UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended ended: September 30, 2020
☐ TRANSACTIONTRANSITION REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transactiontransition period from ____________________ to ________
Commission File number
KNOW LABS, INC. | |
(Exact name of registrant as specified in its charter) |
Nevada | 90-0273142 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
500 Union Street, Suite 810, Seattle, Washington | 98101 | |
(Address of principal executive offices) | (Zip Code) |
(206) 903-1351 | ||
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | KNW | NYSE American LLC | ||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ Yes No ☒No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:Act. Yes ☐ Yes No ☒No
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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | ☐ |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 31, 20202022 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, the aggregate market value of the voting and non-voting common equity held by non-affiliates (for this purpose, all outstanding and issued common stock minus stock held by the officers, directors and known holders of 10% or more of the Company’s common stock) was $13,419,023.
As of December 20, 2022, there were a total of 48,157,937 shares of the registrant’s common stock $.001 par value, issued and outstanding as of December 27, 2020: 25,730,224 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
Know Labs, Inc.
Annual Report on Form 10-K
Year Ended September 30, 2022
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of | 30 | |||
Quantitative and Qualitative Disclosures About Market | 37 | |||
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Changes in and Disagreements with Accountants on Accounting and Financial | 37 | |||
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Directors, Executive Officers and Corporate | 40 | |||
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Certain Relationships and Related Transactions, and Director | 55 | |||
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Item 16. | Form 10-K Summary. | |||
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INTRODUCTORY NOTES
Use of Terms
Except as otherwise indicated by the other information containedcontext and for the purposes of this report only, references in this report should be considered carefully in evaluating usto “we,” “us,” “our” and our prospects. “our company” are to Know Labs, Inc., a Nevada corporation, and its consolidated subsidiaries.
Special Note Regarding Forward-Looking Statements
This report (including without limitation the followingcontains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us andcause our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.
· | our goals and strategies; | |
· | our future business development, financial condition and results of operations; | |
· | expected changes in our revenue, costs or expenditures; | |
· | growth of and competition trends in our industry; | |
· | our expectations regarding demand for, and market acceptance of, our products; | |
· | our expectations regarding our relationships with investors, institutional funding partners and other parties with whom we collaborate; | |
· | fluctuations in general economic and business conditions in the markets in which we operate; and | |
· | relevant government policies and regulations relating to our industry. | |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those discussed below in “Risk Factors”listed under Item 1A “Risk Factors” and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this report. ReadersIf one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are urged notbased upon information available to place undue reliance on these forward-looking statements, which speak onlyus as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. We undertakeExcept as expressly required by the federal securities laws, there is no obligationundertaking to revisepublicly update or updaterevise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Trademarks, Trade Names and Service Marks
We own or have rights to trademarks, service marks and trade names that we use in orderconnection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this report are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to reflect any eventin this report are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names. This report may include trademarks, service marks and trade names owned by us or circumstance that may arise afterother companies. All trademarks, service marks and trade names included in this prospectus are the dateproperty of this report.
Overview
We are focused on the development marketing and salescommercialization of proprietary sensor technologies which, when paired with our artificial intelligence, or AI, deep learning platform, are capable of uniquely identifying or authenticatingand measuring almost any substancematerial or materialanalyte using electromagnetic energy to detect, record, detect,identify and identifymeasure the unique “signature” of the substancesaid materials or material.analytes. We call thesethis our “Bio-RFID™”“Bio-RFID” technology platform, when pertaining to radio and “ChromaID™” technologies.
ChromaID was the first technology developed and patented by our company. For the past several years, 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 patentable inventions that are derived from and extend beyond our ChromaID technology. We call this new technology “Bio-RFID.”and intellectual property. 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 primary focus of our sole focuscompany is on itsour Bio-RFID technology and its commercialization.
Corporate History and Structure
Know Labs, Inc. was incorporated under the laws of the State of Nevada in 1998. Since 2007, our company has been focused primarily on research and development of proprietary spectroscopic technologies spanning the electromagnetic spectrum.
On April 30, 2020, we approved and ratified the incorporation ofincorporated Particle, Inc., or Particle, as a Nevada corporation. Aswholly-owned subsidiary in the State of September 30, 2020 we are the sole shareholder but have entered into Simple Agreements for Future Equity to sell separate ownership in Particle.Nevada. Particle is now a direct, 100% owned subsidiary of the Company but our future ownership could be diluted if Particle is successful in raising equity from outside investors. Particle shall utilize the same corporate offices as the Company and shall focusfocused 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 focus.
On September 17, 2021, we incorporated of AI Mind, Inc., or AI Mind, as a wholly-owned subsidiary in the non-invasive measurementState of blood glucose
The Know Labs Technology
We have internally and under contract with third parties developed proprietary platform technologies to uniquely identify or authenticateand measure almost any organic and inorganic material and substance.or analyte. Our patented technology utilizes electromagnetic energy along a wide range of the electromagnetic spectrum from visible light and infrared to radio and microwave wavelengths to perform analytics which allow the user to accurately identify and authenticate substancesmeasure materials and materialsanalytes depending upon the user’s unique applicationspecified targets or endpoints and field of use. Our proprietary platform technologies are called Bio-RFID and ChromaID.
Our latest technology platform, is called Bio-RFID.Bio-RFID, utilizes spectroscopy at higher wavelengths than ChromaID’s optical range to span radio wave and microwave segments of the electromagnetic spectrum. Working in our lab over the past two years, we have developed extensions and new inventions derived in part from our ChromaID technology, which we refer to as Bio-RFID. We believe an important competitive differentiator for Bio-RFID technology.to be its ability to not only identify a wide range of organic and inorganic materials and analytes, but to do so concurrently, and in real time, which potentially enables new multivariate models of clinical diagnostics, and health and wellness monitoring. We are rapidly advancing the development of this technology.technology by increasing its accuracy, sensitivity, and specificity. We have announced detailed results confirming that our Bio-RFID technology haswe have successfully been able to non-invasively ascertainmeasure blood glucose levels in humans. Significantly, we believe Bio-RFID successfully addresses the limiting qualities of optical technologies whose diagnostic capacities may be inhibited by skin tones, skin thickness and other factors.
Our ability to obtain exacting results from the data obtained from our Bio-RFID sensor technology, also referred to as radio frequency spectroscopy or RF spectroscopy, is a consequence of the application of our trade secret algorithms. We have been buildingworked for the last several years on the AI and machine learning, or ML, that drives the accurate pattern recognition of our algorithms. This work has led to the development of a robust AI deep learning platform. This AI deep learning platform drives the data pattern recognition for Bio-RFID’s exacting determination of blood glucose levels. It can also provide the data recognition for blood alcohol and blood oxygen levels which we have also identified in preliminary tests. It will provide the analytics for the long list of other analytes in the human body that we will pursue non-invasive detection of, many of which are set forth in our issued patent USPTO 11,033,208 B1. Our AI deep learning platform may be separately monetized through our subsidiary AI Mind.
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We continue to build the internal and external development team necessary to commercialize thisour 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.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, approvalor FDA, clearance prior to its introduction to the market.
We have also announced the results of internal laboratory-based comparison testing between our Bio-RFID technology and the leading continuous glucose monitors from Abbott Labs (Freestyle Libre®)Libre) and DexCom (G5®)(G6). 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 patented technology is fundamentally differentiated from these industry leaders as our technology completely non-invasively monitors blood glucose levels.
We expecthave begun the internal process to begin the process of obtaining US Food and Drug Administration (FDA)pursue FDA approval of our non-invasive blood glucose monitoring device during calendar year 2021. We will be guidedas soon as possible. To guide us in that undertaking, we previously announced the FDA regulatory approval process by ourhiring of a Chief Medical Officer and our Medicalformed a medical and Regulatory Advisory Board.regulatory advisory board to guide us through the FDA process. Additionally, we have retained third party quality assurance and documentation consultants to ensure that the rigorous requirements of the FDA are met. We are unable, however, to estimate the time necessary for suchFDA approval noror the likelihood of success in that endeavor.
While the first focus of our Bio-RFID platform is non-invasive glucose monitoring, it is important to note that our KnowU and the UBand devices have the capacity to monitor and identify other analytes in the human body with a relatively simple software modification. Each additional analyte we identify over time will require its own subsequent FDA approval, the success of which we are unable to estimate at this time.
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. We may out license our
Bio-RFID, ChromaID technology for various fields of use or, over time, internally develop applications based upon this technology.
Our Bio-RFID and ChromaID technologies provide a unique 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 believeswe believe 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 identify and monitor changes in the presence and quantity of blood glucose in the human body. By extension, there may be other analytes or molecular structures which this same technology can identityidentify in the human body which, over time, the Company willwe intend to focus upon.on. They may include the monitoring of drug usage or the presence of illicit drugs. They may also involve identifying hormones and various markersbiomarkers of disease or pre-conditions 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.
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The AI deep learning platform is an enabling technology which can identify patterns from data gathered from both the Bio-RFID and ChromaID platform technologies. The AI deep learning platform is critical to our ability to identify accurately blood glucose levels and other analytes in the human body. Over time, utilizing our AI deep learning platform, we plan to develop analytics which, when using data collected from our sensors, will provide useful information on health and wellness to end users, and potentially lead to what we call “Predictive Health.” In addition to identifying patterns, the inverse is also possible as our AI deep learning platform can also create patterns in the form of 3D graphical images. That activity has found its first form in the work of our subsidiary, AI Mind, to generate beautiful 3D graphical images which were sold as non-fungible tokens, or NFTs, providing revenue in the first quarter of fiscal year 2022. NFT sales from images created by our AI deep learning platform were the result of a one-time successful experiment. We do not expect future activity or revenue from that source.
