975,326
|
$1,072,095
|
Cashless warrant
exercise (fair value)
|
$111,554
|
$127,414
|
Cashless stock
options exercise (fair value)
|
$18,298
|
$-
|
Conversion of debt
offering
|
$4,245,448
|
$-
|
Conversion of
accrued interest
|
$351,089
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
KNOW LABS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Know Labs, Inc. (the “Company”) was
incorporated under the laws of the State of Nevada in 1998.
The Company has authorized 105,000,000 shares of capital stock, of
which 100,000,000 are shares of voting common stock, par value
$0.001 per share, and 5,000,000 are shares preferred stock, par
value $0.001 per share.
The
Company is focused on the development, marketing and sales of
proprietary technologies which are capable of uniquely identifying
or authenticating almost any substance or material using
electromagnetic energy to record, detect, and identify the unique
“signature” of the substance or material. The Company
call these our “Bio-RFID™” and
“ChromaID™” technologies.
Historically,
the Company focused on the development of our proprietary ChromaID
technology. Using light from low-cost LEDs (light emitting diodes)
the ChromaID technology maps the color of substances, fluids and
materials. With the Company’s proprietary processes we can
authenticate and identify based upon the color that is present. The
color is both visible to the Company as humans but also outside of
the humanly visible color spectrum in the near infra-red and near
ultra-violet and beyond. The Company’s ChromaID scanner sees
what we like to call “Nature’s Color
Fingerprint.” Everything in nature has a unique color
identifier and with ChromaID the Company can see, and identify, and
authenticate based upon the color that is present. The
Company’s ChromaID scanner is capable of uniquely identifying
and authenticating almost any substance or liquid using light to
record, detect and identify its unique color signature. Today the
Company is focused upon extensions and new inventions that are
derived from and extend beyond the Company’s ChromaID
technology. The Company calls this new technology
“Bio-RFID.” The rapid advances made with the
Company’s Bio-RFID technology in our laboratory have caused
us to move quickly into the commercialization phase as the Company
works to create revenue generating products for the marketplace.
Today, the sole focus of the Company is on its Bio-RFID technology
and its commercialization.
On April 30, 2020,
the Company approved and ratified the incorporation of Particle,
Inc., a Nevada corporation. The Company is the sole shareholder as
of the date of incorporation. Particle is now a direct, majority
owned subsidiary of the Company. Particle shall utilize the same
corporate offices as the Company and shall focus on the development
and commercialization of our extensive intellectual property
relating to electromagnetic energy outside of the medical
diagnostic arena which remains the parent company’s singular
focus with its Bio-RFID technology and its initial application ,
the non-invasive measurement of blood glucose
On
June 1, 2020, the Company approved and ratified entry into an
intercompany Patent License Agreement dated May 21, 2020 with our
majority owned subsidiary, Particle. Pursuant to the Agreement,
Particle shall receive an exclusive non-transferrable license to
use certain of our patents and trademarks, in exchange the Company
shall receive: (i) a one-time fee of $250,000 upon a successful
financing of Particle, and (ii) a quarterly royalty payment equal
to the greater of 5% of the Gross Sales, net of returns, from
Particle or $5,000.
In 2010, the Company acquired TransTech Systems,
Inc. as an adjunct to our business. Operating as an independent
subsidiary, TransTech was a distributor of products for employee
and personnel identification and authentication. TransTech
historically provided substantially all of the Company’s
revenues. The financial results from our TransTech subsidiary had
been diminishing as vendors of their products increasingly moved to
the Internet and direct sales to their customers. TransTech
closed on June 30, 2020.
The accompanying
financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company
incurred net losses of $13,562,641 and $7,612,316 for the years
ended September 30, 2020 and 2019, respectively. Net cash used in
operating activities was $3,913,803 and $3,104,035 for the years
ended September 30, 2020 and 2019, respectively.
The Company
anticipates that it will record losses from operations for the
foreseeable future. As of September 30, 2020, the Company’s
accumulated deficit was $55,966,281. The Company has
limited capital resources. These conditions raise substantial doubt
about our ability to continue as a going concern. The audit report
prepared by the Company’s independent registered public
accounting firm relating to our consolidated financial statements
for the year ended September 30, 2020 includes an explanatory
paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
The Company
believes that its cash on hand will be sufficient to fund our
operations until September 30, 2021. The Company may need additional financing to
implement our business plan and to service our ongoing operations
and pay our current debts. There can be no assurance that we will
be able to secure any needed funding, or that if such funding is
available, the terms or conditions would be acceptable to us. If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business. We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to the
Company’s then-existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such
financing is not available on satisfactory terms, or is not
available at all, the Company may be required to delay, scale back,
eliminate the development of business opportunities and our
operations and financial condition may be materially adversely
affected.
3.
|
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
|
Basis of Presentation – The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these unaudited condensed consolidated financial
statements were prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”).
Principles of
Consolidation – The
consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, TransTech Systems, Inc. and
RAAI Lighting, Inc., and majority-owned subsidiary, Particle, Inc.
Inter-Company items and transactions have been eliminated in
consolidation. The ownership of
Particle not owned by the Company at September 30, 2020 is not
material and thus no non-controlling interest is
recognized.
Cash and Cash
Equivalents – The
Company classifies highly liquid temporary investments with an
original maturity of three months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At September 30, 2020, the Company had uninsured deposits in the amount
of $4,048,719.
Accounts Receivable and Revenue –
The Company recognizes revenue in accordance with ASC Topic 606,
Revenue from Contracts with Customers, which requires the
application of the five-step-principles-based-accounting-model for
revenue recognition. These steps include (1) a legally enforceable
contract, written or unwritten is identified; (2) performance
obligations in the contracts are identified; (3) the transaction
price reflecting variable consideration, if any, is identified; (4)
the transaction price is allocated to the performance obligations;
and (5) revenue is recognized when the control of goods is
transferred to the customer at a particular time or over time. For
TransTech, the Company extends thirty day terms to some customers.
Accounts receivable were reviewed periodically for
collectability.
TransTech Systems Inc. sold products directly to
customers. the products were typically sold pursuant to purchase
orders placed by our customers, and our terms and conditions of
sale did not require customer acceptance. We accounted for a
contract with a customer when there is a legally enforceable
contract, which could be the customer’s purchase order, the
rights of the parties are identified, the contract has commercial
terms, and collectability of the contract consideration is
probable. The majority of our contracts had a single performance
obligation to transfer products and are short term in nature,
usually less than one year. Our revenue was measured based on the
consideration specified in the contract with each customer in
exchange for transferring products that is generally based upon a
negotiated, formula, list or fixed price. Revenue is recognized
when control of the promised goods is transferred to our customer,
which is either upon shipment from our dock, receipt at the
customer’s dock, or removal from consignment inventory at the
customer’s location, in an amount that reflects the
consideration we expected to be entitled to receive in exchange for
those goods. The Company shut down TransTech on June 30,
2020.
Allowance for Doubtful
Accounts - We maintain an allowance for uncollectible
accounts receivable. It is our practice to regularly review and
revise, when deemed necessary, our estimates of uncollectible
accounts receivable, which are based primarily on actual historical
return rates. We record estimated uncollectible accounts receivable
as selling, general and administrative expense. As of September 30,
2020 and 2019, there was a reserve for sales returns of $0 and
$40,000, respectively, which is minimal based upon our historical
experience. The Company shut
down TransTech on June 30, 2020.
Inventories – Inventories consisted primarily of
printers and consumable supplies, including ribbons and cards,
badge accessories, capture devices, and access control components
held for resale and are stated at the lower of cost or market on
the first-in, first-out (“FIFO”)
method. Inventories are considered available for resale
when drop shipped and invoiced directly to a customer from a
vendor, or when physically received by TransTech. The
Company records a provision for excess and obsolete inventory
whenever an impairment has been identified. There is a $0 and
$28,000 reserve for impaired inventory as of September 30, 2020 and
2019, respectively.
Equipment – Equipment consists of machinery, leasehold
improvements, furniture and fixtures and software, which are stated
at cost less accumulated depreciation and amortization.
Depreciation is computed by the straight-line method over the
estimated useful lives or lease period of the relevant asset,
generally 2-10 years, except for leasehold improvements which are
depreciated over 5 years.
Long-Lived Assets
– The Company reviews its
long-lived assets for impairment annually or when changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets under certain circumstances are
reported at the lower of carrying amount or fair value. Assets to
be disposed of and assets not expected to provide any future
service potential to the Company are recorded at the lower of
carrying amount or fair value (less the projected cost associated
with selling the asset). To the extent carrying values exceed fair
values, an impairment loss is recognized in operating
results.
Intangible Assets – Intangible
assets are capitalized and amortized on a straight-line basis over
their estimated useful life, if the life is determinable. If the
life is not determinable, amortization is not recorded. We
regularly perform reviews to determine if facts and circumstances
exist which indicate that the useful lives of our intangible assets
are shorter than originally estimated or the carrying amount of
these assets may not be recoverable. When an indication exists that
the carrying amount of intangible assets may not be recoverable, we
assess the recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Research and Development Expenses
– Research and development expenses consist of the cost of
employees, consultants and contractors who design, engineer and
develop new products and processes as well as materials, supplies
and facilities used in producing prototypes.
The Company’s current research and
development efforts are primarily focused on improving our Bio-RFID
technology, extending its capacity and developing new and unique
applications for this technology. As part of this effort, the
Company conducts on-going laboratory testing to ensure that
application methods are compatible with the end-user and regulatory
requirements, and that they can be implemented in a cost-effective
manner. The Company also is actively involved in identifying new
applications. The Company’s current internal team along with
outside consultants has considerable experience working with the
application of the Company’s technologies and their
applications. The Company engages third party experts as required
to supplement our internal team. The Company believes that
continued development of new and enhanced technologies is essential
to our future success. The Company incurred expenses of
$2,033,726 and
$1,257,872 for the years
ended September 30, 2020 and
2019, respectively, on development activities.
Advertising – Advertising costs are charged to selling,
general and administrative expenses as incurred. Advertising and
marketing costs for the years ended September 30, 2020 and 2019
were $230,844 and $0, respectively.
Fair Value Measurements and Financial
Instruments – ASC Topic 820, Fair Value Measurement and Disclosures,
defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
Level 1 –
Quoted prices in active markets for identical assets and
liabilities;
|
Level 2 –
Inputs other than level one inputs that are either directly or
indirectly observable; and.
|
Level 3 -
Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The recorded value
of other financial assets and liabilities, which consist primarily
of cash and cash equivalents, accounts receivable, other current
assets, and accounts payable and accrued expenses approximate the
fair value of the respective assets and liabilities as of September
30, 2020 and 2019 are based upon the short-term nature of the
assets and liabilities.
The Company has a
money market account which is considered a level 1 asset. The
balance as of September 30, 2020 and 2019 was $4,252,959 and
$1,901,278, respectively.
The following table
represents a roll-forward of the fair value of the Simple Agreement
for Future Equity (“SAFE”) for which fair value is
determined by Level 3 inputs:
Balance
as of October 1, 2019
|
$-
|
Proceeds
from issuance of SAFE
|
785,000
|
Fair
value adjustment
|
-
|
Balance
as of September 30, 2020
|
$785,000
|
Fair value of the
SAFE on issuance was determined to be equal to the proceeds
received (see Note 11). There were no transfers among Level 1,
Level 2, or Level 3 categories in the periods
presented.
Derivative Financial Instruments
–Pursuant to ASC 815 “Derivatives and
Hedging”, the Company evaluates all of its financial
instruments to determine if such instruments are derivatives or
contain features that qualify as embedded derivatives. The Company
then determines if embedded derivative must bifurcated and
separately accounted for. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a Black-Scholes-Merton
option pricing model to value the derivative instruments at
inception and on subsequent valuation dates. The classification of
derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of
each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet
date.
The Company
determined that the conversion features for purposes of
bifurcation within its currently outstanding convertible notes
payable were immaterial and there was no derivative liability to be
recorded as of September 30, 2020 and
2019.
Stock Based Compensation - The Company has share-based compensation plans
under which employees, consultants, suppliers and directors may be
granted restricted stock, as well as options and warrants to
purchase shares of Company common stock at the fair market value at
the time of grant. Stock-based compensation cost to employees is
measured by the Company at the grant date, based on the fair value
of the award, over the requisite service period under ASC 718. For
options issued to employees, the Company recognizes stock
compensation costs utilizing the fair value methodology over the
related period of benefit.