Product Strategy
We are currently undertaking internal development work on potential products for the commercial marketplace. We have announced the development of our non-invasive glucose monitor and our desire to obtain FDA clearance for the marketing of this product. 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, testing, 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, through third party validation studies, appropriate and required clinical trials and into the marketplace. At this point in our development cycle the sensor hardware is completed, the product form factor is nearing completion, and the algorithms which provide accurate results from the data collected by our sensor are in the final development stages.
Our subsidiary, Particle, continues to seek a strategic distribution partner or partners to move its virus deactivating light bulb into the global marketplace. Our subsidiary, AI Mind, will, over time, look at additional ways to monetize our AI deep learning platform.
Sales and Marketing
While we continue with our internal development efforts and the move toward FDA approved clinical trials and expected (but not guaranteed) clearance of our first product, a non-invasive blood glucose monitoring device, we will explore the several potential avenues for moving our first product and potential follow on products into the marketplace. The avenues being explored include direct to consumer, initial launch partners, broad distribution partners, licensing partners and private label approaches to the market among others. We have begun to build our internal sales and marketing team in preparation for detailed strategic thinking about the optimal approach to the marketplace.
Competition
We group the competition into three large categories. Those are (i) large global technology companies who may enter the blood glucose monitoring and other medical diagnostic markets, (ii) legacy providers of blood glucose monitoring technology, and (iii) new entrants working to achieve a non-invasive solution or more acceptable blood glucose monitoring solution which may or may not be similar to our technology. With regard to companies in each category, we perform due diligence from all publicly available sources of information on their relevant technologies and their product plans. This information informs and refines our activities and underscores our sense of urgency as we work to bring our own technology to the marketplace. The addressable market is very large and there is room for a multitude of providers of blood glucose monitoring services. Of note, we believe few, if any, of the competitors in the blood glucose monitoring space possess a platform technology competitive with our Bio-RFID technology and our ability to identify a multitude of analytes in the human body.
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Competitive Advantages
We believe our key competitive strengths include:
· | Through first principles, Bio-RFID’s ability to not only identify a wide range of organic and inorganic materials and analytes, but to do so concurrently, and in real time, which potentially enables new multivariate models of clinical diagnostics, and health and wellness monitoring. | |
· | Our Bio-RFID technology is non-invasive, using radio waves to identify and measure what is going on inside the body in real-time | |
· | Our Bio-RFID technology platform can be integrated into a variety of wearable, mobile or counter-top form factors, as well as interoperability with existing products from current market leaders. | |
· | No needles nor invasive transmitters in your body, making Bio-RFID sensors convenient and pain-free. | |
· | No expensive supplies, such as test strips and lancets, are required to operate Bio-RFID devices. | |
Growth Strategy
The key elements of our strategy to grow our business include:
· | Initially, entering the diabetes continuous glucose monitoring market with our non-invasive continuous glucose monitoring products. | |
· | Following our entry into the continuous glucose monitoring market, entering other clinical monitoring markets for continuous, non-invasive hormone, medication metabolite, endocrinology components and biomolecular monitoring. | |
· | Applying our Bio-RFID platform technology to lifestyle analysis, clinical trials and chronic illnesses. We believe that potential use cases include real time wearable medication monitoring and detection of, for example, ovulation and hormone deficiency. | |
· | Significantly, every new application will function utilizing the same sensor. You will not need a new device, simply a new software algorithm. | |
· | Each new application provides new opportunities for monetization of the Bio-RFID platform technology. | |
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 and the AI deep learning platform that drives its analytics. 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 $5,385,586 and $3,969,972 for the years ended September 30, 2022 and 2021, respectively, on development activities.
Our wholly owned subsidiary, Particle, was focused on the development and commercialization of our extensive intellectual property relating to electromagnetic energy outside of the medical diagnostic arena which remains our singular focus. Since its 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. Particle is now looking for partners to commercialize this product.
Our wholly owned subsidiary, AI Mind, is focused on opportunities to monetize our AI deep learning platform over time. It is unlikely we will repeat the successful experiment with AI created art that sold as NFT in late 2021.We will, however, over time, continue to look for opportunities for new applications on our AI deep learning platform, to generate revenues to support the continued development of our non-invasive diagnostic technology.
Intellectual Property
The cornerstone of a company with aour foundational platform technology is itsour intellectual property.property portfolio. We have pursued an active intellectual property strategy which includes focus on patents where appropriate and a diligent protection of trade secrets. To date, we have been granted 1427 patents and 19 design patents. We currently have a number of patents pending and continue, on a regular basis, with the filing of new patents. We possess all right,rights, 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.
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Our issued patents will expire at various times between 2027 and 2039.2041. 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 Labsour ChromaID and Bio-RFID 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, over time, to expand our patent portfolio.
Additionally, significant aspects of our technology are maintained as trade secrets which may not be disclosed through the patent filing process. We intend to beare diligent in maintaining and securing our trade secrets.
Related Patent Assets
Inherent in a platform technology is the ability to Know Labsdevelop or license technology in diverse fields of use apart from our core focus. We focus on human health and their dateswellness with a first focus on the non-invasive monitoring of issuance are:
We expect although we cannot guarantee that we will create other such subsidiaries over time. Additionally, we may license our intellectual property to third parties so that they may pursue activities that are currently undertaking internal development work on potential products for the consumer marketplace. We have announced the developmentnot a part of our non-invasive glucose monitor and our desire to obtain US Food and Drug Administration approval for the marketingcore focus.
Employees
As 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.
Government Regulation
United States
Our medical diagnostic products and operations, initially the KnowU and UBand glucose monitoring products, are subject to extensive and rigorous regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations, guidance documentation, and standards. Our KnowU and UBand products will be regulated by the FDA as necessary.
Under the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness.
Class I devices are those for which safety and effectiveness can be assured by adherence to FDA’s “general controls” for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.
Class II devices are subject to FDA’s general controls, and any other “special controls” deemed necessary by FDA to ensure the safety and effectiveness of the device, such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or post-market surveillance. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure, though certain Class II devices are exempt from this premarket review process. When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is “substantially equivalent” to a legally marketed device, which in some cases may require submission of clinical data. Unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. If the FDA determines that the device, or its intended use, is not substantially equivalent to a legally marketed device, the FDA will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill much more rigorous premarketing requirements.
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Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device. The safety and effectiveness of Class III devices cannot be assured solely by general or special controls. Submission and FDA approval of a premarket approval, or PMA, application is required before marketing of a Class III device can proceed. As with 510(k) submissions, unless subject to an exemption, PMA submissions are subject to user fees. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is safe and effective, must be supported by extensive data, typically including data from preclinical studies and human clinical trials.
510(k) Clearance
To obtain 510(k) clearance for a medical device, an applicant must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate device.” A legally marketed predicate device may include a device that was legally marketed prior to May 28, 1976 for which a PMA is not required (known as a “pre-amendments device” based on the date of enactment of the Medical Device Amendments of 1976), a device that has been reclassified from Class III to Class II or Class I, or a device that was found substantially equivalent through the 510(k) process. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics, or (ii) different technological characteristics, but the information provided in the 510(k) submission demonstrates that the device does not raise new questions of safety and effectiveness and is at least as safe and effective as the predicate device. A showing of substantial equivalence sometimes, but not always, requires clinical data.
Before the FDA will accept a 510(k) submission for substantive review, the FDA will first assess whether the submission satisfies a minimum threshold of acceptability. If the FDA determines that the 510(k) submission is incomplete, the FDA will issue a “Refuse to Accept” letter which generally outlines the information the FDA believes is necessary to permit a substantive review and to reach a determination regarding substantial equivalence. An applicant must submit the requested information before the FDA will proceed with additional review of the submission. Once the 510(k) submission is accepted for review, by regulation, the FDA has 90 days to review and issue a determination. As a practical matter, clearance often takes longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The determination as to whether or not a modification could significantly affect the device’s safety or effectiveness is initially left to the manufacturer using available FDA guidance. Many minor modifications today are accomplished by a “letter to file” in which the manufacture documents the rationale for the change and why a new 510(k) is not required. However, the FDA may review such letters to file to evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.
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PMA Approval
A PMA must be submitted to the FDA for any device that is classified in Class III or otherwise cannot be cleared through the 510(k) process (although the FDA has discretion to continue to allow certain pre-amendment Class III devices to use the 510(k) process). PMA applications must be supported by, among other things, valid scientific evidence demonstrating the safety and effectiveness of the device, which typically requires extensive data, including technical, preclinical, clinical and manufacturing data. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA application, once the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will formally accept the application for review. The FDA, by statute and by regulation, has 180-days to review an “accepted” PMA application, although the review of an application more often occurs over a significantly longer period of time, and can take up to several years. During the review period, the FDA will typically request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the QSR.
If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted. Once granted, PMA approval may be withdrawn by the FDA if compliance with post-approval requirements, conditions of approval or other regulatory standards is not maintained or problems are identified following initial marketing.