Convertible Securities
– Based upon ASC 815-15,
we have adopted a sequencing approach regarding the application of
ASC 815-40 to convertible securities. We will evaluate our
contracts based upon the earliest issuance date. In the event
partial reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
Net Loss per Share
– Under the provisions of ASC
260, “Earnings Per Share,” basic loss per common share
is computed by dividing net loss available to common stockholders
by the weighted average number of shares of common stock
outstanding for the periods presented. Diluted net loss per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock. As of September 30, 2020, there were
options outstanding for the purchase of 4,805,000 common shares
(including unearned stock option grants totaling 2,630,000 shares
related to performance targets), warrants for the purchase of
20,016,367 common shares, and 8,108,356 shares of the
Company’s common stock issuable upon the conversion of Series
C and Series D Convertible Preferred Stock. In addition, the
Company currently has 14,659,764 common shares (9,020,264 common
shares at the current price of $0.25 per share and 5,639,500 common
shares at the current price of $1.00 per share) and are issuable
upon conversion of convertible debentures of $7,894,566. All of
which could potentially dilute future earnings per share but
excluded from the September 30, 2020 calculation of net loss per
share because their impact is antidilutive.
As of September 30,
2019, there were options outstanding for the purchase of 4,532,668
common shares (including unearned stock option grants totaling
2,410,000 and excluding certain stock option grants for a cancelled
kickstarter program), warrants for the purchase of 17,747,090
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
13,262,779 common shares (9,020,264 common shares at the current
price of $0.25 per share and 4,242,490 common shares at the current
price of $1.00 per share) that are issuable upon conversion of
convertible debentures of $6,497,581. Issuance of more shares could
potentially dilute future earnings per share but are excluded from
the September 30, 2019 calculation of net loss per share because
their impact is antidilutive.
Comprehensive loss – Comprehensive
loss is defined as the change in equity of a business during a
period from non-owner sources. There were no differences between
net loss for the years ended September 30, 2020 and 2019 and
comprehensive loss for those periods.
Dividend Policy
– The Company has never paid any
cash dividends and intends, for the foreseeable future, to retain
any future earnings for the development of our business. Our future
dividend policy will be determined by the board of directors on the
basis of various factors, including our results of operations,
financial condition, capital requirements and investment
opportunities.
Use of Estimates
– The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent
Accounting Pronouncements
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing
arrangements. The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to recognize a ROU
asset and lease liability on the balance sheet for all leases with
a term longer than 12 months. Leases are now classified as finance
or operating, with classification affecting the pattern and
classification of expense recognition in the statement of
operations.
The Company adopted
the new standard on October 1, 2019 using the modified
retrospective method and the transition relief guidance provided by
the FASB in ASU 2018-11, Leases
(Topic 842): Targeted Improvements. Consequently, the
Company did not update financial information or provide disclosures
required under the new standard for dates and periods prior to
October 1, 2019. The Company elected the package of practical
expedients and did not reassess prior conclusions on whether
contracts are or contain a lease, lease classification, and initial
direct costs. In addition, the Company adopted the lessee practical
expedient to combine lease and non-lease components for all asset
classes and elected to not recognize ROU assets and lease
liabilities for leases with a term of 12 months or
less.
In August 2020, the
FASB issued ASU No. 2020-06, Debt
– Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own
Equity (Subtopic 815-40). The amendment is meant to simplify
the accounting for convertible instruments by removing certain
separation models in subtopic 470-20 for convertible instruments. The amendment also
changed the method used to calculate dilutes EPS for convertible
instruments and for instruments that may be settled in cash. The
amendment is effective
for years beginning after December 15, 2021, including interim
periods for those fiscal years. We are currently evaluating the
impact of adoption this standard on the Company’s consolidated financial statements
and related disclosures.
Based on the
Company’s review of accounting standard updates issued since
the filing of the 2020 Form 10-K, there have been no other newly
issued or newly applicable accounting pronouncements that have had,
or are expected to have, a significant impact on the
Company’s consolidated financial statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the
Company’s consolidated financial statements upon
adoption.
4. ACCOUNTS
RECEIVABLE
Accounts receivable were $0 and $63,049, net of
allowance, as of September 30, 2020 and 2019, respectively. The
Company has a total allowance for bad debt in the amount of $0 and
$40,000 as of September 30, 2020 and 2019,
respectively. The decrease is due to the shutdown of
TransTech on June 30, 2020.
5. INVENTORIES
Inventories
were $0 and $7,103 as of September 30, 2020 and 2019, respectively.
Inventories consisted primarily of printers and consumable
supplies, including ribbons and cards, badge accessories, capture
devices, and access control components held for resale related to
our TransTech business which shut down on June 30, 2020. There was
a $0 and $28,000 reserve for impaired inventory as of September 30,
2020 and 2019, respectively.
6. FIXED
ASSETS
Property
and equipment as of September 30, 2020 and 2019 was comprised of
the following:
|
Estimated
|
|
|
|
Useful
Lives
|
|
|
Machinery
and equipment
|
2-10
years
|
$355,271
|
$412,238
|
Leasehold
improvements
|
2-3
years
|
3,612
|
3,612
|
Furniture
and fixtures
|
2-3
years
|
26,855
|
58,051
|
Software
and websites
|
3-
7 years
|
-
|
35,830
|
Less:
accumulated depreciation
|
|
(257,067)
|
(379,259)
|
|
$128,671
|
$130,472
|
Total depreciation expense was $69,655
and $86,016 for the year ended September 30, 2020
and 2019, respectively. All equipment
is used for selling, general and administrative purposes and
accordingly all depreciation is classified in selling, general and
administrative expenses.
The Company retired
assets at TransTech with a net book value of $4,358 as of June 30,
2020. TransTech was shut down on June 30, 2020.
7. INTANGIBLE
ASSETS
Intangible
assets as of September 30, 2020 and 2019 consisted of the
following:
|
Estimated
|
|
|
|
Useful
Lives
|
|
|
|
|
|
|
Technology
|
3
years
|
$520,000
|
$520,000
|
Less:
accumulated amortization
|
|
(418,886)
|
(245,554)
|
Intangible
assets, net
|
|
$101,114
|
$274,446
|
Total
amortization expense was $173,332 and $173,331 for the years ended
September 30, 2020 and 2019, respectively.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, the Company entered into an Agreement and Plan of
Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
acquired all the outstanding shares of RAAI’s capital stock
through a merger of Merger Sub with and into RAAI (the
“Merger”), with RAAI surviving the Merger as a wholly
owned subsidiary of the Company.
The
fair value of the intellectual property associated with the assets
acquired was $520,000 estimated by using a discounted cash flow
approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
8. ACCOUNTS PAYABLE
Accounts
payable were $487,810 and $810,943 as of September 30, 2020
and 2019, respectively. Such liabilities consisted of amounts due
to vendors for inventory purchases and technology development,
external audit, legal and other expenses incurred by the
Company.
9. LEASES
The Company has
entered into operating leases for office and development
facilities. These leases have terms which range from two to three
years and include options to renew. These operating leases are
listed as separate line items on the Company's September 30, 2020
and September 30, 2019 Consolidated Balance Sheets and represent
the Company’s right to use the underlying asset for the lease
term. The Company’s obligation to make lease payments are
also listed as separate line items on the Company's September 30,
2020 and 2019 Consolidated Balance Sheets. Based on the present
value of the lease payments for the remaining lease term of the
Company's existing leases, the Company recognized right-of-use
assets and lease liabilities for operating leases of approximately
$250,000 on October 1, 2018. Operating lease right-of-use assets
and liabilities commencing after October 1, 2018 are recognized at
commencement date based on the present value of lease payments over
the lease term. During the year ended September 30, 2020 and 2019,
the Company had one lease expire and recognized the rent payments
as an expense in the current period. As of September 30, 2020 and
2019, total right-of-use assets and operating lease liabilities for
remaining long term lease was approximately $132,000 and $246,000,
respectively. In the year ended September 30, 2020 and 2019, the
Company recognized approximately $136,718 and $133,996,
respectively in total lease costs for the leases.
Because the rate
implicit in each lease is not readily determinable, the Company
uses its incremental borrowing rate to determine the present value
of the lease payments.
Information related
to the Company's operating right-of-use assets and related lease
liabilities as of and for the year ended September 30, 2020 was as
follows:
Cash
paid for ROU operating lease liability $136,738
Weighted-average
remaining lease term 1.3 years
Weighted-average
discount rate 7%
The minimum future
lease payments as of September 30, 2020 are as
follows:
Year
|
|
2021
|
$113,553
|
2022
|
23,968
|
Imputed
interest
|
(5,486)
|
Total
lease liability
|
$132,035
|
10. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible
notes payable as of September 30, 2020 and 2019 consisted of the
following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve $1,071,000
under convertible promissory or OID notes. The Company recorded
accrued interest of $71,562 and $62,171 as of September 30,
2020 and 2019, respectively. On
May 8, 2019, the Company signed Amendment 2 to the convertible
promissory or OID notes, extending the due dates to September 30,
2019. On November 26, 2019, the Company signed Amendments to the
convertible promissory or OID notes, extending the due dates to
June 30, 2020. Mr. Struve also invested $1,000,000 in the May 2019
Debt Offering. On May 11, 2020, the Company signed Amendments to
the convertible promissory or OID notes, extending the due dates to
September 30, 2020. On December 23, 2020, the Company signed
Amendments to the convertible promissory or OID notes, extending
the due dates to March 31, 2021.
Convertible
Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
On March 16, 2018,
the Company entered into a Note and Account Payable Conversion
Agreement pursuant to which (a) all $664,233 currently owing under
the J3E2A2Z Notes was converted to a Convertible Redeemable
Promissory Note in the principal amount of $664,233, and (b) all
$519,833 of the J3E2A2Z Account Payable was converted into a
Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. The warrants were valued at $110,545. Because
the note is immediately convertible, the warrants and beneficial
conversion were expensed as interest. The Company recorded accrued
interest of $73,964 as of September 30, 2019. On May 8,
2019, the Company signed Amendment 1 to the convertible redeemable
promissory notes, extending the due dates to September 30, 2019 and
increasing the interest rate to 6%. On November 26, 2019, the
Company signed Amendment 2 to the convertible promissory or OID
notes, extending the due dates to March 31, 2020. On May 11, 2020,
the Company signed Amendment 3 to the convertible promissory or OID
notes, extending the due dates to September 30, 2020. On December
8, 2020, the Company signed Amendment 4 to the convertible
promissory or OID notes, extending the due dates to March 31,
2021.
Convertible
Debt Offering which Closed May 28, 2019
On May 28, 2019,
the Company closed additional rounds of a debt offering and
received gross proceeds of $4,242,515 in exchange for issuing
Subordinated Convertible Notes (the “Convertible
Notes”) and Warrants (the “Warrants”) in a
private placement to 54 accredited investors, pursuant to a series
of substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents. The Convertible Notes will
be automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
The Convertible
Notes had an original principal amount of $4,242,515 and bear
annual interest of 8%. Both the principal amount and the interest
are payable on a payment-in-kind basis in shares of Common Stock of
the Company (the “Common Stock”).
The Warrants were
granted on a 1:0.5 basis (one-half Warrant for each full share of
Common Stock into which the Convertible Notes are convertible). The
Warrants have a five-year term and an exercise price equal to 120%
of the per share conversion price of the Qualified Financing or
other mandatory conversion.
The Convertible
Notes are initially convertible into 4,242,515 shares of Common
Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 2,121,258 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
In connection with
the debt offering, the placement agent for the Convertible Notes
and the Warrants received a cash fee of $361,401 and warrants to
purchase 542,102 shares of the Company’s common stock, all
based on 8-10% of gross proceeds to the Company. The placement
agent has also received a $25,000 advisory fee. The warrants issued
for these services had a fair value of $1,072,095 at the date of
issuance. The fair value of the warrants was recorded as debt
discount (with an offset to APIC) and will be amortized over the
one-year term of the Convertible Notes. The $361,401 cash fee was
recorded as issuance costs and will be amortized over the one-year
term of the related Convertible Notes.
As part of the
Purchase Agreement, the Company entered into a Registration Rights
Agreement, which grants the investors “demand” and
“piggyback” registration rights to register the shares
of Common Stock issuable upon the conversion of the Convertible
Notes and the exercise of the Warrants with the Securities and
Exchange Commission for resale or other disposition. In addition,
the Convertible Notes are subordinated to certain senior debt of
the Company pursuant to a Subordination Agreement executed by the
investors.
The Convertible
Notes and Warrants were issued in transactions that were not
registered under the Securities Act of 1933, as amended (the
“Act”) in reliance upon applicable exemptions from
registration under Section 4(a)(2) of the Act and/or Rule 506 of
SEC Regulation D under the Act.
In accordance to
ASC 470-20-30, Debt with Conversion and Other Options, the guidance
therein applies to both convertible debt and other similar
instruments, including convertible preferred shares. The guidance
states that “the allocation of proceeds shall be based on the
relative fair values of the two instruments at time of issuance.