In approving a PMA, the FDA may also require some form of post-market surveillance when necessary to protect the public health or to provide additional safety and effectiveness data for the device. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients.
New PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of a PMA-approved device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.
De Novo Classification
Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed.
It is our current belief that our initial product is appropriate for a de novo classification request.
Breakthrough Devices Program
The Breakthrough Devices Program is a voluntary program for certain medical devices and device-led combination products that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions.
The goal of the Breakthrough Devices Program is to provide patients and health care providers with timely access to these medical devices by speeding up their development, assessment, and review, while preserving the statutory standards for premarket approval, 510(k) clearance, and De Novo marketing authorization, consistent with the FDA’s mission to protect and promote public health.
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The Breakthrough Devices Program replaces the Expedited Access Pathway and Priority Review for medical devices. The FDA considers devices granted designation under the Expedited Access Pathway to be part of the Breakthrough Devices Program.
We may pursue the Breakthrough Devices Program.
Clinical Studies
When FDA clearance or approval of a Class I, Class II or Class III device requires human clinical trials, and if the device presents a “significant risk” to human health, the device sponsor is required to file an IDE application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant risk,” IDE submission to FDA is not required. Instead, only approval from the Institutional Review Board overseeing the investigation at each clinical trial site is required. Human clinical studies are generally required in connection with approval of Class III devices and may be required for Class I and II devices. The FDA or the Institutional Review Board at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States.
Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
· | product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; | |
· | QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process; | |
· | labeling regulations and FDA prohibitions against the promotion of products for uncleared or unapproved “off-label” uses; | |
· | clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; | |
· | approval of product modifications that affect the safety or effectiveness of one of our approved devices; | |
· | medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur; | |
· | post-approval restrictions or conditions, including post-approval study commitments; | |
· | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; | |
· | the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; | |
· | regulations pertaining to voluntary recalls; and | |
· | notices of corrections or removals. | |
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved or uncleared use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved or uncleared use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged, and adoption of the products would be impaired.
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Furthermore, our products could be subject to voluntary recall if we or the FDA determine, for any reason, that our products pose a risk of injury or are otherwise defective. Moreover, the FDA can order a mandatory recall if there is a reasonable probability that our product would cause serious adverse health consequences or death.
The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of some of our subcontractors. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:
· | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; | |
· | unanticipated expenditures to address or defend such actions; | |
· | customer notifications for repair, replacement, refunds; | |
· | recall, detention or seizure of our products; | |
· | operating restrictions or partial suspension or total shutdown of production; | |
· | refusing or delaying our requests for 510(k) clearance or PMA approval of new products or modified products; | |
· | withdrawing 510(k) clearances or PMA approvals that have already been granted; | |
· | refusal to grant export approval for our products; or | |
· | criminal prosecution. | |
International
International sales are subject to regulatory requirements in the countries in which our products may be sold. The regulatory review process varies from country to country and may in some cases require the submission of clinical data. We are not currently actively pursuing approval of our product outside of the United States.
ITEM 1A. RISK FACTORS.
An investment in our common stock trades oninvolves a high degree of risk. You should carefully read and consider all of the OTCQB Exchange underrisks described below, together with all of the symbol “KNWN.” On May 1, 2018, we filed a corporate actionother information contained or referred to in this report, before making an investment decision with FINRArespect 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
Risks Related to Pandemics
The near-term effects of the recent COVID-19 coronavirus pandemic are known, as they adversely affected our business. LongerSome longer term effects, such as supply chain issues and inflation, are not immediatelybecoming known and may adversely affect our business, results of operations, financial condition, liquidity and cash flow.
On January 30, 2020, the World Health Organization announced a global health emergency caused by a new strain of the coronavirus, or COVID-19, and advised of the risks to the international community as the virus spread globally. In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The spread of COVID-19 caused public health officials to recommend precautions to mitigate the spread of the virus, especially as to travel and congregating in large numbers. Over time, the incidence of COVID-19 and its variants has diminished although periodic spikes in incidence occur. Consequently, restrictions imposed by various governmental health organizations may change over time. Several states have lifted restrictions only to reimpose such restrictions as the number of cases rise and new variants arise.
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Over the past two years, 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. We have witnessed supply chain related delays and increasing costs due to inflation. It is difficult to predict what other adverse effects, if any, COVID-19 and related matters can have on our business, or against the various aspects of same.
We may experience long-term disruptions to our operations resulting from changes in government policy or guidance; quarantines of the date of this Annual Report, COVID-19 coronavirus has been declared a pandemicemployees, customers and suppliers in areas affected by the World Health Organization, has been declared a National Emergency bypandemic and the United States Governmentpresence of new variants of COVID-19; and has resulted in several states being designated disaster zones. COVID-19 coronavirus caused significant volatility in global markets. The spreadclosures of COVID-19 coronavirus has caused public health officialsbusinesses or manufacturing facilities critical to recommend precautionsits business or supply chains. We are actively monitoring, and will continue to mitigateactively monitor, the spread ofpandemic and 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.
We are hopeful that COVID-19 closures will have only a limited effect on our operations and revenues.
National securities markets in the United States and worldwide national securities markets have undergone unprecedented stress in recent years due to, among other things, uncertainties surrounding the COVID-19 pandemic, uncertainties ofsurrounding the pandemicmilitary conflict in Ukraine, uncertainties regarding the economy and increasing inflation, and the resulting reactions and outcomes of government, businessgovernments, businesses 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 hasthese matters have stabilized, the markets may not be available to us 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.
We may 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.loss and using substantial cash to fund our operation. We believe that our cash on hand will be sufficient to fund our operations through September 2021.
We need to continue as a going concern if our business is to succeed.
We have cash and cash equivalents of $12,593,692 and net working capital of approximately $11,040,123 (exclusive of convertible notes payable) as of September 30, 2022. We anticipate that we will record losses from operations for the foreseeable future. We believe that we have enough available cash to operate until December 31, 2023. As of September 30, 2022, our accumulated deficit was $101,397,738. We intend to seek additional cash via equity and debt offerings.
On September 20, 2022, we completed a public offering of our recurring lossescommon stock pursuant to which we sold 4,140,000 shares of common stock, at a purchase price of $2.00 per share, for total gross proceeds of $8,280,000. After deducting underwriting commissions and negativeother offering expenses, we received net proceeds of $7,424,679.
The proceeds of warrants currently outstanding, which could be exercised on a cash flows from operations, the audit reportbasis, may generate potential proceeds of our independent registered public accountants on our consolidated financial statements for the year ended up to $15,694,288. We cannot provide assurance that any of these warrants will be exercised.
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As of 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. If2022, 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.
We owe $2,550,066 under various convertible promissory notes as of September 30, 2022 including $1,184,044 owed to entities controlled by Ronald P. Erickson, our current chairman,Chairman. Mr. Erickson and/or entities with which he is affiliated also have accounts payable and accrued compensation, travel and interestliabilities $295,418 of approximately $
We have a history of operating losses and there can be no assurance that we can achieve or maintain profitability.
We have experienced net losses since inception. As of
September 30,We may not be able to generate sufficient revenue from the commercialization of our ChromaID and Bio-RFID and Particle technologiestechnology 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 and Particle technologies,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.
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 and Particle technologiestechnology 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 and Particle technologiestechnology and related products are an attractive alternative to existing electromagnetic and light-based technologies. We will need to demonstrate that our products provide accurate and cost-effective alternatives to existing electromagnetic and 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.
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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 wesubsidiaries have material weaknesses in our internal controls over financial reporting and that our disclosure controls and procedures are not effective.
Particle Inc. subsidiary was incorporated April 30, 2020 and has no operating history.
To date, we have generated no revenue from Particle. WeParticle and 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
AI Mind was incorporated on September 17, 2021. It generated its first revenues during the first quarter of fiscal 2022 from its initial commercialization efforts related to the generation of NFT’s. There can be no assurance that it will continue to generate revenues nor be successful in continuing its marketing of parent company assets. These assets rely on fundamental trade secrets which at this time are proprietary yet not protected by any pending patents. It may not be possible to protect these trade secrets which would impact the ability of AI Mind to continue to generate revenues.
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, Philfor Mr. 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.
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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 theThere can be no assurance that:
· | any of our existing patents will continue to be held valid, if challenged; | |
· | patents will be issued for any of our pending applications; | |
· | any claims allowed from existing or pending patents will have sufficient scope or strength to protect us; | |
· | 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 | |
· | 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.
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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 not been engaged in litigation andbut litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. A successful claim of intellectual property infringement against us and our failure or inability to license the infringed technology or develop or license technology with comparable functionality could have a material adverse effect on our business, financial condition and operating results.
If we are unable to secure a sales and marketing partner or establish satisfactory sales and marketing capabilities at Know Labs and Particle,our company, we may not be able to successfully commercialize our technology.
If we are not successful entering into appropriate collaboration arrangements or recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing our technology, which would adversely affect our business, operating results and financial condition.
We may not be able to enter into collaboration agreements on terms acceptable to us or at all. In addition, even if we enter into such relationships, we may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties. If we elect to establish a sales and marketing infrastructure, we may not realize a positive return on this investment. In addition, we must compete with established and well-funded pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. Factors that may inhibit our efforts to commercialize technology without strategic partners or licensees include:
· | our inability to recruit and retain adequate numbers of effective sales and marketing personnel; |
· | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and |
· | unforeseen costs and expenses associated with creating an independent sales and marketing organization. | |
We may engage in acquisitions, mergers, strategic alliances, joint ventures and divestures that could result in final results that are different than expected
.In the normal course of business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. Such transactions are accompanied by a number of risks, including the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, the possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition, and various potential difficulties involved in integrating acquired businesses into our operations.