When warrants are issued in conjunction with a debt instrument as
consideration in purchase transactions, the amounts attributable to
each class of instrument issued shall be determined separately,
based on values at the time of issuance. The debt discount or
premium shall be determined by comparing the value attributed to
the debt instrument with the face amount thereof.
In conjunction with
the issuance of Convertible Notes and the Warrants, the Company
recorded a debt discount of $2,857,960 associated with a beneficial
conversion feature on the debt, which is being accreted using the
effective interest method over the one-year term of the Convertible
Notes. Intrinsic value of the beneficial conversion feature was
calculated at the commitment date as the difference between the
conversion price and the fair value of the common stock into which
the security is convertible, multiplied by the number of shares
into which the security is convertible. In accordance to ASC
470-20-30, if the intrinsic value of the beneficial conversion
feature is greater than the proceeds allocated to the convertible
instrument, the amount of the discount assigned to the beneficial
conversion feature shall be limited to the amount of the proceeds
allocated to the convertible instrument.
The Warrants were
indexed to our own stock and no down round provision was
identified. The Warrants were not subject to ASC 718. Therefore,
the Company concluded that based upon the conversion features, the
Warrants should not be accounted for as derivative liabilities. The
fair value of the Warrants was $1,384,530 and was recorded as Debt
Discount (with an offset to APIC) on the date of issuance and
amortized over the one-year term of the notes.
During the year ended September 30, 2020, the
Company issued 4,581,917 shares
of common stock related to the automatic conversion of
Convertible Notes and interest from a private placement to
accredited investors in 2019. The Convertible Notes and interested
were automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
Convertible
Debt Offering during the year ended September 30, 2020
During the year
ended September 30, 2020, the Company closed additional rounds of a
debt offering and received gross proceeds of $5,639,500 in exchange
for issuing Subordinated Convertible Notes and Warrants in a
private placement to accredited investors, pursuant to a series of
substantially identical Securities Purchase Agreements, Common
Stock Warrants, and related documents.
The Convertible
Notes are initially convertible into 5,639,500 shares of Common
Stock, subject to certain adjustments, and the Warrants are
initially exercisable for 2,819,750 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
The fair value of
the Warrants issued to debt holders was $1,824,998 on the date of
issuance and will be amortized over the one-year term of the
Convertible Notes.
In connection with
the debt offering, the placement agent for the Convertible Notes
and the Warrants received a cash fee of $529,965 and warrants to
purchase 615,675 shares of the Company’s common stock, all
based on 6.3-8%% of gross proceeds to the Company. The warrants
issued for these services had a fair value of $1,016,797 at the
date of issuance. The fair value of the warrants was recorded as
debt discount (with an offset to APIC) and will be amortized over
the one-year term of the Convertible Notes. The $529,965 cash fee
was recorded as issuance costs and will be amortized over the
one-year term of the related Convertible Notes.
The Company
recorded a debt discount of $3,766,074 associated with a beneficial
conversion feature on the debt, which is being accreted using the
effective interest method over the one-year term of the Convertible
Notes.
During the year
ended September 30, 2020, amortization related to the 2019 and 2020
debt offerings of $5,662,690 of the beneficial conversion feature,
warrants issued to debt holders and placement agent was recognized
as interest expense in the consolidated statements of
operations.
Convertible notes
payable as of September 30, 2020 and 2019 are summarized
below:
|
|
|
Convertible
note- Clayton A. Struve
|
$1,071,000
|
$1,071,000
|
Convertible
note- Ronald P. Erickson and affiliates
|
1,184,066
|
1,184,066
|
2019
Convertible notes
|
4,242,490
|
4,242,515
|
Q1
2020 Convertible notes
|
520,000
|
-
|
Q2
2020 Convertible notes
|
195,000
|
-
|
Q3
2020 Convertible notes
|
4,924,500
|
-
|
Bousted
fee refund (originally booked as contra debt)
|
50,000
|
-
|
Less
conversions of 2019 notes
|
(4,242,490)
|
-
|
Less
debt discount - BCF
|
(2,127,894)
|
(1,273,692)
|
Less
debt discount - warrants
|
(1,025,512)
|
(616,719)
|
Less
debt discount - warrants issued for services
|
(823,582)
|
(652,919)
|
|
$3,967,578
|
$3,954,251
|
Note
Payable
On April 30, 2020, the Company received
$226,170 under the Paycheck Protection Program of the U.S.
Small Business Administration’s 7(a) Loan Program pursuant to
the Coronavirus, Aid, Relief and Economic Security Act (CARES Act),
Pub. Law 116-136, 134 Stat. 281 (2020). During the year ended
September 30, 2020, the Company recorded interest expense of $960.
The Company is utilizing the funds in accordance with the legal
requirements and expects this loan to be forgiven. Until the loan
is legally forgiven, the loan balance will outstanding. The Company
expects to start the application for the loan forgiveness during
the three months ended December 31, 2020.
11.
|
SIMPLE AGREEMENTS FOR FUTURE EQUITY
|
In July 2020, Particle entered into Simple
Agreements for Future Equity (“SAFE”) with twenty two
accredited investors pursuant to which Particle received $785,000
in cash in exchange for the providing the investor the right to
receive shares of the Particle stock. The Company expects to issue
981,250 shares of the Particle stock that was initially valued at
$0.80 per share. The Company paid $47,100 in broker fees which were
expensed as business development expenses. The SAFE contained a
number of conversion and redemption provisions, including
settlement upon liquidity or
dissolution events. The final price and shares are not known until
settlement upon liquidity or dissolution events conditions are
achieved. The Company elected the fair value option of accounting
for the SAFE.
12.
EQUITY
Authorized
Capital Stock
The Company
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
Authorized
Capital Stock
The Company
authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
As of September 30,
2020, the Company had 24,804,874 shares of common stock issued and
outstanding, held by 123 stockholders of record. The number of
stockholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock
entitles its holder to one vote on each matter submitted to the
stockholders for a vote, and no cumulative voting for directors is
permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by the
Company. As of September 30, 2020, there were options
outstanding for the purchase of 4,805,000 common shares (including
unearned stock option grants totaling 2,630,000 shares related to
performance targets), warrants for the purchase of 20,016,367
common shares, and 8,108,356 shares of the Company’s
common stock issuable upon the conversion of Series C and Series D
Convertible Preferred Stock. In addition, the Company currently has
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and are issuable upon conversion of
convertible debentures of $7,894,566. All of which could
potentially dilute future earnings per share.
Voting
Preferred Stock
The
Company is authorized to issue up to 5,000,000 shares of preferred
stock with a par value of $0.001.
Series A Preferred Stock
There
are 23,334 shares of Series A Preferred shares authorized. Series A
Preferred is entitled to the number of votes equal to the number of
whole shares of common stock into which the shares of Series A
Preferred held by such holder are then convertible as of the
applicable record date. The Series A Preferred was not be
redeemable without the consent of the holder.
On
January 29, 2019, a holder of Series A Preferred Stock converted
20,000 shares into 80,000 shares of common stock. There are no
Series A Preferred Stock outstanding as of January 29,
2019.
On
December 14, 2020, the Company cancelled the Certificate of
Designations for the Series A Preferred Stock.
Series
C and D Preferred Stock and Warrants
On August 5, 2016,
the Company closed a Series C Preferred Stock and Warrant Purchase
Agreement with Clayton A. Struve, an accredited investor for the
purchase of $1,250,000 of preferred stock with a conversion price
of $0.70 per share. The preferred stock has a yield of 8% and an
ownership blocker of 4.99%. In addition, Mr. Struve received a
five-year warrant to acquire 1,785,714 shares of common stock at
$0.70 per share. On August 14,
2017, the price of the Series C
Stock were adjusted to $0.25 per share pursuant to the documents governing such
instruments. On September 30, 2020 and September 30, 2019 there are 1,785,715 Series
C Preferred shares outstanding.
As of September 30, 2020, and September 30, 2019, the Company has
1,016,014 of Series D Preferred
Stock outstanding with Clayton A. Struve, an accredited investor.
On August 14, 2017, the price
of the Series D Stock were
adjusted to $0.25 per share pursuant
to the documents governing such instruments.
The Series D
Preferred Stock is convertible into shares of common stock at a
price of $0.25 per share or by multiplying the number of Series D
Preferred Stock shares by the stated value and dividing by the
conversion price then in effect, subject to certain diluted events,
and has the right to vote the number of shares of common stock the
Series D Preferred Stock would be issuable on conversion, subject
to a 4.99% blocker. The Preferred
Series D has an annual yield of 8% The Series D Preferred
Stock is convertible into shares of common stock at a price of
$0.25 per share or by multiplying the number of Series D Preferred
Stock shares by the stated value and dividing by the conversion
price then in effect, subject to certain diluted events, and has
the right to vote the number of shares of common stock the Series D
Preferred Stock would be issuable on conversion, subject to a 4.99%
blocker. The Preferred Series D has an
annual yield of 8% if and when dividends are
declared.
Series
F Preferred Stock
On
August 1, 2018, the Company filed with the State of Nevada a
Certificate of Designation establishing the Designations,
Preferences, Limitations and Relative Rights of Series F Preferred
Stock. The Designation authorized 500 shares of Series F Preferred
Stock. The Series F Preferred Stock shall only be issued to the
current Board of Directors on the date of the Designation’s
filing and is not convertible into common stock. As set forth in
the Designation, the Series F Preferred Stock has no rights to
dividends or liquidation preference and carries rights to vote
100,000 shares of common stock per share of Series F upon a Trigger
Event, as defined in the Designation. A Trigger Event includes
certain unsolicited bids, tender offers, proxy contests, and
significant share purchases, all as described in the Designation.
Unless and until a Trigger Event, the Series F shall have no right
to vote. The Series F Preferred Stock shall remain issued and
outstanding until the date which is 731 days after the issuance of
Series F Preferred Stock (“Explosion Date”), unless a
Trigger Event occurs, in which case the Explosion Date shall be
extended by 183 days. As of September 30, 2020 and September 30,
2019, there are no Series F shares outstanding.
Securities Subject to Price Adjustments
In the future, if
the Company sells its common stock at a price below $0.25 per
share, the exercise price of 8,108,356
outstanding shares of Series C and D Preferred Stock that adjust
below $0.25 per share pursuant to the documents governing such
instruments. In addition, the conversion price of Convertible Notes
Payable of $7,894,566 or
14,659,764 common shares (9,020,264 common shares at the current
price of $0.25 per share and 5,639,500 common shares at the current
price of $1.00 per share) and the
exercise price of additional outstanding warrants to purchase
12,588,286 shares of common stock would adjust below $0.25 per
share pursuant to the documents governing such instruments.
Warrants totaling 5,191,636 would adjust below $1.20 per share
pursuant to the documents governing such
instruments.
Common Stock
All
of the offerings and sales described below were deemed to be exempt
under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
On November 9,
2019, a former employee exercised stock option grants on a cashless
basis. The former employee received 73,191 shares of common stock
for vested stock option grants. The stock option grant had an
exercise price of $0.25 per share.
During
the year ended September 30, 2020, the Company issued 550,000
shares of restricted common stock for services. The shares were
issued were valued at $1.90 per share, the market price of our
common stock, or $1,045,000.
During the year ended September 30, 2020, the
Company issued 4,581,917 shares
of common stock related to the automatic conversion of
Convertible Notes and interest from a private placement to
accredited investors in 2019. The Convertible Notes and interested
were automatically converted to Common Stock at $1.00 per share on
the one year anniversary starting on February 15,
2020.
During the year ended September 30, 2020, the
Company issued 733,588 shares
of common stock at $0.889 per share related to the exercise of
warrants.
On
July 1, 2020, the Company entered into a Settlement Agreement and
General Mutual Release with a shareholder of the Company. On July
6, 2020, the shareholder paid $125,000 us and we issued 500,000
shares of common stock. We accrued for the loss on debt settlement
of $825,000 as of June 30, 2020 which represents the difference
between the fair market value of the stock and $125,000 paid by the
shareholder.
The
following equity issuances occurred during the year ended September
30, 2019:
During
the year ended September 30, 2019, the Company issued 509,656
shares of common stock at $0.25 per share to consultants and
investors related to the cashless exercise of
warrants.
During
the year ended September 30, 2019, the Company issued 145,000
shares of common stock for services provided by two consultants.
The common stock was valued at the daily trading price of totaling
$246,900 or $1.703 per share.
On
January 2, 2019, the Company issued 100,000 shares of common stock
for services provided to Ronald P. Erickson. The shares were valued
at $102,000 or $1.02 per share.
On January 29,
2019, a holder of Series A Preferred Stock converted 20,000 shares
into 80,000 shares of common stock.
Warrants to Purchase Common Stock
The following warrant transactions occurred during
the year ended September 30, 2020:
During the year ended September 30, 2020, the
Company issued 733,588 shares
of common stock at $0.952 per share and cancelled warrants to
purchase 507,560 shares of
common stock at $$1.120 per share to related to the exercise of
warrants.