From time to time, we have also engaged in discussions with candidates regarding the potential acquisitions of our product lines, technologies and businesses. If a divestiture such as this does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser; identify and separate the intellectual property to be divested from the intellectual property that we wish to retain; reduce fixed costs previously associated with the divested assets or business; and collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or divestiture transaction, our financial position, results of operations, cash flows and stock price could be negatively impacted.
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We have made strategic acquisitions in the past and may do so in the future, and if the acquired companies do not perform as expected, this could adversely affect our operating results, financial condition and existing business.
We may continue to expand our business through strategic acquisitions. The success of any acquisition will depend on, among other things:
· | the availability of suitable candidates; |
· | higher than anticipated acquisition costs and expenses; |
· | competition from other companies for the purchase of available candidates; |
· | our ability to value those candidates accurately and negotiate favorable terms for those acquisitions; |
· | the availability of funds to finance acquisitions and obtaining any consents necessary under our credit facility; |
· | the ability to establish new informational, operational and financial systems to meet the needs of our business; |
· | the ability to achieve anticipated synergies, including with respect to complementary products or services; and |
· | the availability of management resources to oversee the integration and operation of the acquired businesses. | |
We may not be successful in effectively integrating acquired businesses and completing acquisitions in the future. We also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions. Acquired businesses may fail to meet our performance expectations. If we do not achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or analysts may not perceive the same benefits of the acquisition as we do. If these risks materialize, our stock price could be materially adversely affected.
Government regulatory approval may be subsequently adopted bynecessary before some of our products can be sold and there is no assurance such approval will be granted.
Our technology may have a number of potential applications in fields of use which will require prior governmental regulatory approval before the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.
We or our manufacturers may be unable to obtain or maintain international regulatory clearances or approvals for our current or future products, or our distributors may be unable to obtain necessary qualifications, which could harm our business.
Sales of the Know Labsour products internationally are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the U.S. Complying with international regulatory requirements can be an expensive and time-consuming process, and marketing approval or clearance is not certain. The time required to obtain clearances or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may rely on third-party distributors to obtain regulatory clearances and approvals required in other countries, and these distributors may be unable to obtain or maintain such clearances or approvals. Our distributors may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or clearances, which could increase the difficulty of attracting and retaining qualified distributors. If our distributors experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the U.S., or if they fail to receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements in international markets effectively, or at all.
Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products outside of the U.S., we may be subject to rigorous international regulation in the future. In these circumstances, we would be required to rely on our foreign independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our product in foreign countries.
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Cybersecurity risks and cyber incidents could result in the compromise of confidential data or critical data systems and give rise to potential harm to customers, remediation and other expenses, expose us to liability under consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business and operations.
Cyber incidents can result from deliberate attacks or unintentional events. We collect and store on our networks sensitive information, including intellectual property, proprietary business information and personally identifiable information of our customers. The secure maintenance of this information and technology is critical to our business operations. We have implemented multiple layers of security measures to protect the confidentiality, integrity and availability of this data and the systems and devices that store and transmit such data. We utilize current security technologies, and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, threats from malicious persons and groups, new vulnerabilities and advanced new attacks against information systems create risk of cybersecurity incidents. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.
These threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to state-sponsored attacks. Cyber threats may be generic, or they may be custom crafted against our information systems. Over the past several years, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data privacy or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff.
There can be no assurance that we will not be subject to cybersecurity incidents that bypass our security measures, impact the integrity, availability or privacy of personal health information or other data subject to privacy laws or disrupt our information systems, devices or business, including our ability to deliver services to our customers. As a result, cybersecurity, physical security and the continued development and enhancement of our controls, processes and practices designed to protect our enterprise, information systems and data from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cybersecurity vulnerabilities.
We are subject to corporate governance and internal control requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements could adversely affect our business.
We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the Securities and Exchange Commission, or the SEC, and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.
We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters in the future. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.
Risks Related to Ownership of Our Common Stock
We may not be able to maintain a listing of our common stock on NYSE American.
Our common stock is currently listed on NYSE American. We must meet certain financial and liquidity criteria to maintain the listing of our common stock on NYSE American. If we fail to meet any listing standards or if we violate any listing requirements, our common stock may be delisted. In addition, our board of directors may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our common stock from NYSE American may materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. The delisting of our common stock could significantly impair our ability to raise capital and the value of your investment.
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The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:
· | Announcements by us regarding liquidity, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments and litigation; | |
· | Issuance of convertible or equity securities and related warrants for general or merger and acquisition purposes; | |
· | Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes; | |
· | Sale of a significant number of shares of our common stock by stockholders; | |
· | General market and economic conditions; | |
· | Quarterly variations in our operating results; | |
· | Investor and public relation activities; | |
· | Announcements of technological innovations; | |
· | New product introductions by us or our competitors; | |
· | Competitive activities; | |
· | Low liquidity; and | |
· | Additions or departures of key personnel. | |
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition, and results of operations.
The sale of a significant number of our shares of common stock could depress the price of our common stock.
As of September 30, 2022, we had 48,156,062 shares of common stock issued and outstanding. As of September 30, 2022, there were options outstanding for the purchase of 20,792,370 common shares (including unearned stock option grants totaling 9,704,620 shares related to performance targets), warrants for the purchase of 21,786,313 common shares, and 8,108,356 shares of our common stock issuable upon the conversion of Series C and Series D Convertible Preferred Stock. In addition, we currently have 9,020,264 common shares at the current price of $0.25 per share reserved and are issuable upon conversion of convertible debentures of $2,255,066. All of which could potentially dilute future earnings per share but are excluded from the September 30, 2022, calculation of net loss per share because their impact is antidilutive.
Significant shares of common stock are held by our principal stockholders, other company insiders and other large stockholders. As “affiliates,” as defined under Rule 144 under the Securities Act, our principal stockholders, other of our insiders and other large stockholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible preferred stock could result in further dilution to common stockholders and may affect the market price of the common stock.
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Future capital raises or other issuances of equity or debt securities may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
Pursuant to our articles of incorporation, we are authorized to issue 200,000,000 shares of common stock. To the extent that common stock is available for issuance, subject to compliance with applicable stock exchange listing rules, our board of directors has the ability to issue additional shares of common stock in the future for such consideration as the board of directors may consider sufficient. The issuance of any additional shares could, among other things, result in substantial dilution of the percentage ownership of our stockholders at the time of issuance, result in substantial dilution of our earnings per share and adversely affect the prevailing market price for our common stock.
Pursuant to our articles of incorporation, we are also authorized to issue 5,000,000 shares of blank check preferred stock. Any preferred stock that we issue in the future may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of our common stock to current stockholders and could adversely affect the market price, if any, of our common stock. In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although we have no present intention to issue any shares of authorized preferred stock, there can be no assurance that we will not do so in the future.
In the future, we may also attempt to increase our capital resources by offering debt securities. These debt securities would have rights senior to those of our common stock and the terms of the debt securities issued could impose significant restrictions on our operations, including liens on our assets.
Because our decision to issue securities or incur debt in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financing. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. Thus, you will bear the risk of our future offerings reducing the value of your shares and diluting your interest in us.
The exercise prices of certain warrants, and the conversion prices of our outstanding convertible notes payable and our preferred stock may require further adjustment.
If in the future, if we sell our common stock at a price below $0.25 per share, the conversion price of our outstanding shares of series C convertible preferred stock and series D convertible preferred stock would adjust below $0.25 per share pursuant to the documents governing such instruments. In addition, the conversion price of the convertible promissory notes referred to above and the exercise price of certain outstanding warrants to purchase 10,154,381 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Warrants totaling 4,439,707 would adjust below $1.20 per share and warrants totaling 4,465,294 would adjust below $2.40 per share, in each case pursuant to the documents governing such instruments.
If our 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 do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
If securities industry analysts do not publish research reports on us, or publish unfavorable reports on us, then the market price and market trading volume of our common stock could be negatively affected.
Any trading market for our common stock may be influenced in part by any research reports that securities industry analysts publish about us. We do not currently have and may never obtain research coverage by securities industry analysts. If no securities industry analysts commence coverage of us, the market price and market trading volume of our common stock could be negatively affected. In the event we are covered by analysts, and one or more of such analysts downgrade our common stock, or otherwise reports on us unfavorably, or discontinues coverage of us, the market price and market trading volume of our common stock could be negatively affected.
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If our securities become subject to the penny stock rules, it would become more difficult to trade our common stock.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on NYSE American or another national securities exchange and if the price of our common stock is less than $5.00, our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their common stock.
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
Our articles of incorporation, our bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Corporate Offices
On April 13, 2017, we leased our executive office located at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101. We lease 943 square feet and the current net monthly payment is $2,672.$3,334. The monthly payment increases approximately 3% each year and the lease expiresexpired on May 31, 2022.
Lab Facilities and Executive Offices
On February 1, 2019,May 18, 2021, we leased ourentered into a lease for its lab facilities and executive offices located at 915914 E Pine Street, Suite 212, Seattle, WA 98122. We lease98122 and leased 2,642 square feet and thefeet. The net monthly lease payment is $8,256. The monthly paymentwas $8,697 and increases approximatelyby 3% on July 1, 2019 and annually thereafter.annually. The lease expires on June 30, 2024. The lease can be extended for one additional three year term.
On October 11, 2021, we entered into the First Amendment of Lease and added 2,485 square feet for $5,000 per month. On September 20, 2022, we entered into the Second Amendment of Lease and added additional space. The expanded space will be utilized for research and testing. The Amendment of Lease expires on December 31, 2023.
On September 22, 2022, we leased lab facilities and executive offices at 58969 Carmelita Circle, Yucca Valley, CA 92284 from Phillip Bosua, our CEO. We lease 1,700 square feet of the total 2,134 square feet of the premises and the current net monthly payment is $7,000. The lease expires September 30, 2023 and can be extended.
On June 26, 2020,November 22, 2022, we leased our temporaryadditional lab facilities located at 3131 Western Avenue,123 Boylston Ave, Suite A350,C, Seattle, WA 98121.98102. We leased 5,707lease 1,800 square feet and the current net monthly payment is $11,414.$2,250. The lease expires on June 30, 2021 and was terminated on August 31, 2020.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become a party toinvolved in various lawsuits and legal proceedings arisingwhich arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a party to any pending legal proceeding that is not ordinary routine litigation incidental tomaterial adverse effect on our business.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on NYSE American under the symbol “KNW” on September 16, 2022.
Number of Holders of our Common Shares
As of December 20, 2022, there were approximately 186 stockholders of record of our common stock. In computing the number of holders of record of our common stock, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the near future. We may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. See also Item 1A “Risk Factors—Risks Related Ownership of Our Common Stock— We do not anticipate paying any cash dividends on our capital stock in the foreseeable future.”
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Recent Sales of Unregistered Securities
During the three months ended September 30, 2022, we had the following sales of unregistered sales of equity securities:
We issued 181,738 shares of common stock related to the exercise of warrants and received $44,000.
We issued 17,543 shares related to the exercise of stock option grants and received $13,000.
We issued 14,634 shares to vendors for services which were valued at $2.05 per share.
Authorized Capital Stock
The Companyfollowing description summarizes important terms of the classes of our capital stock as of September 30, 2022. This summary does not purport to be complete and is qualified in its entirety by the provisions of our articles of incorporation as amended, restated and supplemented to date, or our articles of incorporation, and our second amended and restated bylaws, or our bylaws, which have been filed as exhibits to the registration statement of which this prospectus is a part.
Our authorized 105,000,000capital stock currently consists of 205,000,000 shares, consisting of 200,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares of preferred stock, par value $0.001 per share.
As of September 30, 2020, we had 24,804,8742022, there were 48,156,062 shares of common stock, 1,785,715 shares of series C preferred stock and 1,016,014 shares of series D preferred stock issued and outstanding, held by 123 stockholders of record. outstanding.
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Common Stock
Voting Rights. The number of stockholders, including beneficial owners holding shares through nominee names, is approximately 2,300. Each shareholders of common stock entitles its holderare entitled to one vote for each share held of record on each matterall matters submitted to the stockholders for a vote of the stockholders. Under our articles of incorporation and no cumulative votingbylaws, any corporate action to be taken by vote of stockholders other than for election of directors is permitted.shall be authorized by the affirmative vote of the majority of votes cast. Directors are elected by a plurality of votes. Stockholders do not have cumulative voting rights.
Dividend Rights. Subject to preferences that may be applicable to any preemptive rightsthen-outstanding preferred stock, holders of common stock are entitled to acquire additional securities issuedreceive ratably those dividends, if any, as may be declared from time to time by the Company. Asboard of September 30, 2020, there were options outstandingdirectors out of legally available funds.
Liquidation Rights. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the purchasepayment of 4,805,000 common shares (including unearned stock option grants totaling 2,630,000 shares relatedall of our debts and other liabilities and the satisfaction of any liquidation preference granted to performance targets), warrants for the purchaseholders of 20,016,367 common shares, and 8,108,356any then-outstanding shares of the Company’spreferred stock.
Other Rights. Holders of common stock issuable uponhave no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the conversioncommon stock. The rights, preferences and privileges of Series Cthe holders of common stock are subject to, and Series D Convertible Preferred Stock. In addition,may be adversely affected by, the Company currently has 14,659,764 commonrights of the holders of shares (9,020,264 common shares at the current price of $0.25 per share and 5,639,500 common shares at the current priceany series of $1.00 per share) reserved and are issuable upon conversion of convertible debentures of $7,894,566. All of which could potentially dilute future earnings per share but are excluded from the September 30, 2020 calculation of net loss per share because their impact is antidilutive.
Preferred Stock
Our articles of incorporation authorize our board to issue up to 5,000,000 shares of preferred stock with a par value of $0.001.
Series C Convertible Preferred Stock
Ranking. With respect to dividend rights and rights on liquidation, winding up and dissolution, our series C preferred stock ranks senior to our common stock.
Voting Rights. Each holder of series C preferred stock shall have the right to cast one vote per share of our common stock that would be issuable to such holder upon the conversion of all the shares of series C preferred stock and shall be entitled to notice of any stockholders’ meeting in accordance with our bylaws and are entitled to vote upon such matters and in such manner as may be provided by law. The holders of the series C preferred stock and common stock shall vote together as a single class on all matters.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, after the satisfaction in full of the debts of our company and the payment of any liquidation preference owed to the holders of any securities senior to the series C preferred stock, the holders of our series C preferred stock shall participate pari passu with the holders of our common stock (on an as-converted basis) in the net assets of our company. Neither the consolidation nor merger of our company into or with any other entity or entities nor the consolidation or merger of any entity or entities into our company shall be deemed to be a liquidation, but the sale, lease or conveyance of all or substantially all our assets shall be deemed a liquidation.
Dividend Rights. Each outstanding share of series C preferred stock will accrue cumulative dividends at a rate equal to 8.0% per annum of the series C preferred stock stated value, $0.70, subject to adjustment as provided in the series C preferred stock certificate of designation. Dividends will be payable with respect to any shares of series C preferred stock upon any of the following: (a) upon conversion of such shares in accordance with the provisions of the Series C preferred stock certificate of designation and (b) when, as and if otherwise declared by our board of directors. In the event that we shall at any time pay a dividend on our common stock (other than a dividend payable solely in shares of our common stock) or any other class or series of our capital stock, we shall, at the same time, pay to each holder of series C preferred stock a dividend equal to the dividend that would have been payable to such holder if the shares of series C preferred stock held by such holder had been converted into our common stock on the date of determination of holders of our common stock entitled to receive such dividends without regard to the limitations set forth in the series C preferred stock certificate of designation.
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Voluntary Conversion Rights. Each holder of any shares of series C preferred stock shall have the right, at its option at any time, to convert any such shares of series C preferred stock into such number of fully paid and nonassessable whole shares of our common stock as is obtained by multiplying the number of shares of series C preferred stock to be converted by $0.70, the series C preferred stock stated value, and dividing the result by $0.25, which conversion price may be adjusted in accordance with the terms of the series C preferred stock certificate of designation, which, among other things, provides for a full ratchet anti-dilution adjustment.
Mandatory Conversion Rights. We may also require, upon notice, the conversion of any or all shares of the series C preferred stock into our common stock provided that (i) the shares of our common stock into which the series C preferred stock would convert are eligible to be sold without restriction pursuant to Rule 144 or a registration statement registering the such shares for resale has been declared effective by the SEC and (ii) our common stock has been approved for listing on the Nasdaq Capital Market or the New York Stock Exchange.
Conversion Limitation: We shall not effect a conversion of the series C preferred stock, whether voluntary or mandatory, and the holder of any shares of series C preferred stock shall not have the right to voluntarily convert its shares of series C preferred stock, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates) would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after giving effect to such conversion.
Other Rights. Holders of series C preferred stock have no preemptive or subscription rights and there are no redemption or sinking fund provisions applicable to the series C preferred stock. The rights, preferences and privileges of the holders of series C preferred stock are subject to, and may be adversely affected by, the rights of the holders of shares of any other series of preferred stock.
Series AD Convertible Preferred Stock
Ranking. With respect to dividend rights and rights on liquidation, winding up and dissolution, our series D preferred stock ranks senior to our common stock but junior to our series C preferred stock.
Voting Rights. Each holder of series D preferred stock shall have the right to cast one vote per share of our common stock that would be issuable to such holder upon the conversion of all the shares of series D preferred stock and shall be entitled to notice of any stockholders’ meeting in accordance with our bylaws and are entitled to vote upon such matters and in such manner as may be provided by law. The holders of the series D preferred stock and common stock shall vote together as a single class on all matters.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, after the satisfaction in full of the debts of our company and the payment of any liquidation preference owed to the holders of any securities senior to the series D preferred stock, the holders of our series D preferred stock shall participate in the distribution of the net assets of our company on a basis senior to the holders of our common stock and to the holders of any other series of preferred stock created after the series D preferred stock. Neither the consolidation nor merger of our company into or with any other entity or entities nor the consolidation or merger of any entity or entities into our company shall be deemed to be a liquidation, but the sale, lease or conveyance of all or substantially all our company’s assets shall be deemed a liquidation.