During the year ended September 30, 2020, the
Company issued 75,000 shares of
common stock at $1.95 per share. The warrant was valued at $1.770
per share.
Convertible
Debt Offering Warrants
The Warrants issued
for the 2020 convertible Debt Offering were granted on a 1:0.5
basis (one-half Warrant for each full share of Common Stock into
which the Convertible Notes are convertible). The Warrants have a
five-year term and an exercise price equal to 120% of the per share
conversion price of the Qualified Financing or other mandatory
conversion.
Warrants issued in
connection with 2020 convertible debt offering are initially
exercisable for 2,819,750 shares of Common Stock at an exercise
price of $1.20 per share of Common Stock, also subject to certain
adjustments.
In connection with
the 2020 convertible debt offering, the placement agent for the
Convertible Notes and the Warrants received warrants to 615,675
shares of the Company’s common stock, all based on 8% of
gross proceeds to the Company.
The
following warrants were issued during the year ended September 30,
2019:
The
Company cancelled warrants to purchase 70,011 shares of common
stock at $3.08 per share to consultants and investors related to
the cashless exercise of warrants or expiration of
warrants.
The
Company issued warrants to purchase 70,000 shares of common stock
at $1.61 to $2.72 per share to three consultants. The warrants were
valued at $30,325 or $1.989 per share. The warrants expire during
the first quarter of 2024.
The Company increased warrants by 120,000 shares
at $0.25 per shares related to the June 28, 2019 exercise of
warrants by a holder of Series A Preferred
Stock.
Private
Placement Warrants
The Warrants issued
for the private placements discussed above were granted on a 1:0.5
basis (one-half Warrant for each full share of Common Stock into
which the Convertible Notes are convertible). The Warrants have a
five-year term and an exercise price equal to 120% of the per share
conversion price of the Qualified Financing or other mandatory
conversion.
Warrants are
initially exercisable for 2,121,258 shares of Common Stock at an
exercise price of $1.20 per share of Common Stock, also subject to
certain adjustments.
In connection with
the private placement, the placement agent for the Convertible
Notes and the Warrants received warrants to purchase 542,102 shares
of the Company’s common stock, all based on 8-10% of gross
proceeds to the Company.
A summary of the
warrants outstanding as of September 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
17,747,090
|
$0.455
|
Issued
|
3,510,425
|
1.216
|
Exercised
|
(733,588)
|
(0.952)
|
Forfeited
|
(507,560)
|
(1.120)
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
20,016,367
|
$0.556
|
Exerciseable
at end of period
|
20,016,367
|
|
The following table summarizes information about
warrants outstanding and exercisable as of September 30,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,133,286
|
1.76
|
$0.250
|
13,133,286
|
$0.250
|
714,286
|
0.83
|
0.700
|
714,286
|
0.700
|
882,159
|
1.12
|
1.000
|
882,159
|
1.000
|
5,191,636
|
4.12
|
1.20-1.50
|
5,191,636
|
1.20-1.50
|
95,000
|
4.19
|
2.00-4.08
|
95,000
|
2.34-4.08
|
|
|
|
|
|
20,016,367
|
3.04
|
$0.556
|
20,016,367
|
$0.556
|
|
|
|
|
|
The significant
weighted average assumptions relating to the valuation of the
Company’s warrants for the year ended September
30, 2020 were as
follows:
Assumptions
|
|
Dividend
yield
|
0%
|
Expected
life
|
5
years
|
Expected
volatility
|
176%-177%
|
Risk
free interest rate
|
1.51%-1.71%
|
There were vested and in the money warrants
of 19,996,367 with an aggregate
intrinsic value of $35,329,983.
13.
|
STOCK INCENTIVE PLANS
|
Know
Labs, Inc.
On January 23,
2019, the Board approved an amendment to its 2011 Stock Incentive
Plan increasing the number of shares of common stock reserved under
the Incentive Plan from 2,200,000 to 2,500,000 to common
shares. On May 22, 2019, the Compensation Committee approved
an amendment to its 2011 Stock Incentive Plan increasing the number
of shares of common stock reserved under the Incentive Plan from
2,500,000 to 3,000,000 to common shares. See Note 18 for increase
in option pool subsequent to September 30, 2020.
Determining Fair Value under ASC 718
The
Company records compensation expense associated with stock options
and other equity-based compensation using the Black-Scholes-Merton
option valuation model for estimating fair value of stock options
granted under our plan. The Company amortizes the fair value of
stock options on a ratable basis over the requisite service
periods, which are generally the vesting periods. The expected life
of awards granted represents the period of time that they are
expected to be outstanding. The Company estimates the
volatility of our common stock based on the historical volatility
of its own common stock over the most recent period corresponding
with the estimated expected life of the award. The Company bases
the risk-free interest rate used in the Black Scholes-Merton option
valuation model on the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term equal
to the expected life of the award. The Company has not paid any
cash dividends on our common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the
Company uses an expected dividend yield of zero in the
Black-Scholes-Merton option valuation model and adjusts share-based
compensation for changes to the estimate of expected equity award
forfeitures based on actual forfeiture experience. The effect of
adjusting the forfeiture rate is recognized in the period the
forfeiture estimate is changed.
Stock Option Activity
The Company had the following stock option
transactions during the year ended September 30,
2020:
During the year ended September 30, 2020, the
Company granted stock option grants to executives, directors and
consultants for 3,085,000 shares with a weighted average exercise price of
$1.142 per share. The grants expire in five years and generally
vest quarterly over four years. Stock option grants totaling
2,630,000 shares of common stock are
performance stock option grants and are not vested until the
performance is achieved.
During the year ended September 30, 2020,
executives and employees voluntarily cancelled stock option grants
for 2,739,477 shares with a
weighted average exercise price of $2.593 per
share.
On November 9,
2019, a former employee exercised stock option grants on a cashless
basis. The former employee received 73,191 shares of common stock
for vested stock option grants totaling 93,750 shares. The stock
option grant had an exercise price of $0.25 per share.
There are currently 4,805,000 (including unearned stock option
grants totaling 2,630,000 shares related to performance targets)
options to purchase common stock at an
average exercise price of $1.161 per share outstanding as of
September 30, 2020 under the 2011
Stock Incentive Plan. The Company recorded $868,314
and $1,141,674 of compensation
expense, net of related tax effects, relative to stock options for
the years ended September 30, 2020 and 2019 and in accordance with ASC 718. As
of September 30, 2020, there is
approximately $361,947, net of
forfeitures, of total unrecognized costs related to employee
granted stock options that are not vested. These costs are expected
to be recognized over a period of approximately 3.67
years.