Dividend Rights. Each outstanding share of series D preferred stock will accrue cumulative dividends at a rate equal to 8.0% per annum of the series D preferred stock stated value, $0.70, subject to adjustment as provided in the series D preferred stock certificate of designation. Dividends will be payable with respect to any shares of series D preferred stock upon any of the following: (a) upon conversion of such shares in accordance with the provisions of the series D preferred stock certificate of designation and (b) when, as and if otherwise declared by our board of directors. In the event that we shall at any time pay a dividend on our common stock (other than a dividend payable solely in shares of our common stock) or any other class or series of our capital stock, we shall, at the same time, pay to each holder of series D preferred stock a dividend equal to the dividend that would have been payable to such holder if the shares of series D preferred stock held by such holder are then convertible ashad been converted into our common stock on the date of determination of holders of our common stock entitled to receive such dividends without regard to the applicable record date. The Series A Preferred was not be redeemable withoutlimitations set forth in the consentseries D preferred stock certificate of the holder.
Voluntary Conversion Rights. Each holder of Series A Preferred Stock converted 20,000 shares into 80,000any shares of common stock. There are no Series A Preferred Stock outstanding as of January 29, 2019.
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Mandatory Conversion Rights. The series D preferred stock will automatically convert upon (i) the listing of our common stock on the Nasdaq, the New York Stock Exchange, or the NYSE American market; (ii) the shares of our common stock into which the series D preferred stock would convert are eligible to be sold without restriction pursuant to Rule 144 or a registration statement registering the series D conversion shares for resale has been declared effective by the SEC and remains effective at the time of conversion; and (iii) the average Weighted Average Price (as defined in the series D certificate of designation) of our common stock is at least three (3) times the series D conversion price then in effect for 20 consecutive trading days with average daily trading volume during such period, as reported by Bloomberg, equal to or greater than $200,000.
Conversion Limitation: We shall not effect a conversion of the series D preferred stock, whether voluntary or mandatory, and the holder of any shares of series D preferred stock shall not have the right to voluntarily convert its shares of series D preferred stock, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates) would beneficially own in excess of 4.99% of the shares of our common stock outstanding immediately after giving effect to such conversion.
Other Rights. Holders of series D preferred stock have no preemptive or subscription rights and there are no redemption or sinking fund provisions applicable to the series D preferred stock. The rights, preferences and privileges of the holders of series D preferred stock are subject to, certain diluted events, and hasmay be adversely affected by, the rights of the holders of shares of any other series of preferred stock.
Series F Preferred Stock
Issuing Restrictions. Shares of series F preferred stock may only be issued to and held of record by members of our board of directors as of August 1, 2018, the date the certificate of designation for the series F preferred stock was filed with the Secretary of State of the State of Nevada.
Voting Rights. For so long as any shares of the series F preferred stock remain issued and outstanding, the holders thereof, voting separately as a class, will not have any right to vote unless and until a Trigger Event occurs (as defined below). Upon a Trigger Event, and for so long as any shares of the series F preferred stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have the right to vote the number ofon all shareholder matters at a rate equal to 100,000 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.
Trigger Event. At any time prior to the Explosion Date (defined below), the following events shall constitute 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 SeriesEvent:
(a) | a bid offer is directed to us to purchase the Company which is rejected by our board of directors; | |
(b) | a tender offer to purchase our shareholders’ shares at cost or at a premium to the then-current market price; | |
(c) | a proxy vote is called by any shareholder with a proposed vote which would result in: (i) the removal or replacement of any of our then-current directors or series F preferred stockholders, or (ii) the acquisition of another entity, the acquisition of our company or substantially all our assets by another entity, or a share exchange or merger with another entity; or | |
(d) | a single shareholder or group of shareholders suspected to be working in concert acquires more than 23% of our outstanding common stock; or, any current shareholder already owning shares of our common or preferred stock with aggregate voting power in excess of 23% of the outstanding stock, acquires an additional 10% of our outstanding common stock. | |
Explosion Date. The series F shall have no right to vote. The Series F Preferred Stock shallpreferred stock will remain issued and outstanding until the date which is 731 days after the date of issuance of Seriesthe series F Preferred Stock (“preferred stock by our board of directors to the members of our board of directors entitled to hold the series F preferred stock, which date we refer to as the Explosion Date”),Date, unless such date is extended as the result of a Trigger Event occurs, in which caseextension (as described below). Upon the Explosion Date, shallthe shares of series F preferred stock then outstanding will automatically be cancelled and returned to treasury without any action required by the holders thereof or our board of directors.
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Trigger Date Extension. Upon the occurrence of a Trigger Event, the Explosion Date will be extended by 183 days. If no Trigger Event has occurred, there shall be no extensions of the Explosion Date.
Transferability. Upon a termination or resignation from our board of directors of any holder of our series F preferred stock, the shares of our series F preferred stock held by such person will automatically be transferred and assigned pro-rata to the remaining members of our board of directors then eligible to hold shares of our series F preferred stock without any consent or approval being required from the holder.
Protective Provisions. Subject to the rights of other series of our preferred stock which may from time to time come into existence, so long as any shares of series F preferred stock are outstanding, we shall not without first obtaining the approval of the holders of at least 80% of the then outstanding shares of series F preferred stock, voting together as a class, except as otherwise provided for in the series F preferred stock certificate of designation:
(a) | increase or decrease the total number of authorized shares of series F preferred stock; | |
(b) | effect an exchange, reclassification, or cancellation of all or a part of the series F preferred stock, excluding a reverse stock split or forward stock split; | |
(c) | effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of series F preferred stock; or | |
(d) | amend, alter or repeal any provision of our articles of incorporation or bylaws so as to adversely affect the designations, preferences, limitations and relative rights of the series F preferred stock or otherwise alter or change the rights, preferences or privileges of the shares of series F preferred stock so as to affect adversely the shares of such series, including the rights set forth in the series F preferred stock certificate of designation. | |
Other Rights. Holders of series F preferred stock have no liquidation, dividend, conversion, preemptive or subscription rights and there are no redemption or sinking fund provisions applicable to the series F preferred stock. The rights, preferences and privileges of the holders of series F preferred stock are subject to, and may be adversely affected by, the rights of the holders of shares of any other series of preferred stock.
Equity Incentive Plan
As of September 30, 20202022, we have issued stock options for the purchase of 20,792,370 shares of common stock at a weighted average price of $1.618. The expiration dates of these stock options range from now to September 20, 2027. There are unearned stock option grants totaling 9,704,620 shares related to performance targets.
Warrants to Purchase Common Stock
As of September 30, 2022, we have issued warrants for the purchase of 21,786,313 shares of common stock at a weighted average exercise price of $1.029. The expiration dates of these warrants range from December 2022 to September 26, 2027.
Convertible Promissory Notes
We owe Clayton A. Struve $1,071,000 under convertible promissory at 10% or OID notes. We recorded accrued interest of $86,562 and 2019, there are no Series F$79,062 as of September 30, 2022 and September 30, 2021, respectively. On December 7, 2022, we signed Amendments to the convertible promissory or OID notes, extending the due dates to September 30, 2023.
On March 16, 2018, we entered into a Note and Account Payable Conversion Agreement pursuant to which (a) all $664,233 currently owing under the J3E2A2Z Notes was converted to a Convertible Redeemable Promissory Note in the principal amount of $664,233, and (b) all $519,833 of the J3E2A2Z Account Payable was converted into a Convertible Redeemable Promissory Note in the principal amount of $519,833 together with a warrant to purchase up to 1,039,666 shares outstanding.
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| Table of Contents |
Securities Subject to Price Adjustments
If in the future, if we sell our common stock at a price below $0.25 per share, the exerciseconversion price of 8,108,356our outstanding shares of Seriesseries C convertible preferred stock and series D Preferred Stock thatconvertible preferred stock would 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) convertible promissory notes referred to above and the exercise price of additionalcertain outstanding warrants to purchase 12,588,28610,154,381 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Warrants totaling 5,191,6364,439,707 would adjust below $1.20 per share and warrants totaling 4,465,294 would adjust below $2.40 per share, in each case pursuant to the documents governing such instruments.
Anti-takeover Provisions
Provisions 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.
Nevada Anti-Takeover Statutes
Pursuant to our articles of incorporation, we have elected not to be governed by the terms and provisions of Nevada’s control share acquisition laws (Nevada Revised Statutes 78.378 - 78.3793), which prohibit an acquirer, under certain circumstances, from voting shares of a corporation’s stock after crossing specific threshold ownership percentages, unless the acquirer obtains the approval of the corporation'sissuing corporation’s stockholders. The first such threshold is the acquisition of at least one-fifth but less than one-third of the outstanding voting powerpower.
Pursuant to our articles of incorporation, we have also elected not beneficially ownedto be governed by the terms and provisions of Nevada’s combination with interested stockholder, itsstockholders statute (Nevada Revised Statutes 78.411 - 78.444) which prohibits an “interested stockholder” from entering into a “combination” with the corporation, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates. Furthermore, inassociates, beneficially owns (or within the absence of prior approval certain restrictions may apply even after such two-year period. For purposes of these statutes, an "interested stockholder" is any person who is (x) the beneficial owner, directly or indirectly, of tentwo years, did beneficially own) 10 percent or more of the corporation’s voting stock, or otherwise has the ability to influence or control such corporation’s management or policies.