The
Company had the following stock option transactions during the year
ended September 30, 2019:
On October 31,
2018, the Board awarded stock option grants to two directors to
acquire 50,000 shares each of the Company’s common stock. The
grants had an exercise price of $3.03 per share and expire on
October 31, 2023. The grants vested immediately.
On October 31,
2018, the Board awarded Phillip A. Bosua a stock option grant to
acquire 1,000,000 shares of the Company’s common which vests
upon approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grants had
an exercise price of $3.03 per share and expire on October 31,
2023.
On October 31,
2018, the Board awarded Ronald P Erickson a stock option grant to
acquire 1,000,000 shares of the Company’s common which vests
upon the Company’s successful listing of its Common Stock on
NASDAQ or the New York Stock Exchange (including the NYSE American
Market). The grant had an exercise price of $3.03 per share and
expires on October 31, 2023.
On March 26, 2019,
the Board awarded two employees stock option grants totaling
260,000 shares of the Company’s common which vests upon
approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grant had
an exercise price of $1.50 per share and expires on March 26,
2024.
During April 2019,
the Board awarded stock option grants to two employees and a
consultant to acquire 185,000 shares of the Company’s common
stock. The grants had an exercise price from $1.39 per share to
$1.90 per share and expire during April 2024. Grants totaling
10,000 common shares vested immediately and grants totaling 50,000
vests quarterly over three years. Grants totaling 125,000 common
shares vest quarterly over four years, with no vesting during the
first six months.
On April 15, 2019,
the Board awarded an employee was granted a stock option grant to
acquire 50,000 shares of the Company’s common which vests
upon approval of the Company’s blood glucose measurement
technology by the U.S. Food and Drug Administration. The grants had
an exercise price of $1.50 per share and expire on April 15,
2024.
During July and
August of 2019, the Board awarded stock option grants to four
consultants to acquire 275,000 shares of the Company’s common
stock. The grants have an exercise price from $1.34 per share to
$1.40 per share and expire during July and August 2024. Grants
totaling 10,000 common shares vested immediately and grants
totaling 50,000 vest quarterly over three years. Grants totaling
15,000 common shares vest monthly over six months. A grant of
100,000 shares of common stock vests quarterly over four years,
with no vesting during the first six months. A grant for 100,000
shares of common stock vests quarterly over four years, with no
vesting during the first six months. A grant for 100,000 shares of
common stock vests upon approval of the Company’s blood
glucose measurement technology by the U.S. Food and Drug
Administration.
During the year
ended September 30, 2019, the Board four employees a stock option
grants to acquire 125,000 shares of the Company’s Common
stock for each $1,000,000 raised by the Company in revenue
generated in a planned Kickstarter campaign at a price range for
$1.50 to $3.03 per share. During the year ended September 30, 2019,
the Company recently decided that it would not undertake a
Kickstarter campaign. Options are expected to be cancelled or have
alternative Company milestones.
During
the year ended September 2019, stock option grants for 520,000
shares of common stock with an exercise price ranging from $3.03 to
$4.20 per share were forfeited.
Stock
option activity for the years ended September 30, 2020 and 2019 was
as follows:
|
|
|
|
|
|
|
|
Outstanding as of
September 30, 2018
|
2,182,668
|
$1.698
|
$3,706,519
|
Granted
|
2,870,000
|
2.615
|
7,504,850
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(520,000)
|
(3.906)
|
(2,031,000)
|
Outstanding as of
September 30, 2019
|
4,532,668
|
2.025
|
9,180,369
|
Granted
|
3,085,000
|
1.142
|
3,522,400
|
Exercised
|
(73,191)
|
(0.250)
|
(18,298)
|
Forfeitures
|
(2,739,477)
|
(2.593)
|
(7,103,921)
|
Outstanding as of
September 30, 2020
|
4,805,000
|
$1.161
|
$5,580,550
|
|
|
|
|
The following table summarizes information about
stock options outstanding and exercisable as of September
30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
|
230,000
|
2.71
|
$0.250
|
129,375
|
$0.250
|
1.10-1.25
|
2,940,000
|
4.10
|
1.10
|
306,250
|
1.103
|
1.28-1.52
|
1,500,000
|
4.10
|
1.33
|
695,313
|
1.310
|
1.79-2.25
|
135,000
|
3.75
|
1.37
|
66,250
|
1.961
|
|
4,805,000
|
3.67
|
$1.161
|
1,197,188
|
$1.158
|
There were in the money stock option grants
of 4,805,000 shares as of
September 30, 2020 with an aggregate intrinsic value of
$5,446,854.
Particle, Inc.
On May 21, 2020,
Particle approved a 2020 Stock Incentive Plan and reserved
8,000,000 shares under the Plan. The Plan requires vesting annually
over four years, with no vesting in the first two
quarters.
During July 2020,
Particle approved stock option grants to non-executive employees
and consultants totaling 2,250,000 shares at an average of $0.147
per share. The stock option grants vest annually over four years,
with no vesting in the first two quarters.
On July 2, 2020,
Particle approved stock option grants for 1,500,000 shares at $0.10
per share to both Phillip A. Bosua and Ronald P. Erickson. The
stock option grants vest (i) 33.3% upon issuance; (ii) 33.3% after
the first sale; and (iii) 33.4% after one million in sales are
achieved. The 500,000 vests stock option grants for both Mr. Bosua
and Erickson were valued at $0.788 per share or
$394,000.
The Company recorded $833,771 and $0 of compensation expense, net of related tax
effects, relative to stock options for the years ended September
30, 2020 and 2019 and in
accordance with ASC 718. As of September 30,
2020, there is approximately
$840,729, net of forfeitures,
of total unrecognized costs related to employee granted stock
options that are not vested. These costs are expected to be
recognized over a period of approximately 3.77
years.
The following table summarizes information about
Particle stock options outstanding and exercisable as of
September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
5,100,000
|
4.76
|
$0.10
|
1,116,170
|
$0.10
|
0.80
|
150,000
|
5.00
|
$0.80
|
-
|
-
|
|
|
|
|
|
|
|
5,250,000
|
4.77
|
$0.12
|
1,116,170
|
$0.10
|
There were in the money stock option grants
of 1,116,170 shares as of
September 30, 2020 with an aggregate intrinsic value of
$758,996.
14.
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OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
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