Bylaws
In addition, various provisions of our bylaws may also have an anti-takeover effect. These provisions may delay, defer or prevent a tender offer or takeover attempt of the company that a stockholder might consider in his or her best interest, including attempts that might result in a premium over the market price for the shares held by our stockholders. Our bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the election of directors, and except as provided by Nevada law, our board of directors shall have the power to adopt, amend or repeal the bylaws by a vote of not less than a majority of our directors. Any bylaw provision adopted by the board of directors may be amended or repealed by the holders of a majority of the outstanding voting shares of capital stock entitled to vote for the corporation, or (y) an affiliate or associateelection of directors. Our bylaws also contain limitations as to who may call special meetings as well as require advance notice of stockholder matters to be brought at a meeting. Additionally, our bylaws also provide that no director may be removed by less than a two-thirds vote of the corporationissued and outstanding shares entitled to vote on the removal. Our bylaws also permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships. These provisions will prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
Our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at any time withinan annual meeting will only be able to consider proposals or nominations specified in the two previous years wasnotice of meeting or brought before the beneficial owner, directlymeeting by or indirectly, of ten percent or moreat the direction of the voting powerboard of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given us timely written notice, in proper form, of the then outstanding sharesstockholder’s intention to bring that business before the meeting. Although our bylaws do not give the board of directors the corporation. The definitionpower to approve or disapprove stockholder nominations of the term "combination" is sufficiently broad to cover most significant transactions between the corporation and an "interested stockholder". Subject to certain timing requirements set forth in the statutes, a corporation may elect notcandidates or proposals regarding other business to be governed by these statutes. We have not included any such provision in our articles of incorporation.
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| Table of Contents |
Authorized but Unissued Shares
Our authorized but unissued shares of incorporation and bylaws, among other things:
Cumulative Voting
Neither the holders of our common stock nor the holders of our preferred stock have cumulative voting rights in the election of our directors. The combination of the present ownership by a few stockholders of a significant portion of our issued and outstanding common stock and lack of cumulative voting makes it more difficult for other stockholders to replace our board of directors or rumored takeover attempts. These provisions also may have the effectfor a third party to obtain control of preventing changes in our management.
Market Price of and Dividends on Common Equity and Related Stockholder Matters
Our common stock trades on the OTCQB ExchangeNYSE American 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
| Period Ended | High | Low |
| Year Ending September 30, 2021 | ||
| Through December 27, 2020 | $2.95 | $1.10 |
| Year Ending September 30, 2020 | ||
| September 30, 2020 | $3.45 | $1.71 |
| June 30, 2020 | $2.65 | $0.81 |
| March 31, 2020 | $2.90 | $0.90 |
| December 31, 2019 | $1.95 | $0.92 |
| Year Ending September 30, 2019 | ||
| September 30, 2019 | $1.70 | $1.20 |
| June 30, 2019 | $2.00 | $1.26 |
| March 31, 2019 | $2.97 | $0.90 |
| December 31, 2018 | $4.44 | $0.85 |
Period Ended |
| High |
|
| Low |
| ||
Year Ending September 30, 2023 |
|
|
|
|
|
| ||
Through December 16, 2022 |
| $ | 2.02 |
|
| $ | 1.03 |
|
|
|
|
|
|
|
|
|
|
Year Ending September 30, 2022 |
|
|
|
|
|
|
|
|
September 30, 2022 |
| $ | 3.44 |
|
| $ | 1.85 |
|
June 30, 2022 |
| $ | 2.71 |
|
| $ | 1.36 |
|
March 31, 2022 |
| $ | 2.19 |
|
| $ | 1.22 |
|
December 31, 2021 |
| $ | 2.60 |
|
| $ | 1.48 |
|
|
|
|
|
|
|
|
|
|
Year Ending September 30, 2021 |
|
|
|
|
|
|
|
|
September 30, 2021 |
| $ | 3.95 |
|
| $ | 2.06 |
|
June 30, 2021 |
| $ | 4.24 |
|
| $ | 1.70 |
|
March 31, 2021 |
| $ | 4.61 |
|
| $ | 1.60 |
|
December 31, 2020 |
| $ | 2.95 |
|
| $ | 1.10 |
|
As of December 27, 2020,16, 2022, the high and low sales price of our common stock was $1.98$1.03 per share and $2.07$1.45 per share, respectively. As of December 27, 2020,20, 2022, we had 25,730,22448,157,937 shares of common stock issued and outstanding, held by 123186 stockholders of record. This number does not include approximately 2,3003,600 beneficial owners whose shares are held in the names of various security brokers, dealers and registered clearing agencies.
Transfer Agent
We have appointed American Stock Transfer & Trust Company located at 6201 15th Avenue, Brooklyn, New York 11219, and their telephone number is (800) 937-5449.
(a) | (b) | (c) | |
Number of securities | |||
remaining available | |||
Number of securities | Weighted-average | for future issuance | |
to be issued upon | exercise price of | under equity compensation | |
exercise of outstanding | outstanding options, | plan (excluding securities | |
| Plan Category | options, warrants and rights | warrants and rights | reflected in column (a)) |
| Equity compensation plan | |||
| approved by shareholders | 78,333 | $1.161 | 78,333 |
| Equity compensation plans | |||
| not approved by shareholders | 4,726,667 | 1.161 | (4,805,000) |
| Total | 4,805,000 | $1.161 | (4,726,667) |
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| Table of Contents |
ITEM 6. SELECTED FINANCIAL DATA
Summary Financial Information
In the following table, we provide you with our selected consolidated historical financial and other data. We have prepared the consolidated selected financial information using our consolidated financial statements for the years ended September 30, 2020 and 2019.2022 through September 30, 2017. When you read this selected consolidated historical financial and other data, it is important that you read along with it the historical financial statements and related notes in our consolidated financial statements included in this report and prior 10-K filings, as well as Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in thousands)
Years Ended September 30, | |||||
2020 | 2019 | 2017 | 2016 | 2015 | |
| STATEMENT OF OPERATIONS DATA: | |||||
| Net revenue | $122 | $1,805 | $4,874 | $6,024 | $6,291 |
| Cost of goods sold | 70 | 1,378 | 3,966 | 5,036 | 5,274 |
| Gross profit | 52 | 427 | 908 | 988 | 1,017 |
| Research and development expenses | 2,034 | 1,258 | 79 | 326 | 363 |
| General and administrative expenses | 4,844 | 4,182 | 3,088 | 3,355 | 2,984 |
| Impairment of goodwill | - | - | 984 | - | - |
| Operating loss | (6,826) | (5,013) | (3,243) | (2,693) | (2,330) |
| Other income (expense) | (6,737) | (2,599) | (658) | 947 | (271) |
| Net loss | (13,563) | (7,612) | (3,901) | (1,746) | (2,601) |
| Income tax expense | - | - | - | - | 30 |
| Net loss | $(13,563) | $(7,612) | $(3,901) | $(1,746) | $(2,631) |
| Net loss per share | $(0.62) | $(0.42) | $(1.01) | $(1.22) | $(2.33) |
| Weighted average number of shares | 21,791,058 | 18,053,848 | 3,844,840 | 1,428,763 | 1,131,622 |
|
| Years Ended September 30, |
| |||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2017 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenue |
| $ | 4,360 |
|
| $ | - |
|
| $ | 122 |
|
| $ | 1,805 |
|
| $ | 4,874 |
|
Cost of goods sold |
|
| - |
|
|
| - |
|
|
| 70 |
|
|
| 1,378 |
|
|
| 3,966 |
|
Gross profit |
|
| 4,360 |
|
|
| - |
|
|
| 52 |
|
|
| 427 |
|
|
| 908 |
|
Research and development expenses |
|
| 5,386 |
|
|
| 3,970 |
|
|
| 2,034 |
|
|
| 1,258 |
|
|
| 79 |
|
General and administrative expenses |
|
| 8,118 |
|
|
| 6,476 |
|
|
| 4,844 |
|
|
| 4,182 |
|
|
| 3,088 |
|
Selling and transactional costs for digital assets |
|
| 3,430 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Impairment of goodwill |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 984 |
|
Total research and development and operating expenses |
|
| 16,934 |
|
|
| 10,446 |
|
|
| 6,878 |
|
|
| 5,440 |
|
|
| 4,151 |
|
Operating loss |
|
| (12,574 | ) |
|
| (10,446 | ) |
|
| (6,826 | ) |
|
| (5,013 | ) |
|
| (3,243 | ) |
Other income (expense) |
|
| (7,497 | ) |
|
| (14,914 | ) |
|
| (6,737 | ) |
|
| (2,599 | ) |
|
| (658 | ) |
Net loss before income taxes |
|
| (20,071 | ) |
|
| (25,360 | ) |
|
| (13,563 | ) |
|
| (7,612 | ) |
|
| (3,901 | ) |
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Net loss |
| $ | (20,071 | ) |
| $ | (25,360 | ) |
| $ | (13,563 | ) |
| $ | (7,612 | ) |
| $ | (3,901 | ) |
Net loss per share |
| $ | (0.50 | ) |
| $ | (0.86 | ) |
| $ | (0.62 | ) |
| $ | (0.42 | ) |
| $ | (1.01 | ) |
Weighted average number of shares |
|
| 40,370,473 |
|
|
| 29,370,596 |
|
|
| 21,791,058 |
|
|
| 18,053,848 |
|
|
| 3,844,840 |
|
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis ofsummarizes the significant factors affecting our operating results, financial condition, liquidity and resultscash flows as of operations togetherand for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forththereto included elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includesreport. The discussion contains forward-looking statements that involve risksare based on the beliefs of management, as well as assumptions made by, and uncertainties. You should read the "Risk Factors" section of this prospectus for a discussion of important factors thatinformation currently available to, management. Actual results could cause actual results to differ materially from the results describedthose discussed in or implied by the forward-looking statements containedas a result of various factors, including those discussed below and elsewhere in this report, particularly in the following discussionsections titled “Risk Factors” and analysis.
Overview
We are focused on the development marketing and salescommercialization of proprietary biosensor technologies which, when paired with our AI deep learning platform, are capable of uniquely identifying or authenticatingand measuring almost any substancematerial or materialanalyte using electromagnetic energy to detect, record, detect,identify and identifymeasure the unique “signature” of the substancesaid materials or material.analytes. We call thesethis our “Bio-RFID™”“Bio-RFID” technology platform, when pertaining to radio and “ChromaID™” technologies.
ChromaID is the first technology developed and patented by our company. For the past several years, 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 patentable inventions that are derived from and extend beyond our ChromaID technology. We call this new technology “Bio-RFID.”and intellectual property. The rapid advances made with our Bio-RFID technology in our laboratory have caused us to move quickly into the commercialization phase of our Companycompany as we work to create revenue generating products for the marketplace. Today, the soleprimary focus of the Companyour company is on itsour Bio-RFID technology and its commercialization.
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| Table of Contents |
On April 30, 2020, we approved and ratified the incorporation of Particle, Inc., a Nevada corporation. As of September 30, 2020 we are the sole shareholder but have entered into Simple Agreements for Future Equity to sell separate ownership inincorporated our wholly owned subsidiary, Particle. Particle is now a direct, 100% owned subsidiary of the Company but our future ownership could be diluted if Particle is successful in raising equity from outside investors. Particle shall utilize the same corporate offices as the Company and shall focusfocused on the development and commercialization of our extensive intellectual property relating to electromagnetic energy outside of the medical diagnostic arena which remains the parentour company’s singular focus with its Bio-RFID technologyfocus. Since incorporation, Particle has engaged in research and its initial application, the non-invasive measurement of blood glucose
On June 1, 2020,September 17, 2021 we approved and ratified entry into an intercompany Patent License Agreement dated May 21, 2020 withincorporated our majoritywholly owned subsidiary, Particle. Pursuant toAI Mind, for the Agreement, Particle shall receive an exclusive non-transferrable license to use certainpurpose of identifying and capitalizing on market opportunities for our patents and trademarks, in exchangeAI deep learning platform. The first activity undertaken by AI Mind was the Company shall receive: (i) a one-time feecreation of $250,000 upon a successful financing of Particle, and (ii) a quarterly royalty payment equal tographical images expressed as NFTs utilizing the greater of 5% of the Gross Sales, net of returns, from Particle or $5,000. As of September 30, 2020 Particle has not yet executed a successful financing or generated any sales.
Years Ended December 31, | ||||
2020 | 2019 | $ Variance | % Variance | |
| Revenue | $122 | $1,805 | $(1,683) | -93.2% |
| Cost of sales | 70 | 1,378 | (1,308) | 94.9% |
| Gross profit | 52 | 427 | (375) | -87.8% |
| Research and development expenses | 2,034 | 1,258 | 776 | -61.7% |
| Selling, general and administrative expenses | 4,844 | 4,182 | 662 | -15.8% |
| Operating loss | (6,826) | (5,013) | (1,813) | -10.3% |
| Other (expense) income: | ||||
| Interest expense | (6,094) | (2,945) | (3,149) | -106.9% |
| Other income (expense) | 65 | (10) | 75 | 750.0% |
| (Loss) gain on debt settlements | (708) | 356 | (1,064) | -298.9% |
| Total other income (expense) | (6,737) | (2,599) | (4,138) | -159.2% |
| (Loss) before income taxes | (13,563) | (7,612) | (5,951) | -78.2% |
| Income taxes - current (benefit) | - | - | - | 0.0% |
| Net (loss) | $(13,563) | $(7,612) | $(5,951) | -78.2% |
Recent Developments
NYSE Listing
Out common stock began trading on the NYSE under the symbol KNW on September 16, 2022 following the pricing (and the entering into the Underwriting Agreement) of the Offering, discussed below.
Underwriting Agreement
On September 15, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead Securities, LLC, as representative (the “Representative”) of the underwriters named on Schedule 1 thereto (the “Underwriters”), relating to our public offering of common stock (the “Offering”). Pursuant to the Underwriting Agreement, we agreed to sell 3,600,000 shares of common stock to the Underwriters, at a purchase price per share of $1.86 (the offering price to the public of $2.00 per share minus the Underwriters’ discount), and also granted to the Underwriters a 45-day option to purchase up to 540,000 additional shares, solely to cover over-allotments, if any, at the public offering price less the underwriting discounts, pursuant to our registration statement on Form S-1 (File No. 333-266423) under the Securities Act of 1933, as amended (the “Securities Act”), and our registration statement on Form S-1MEF (File No. 333-267448) filed pursuant to Rule 424(b)(4) under the Securities Act (together, the “Registration Statements”).
On September 20, 2022, we completed a public offering of our common stock pursuant to which we sold 4,140,000 shares of common stock, at a purchase price of $2.00 per share, for total gross proceeds of $8,280,000. After deducting underwriting commissions and other offering expenses, we received net proceeds of $7,424,679.
The Underwriting Agreement includes customary representations, warranties and covenants by the Company. It also provides that we will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make because of any of those liabilities.
On September 20, 2022, pursuant to the Underwriting Agreement, we issued a common stock purchase warrant to Boustead Securities, LLC for the purchase of 289,800 shares of common stock at an exercise price of $2.40, subject to adjustment. The Warrant is exercisable at any time and from time to time, in whole or in part, until September 15, 2027 and may be exercised on a cashless basis. The Warrant also includes customary anti-dilution provisions and immediate piggyback registration rights with respect to the registration of the shares underlying the Warrant. The Warrant and the shares of common stock underlying the Warrant were registered as a part of the Registration Statements.
Impact of COVID-19 Pandemic
On January 30, 2020, decreased $
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| Table of Contents |
Over the past two years, 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. We have witnessed supply chain related delays and increasing costs due to inflation. It is difficult to predict what other adverse effects, if any, COVID-19 and related matters can have on our business, or against the various aspects of same.
We may experience long-term disruptions to our operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the pandemic and the presence of new variants of COVID-19; and closures of businesses or manufacturing facilities critical to its business or supply chains. We are actively monitoring, and will continue to actively monitor, the pandemic and the potential impact on its operations, financial condition, liquidity, suppliers, industry and workforce. See also “Risk Factors” for more information.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
· | the ability of our research and development team to produce an FDA clearance quality technology; | |
· | our ability to recruit and maintain quality personnel with the talent to bring our technology to the market; | |
· | the production of market ready products which can sustain FDA clearance quality results; | |
· | the clearance by the FDA after their rigorous clinical trial process of our products for the marketplace; | |
· | the receptivity of the marketplace and the addressable diabetes community to our new non-invasive glucose monitoring technology; and | |
· | access to sufficient capital to support us until its products achieve FDA clearance and are accepted in the marketplace. | |
Segment Reporting
The Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. Our management considers our business to currently consist of three operating segments (i) the development of the Bio-RFID™” and “ChromaID” technologies; (ii) Particle, Inc. technology; and (iii) AI sales of NFT products. Particle commenced operations in the year ended September 30, 2019. 2020. AI commenced operations during the year ended September 30, 2022. For a reporting of the operating results for these three segments for the years ended September 30, 2022,
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| Table of Contents |
Results of Operations
The decrease was due to lower sales resulting fromfollowing table sets forth key components of our results of operations during the planned closure of TransTech.
|
| Years Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
|
| $ Variance |
|
| % Variance |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue- digital asset sales |
| $ | 4,360 |
|
| $ | - |
|
| $ | 4,360 |
|
|
| 100.0 | % |
Research and development and operating expenses- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
| 5,386 |
|
|
| 3,970 |
|
|
| 1,416 |
|
|
| -35.7 | % |
Selling, general and administrative expenses |
|
| 8,118 |
|
|
| 6,476 |
|
|
| 1,642 |
|
|
| -25.4 | % |
Selling and transactional costs for digital assets |
|
| 3,430 |
|
|
| - |
|
|
| 3,430 |
|
|
| -100.0 | % |
Total research and development and operating expenses |
|
| 16,934 |
|
|
| 10,446 |
|
|
| 6,488 |
|
|
| -62.1 | % |
Operating loss |
|
| (12,574 | ) |
|
| (10,446 | ) |
|
| (2,128 | ) |
|
| -20.4 | % |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (8,019 | ) |
|
| (14,914 | ) |
|
| 6,895 |
|
|
| 46.2 | % |
Other income |
|
| 522 |
|
|
| - |
|
|
| 522 |
|
|
| 100.0 | % |
Total other (expense), net |
|
| (7,497 | ) |
|
| (14,914 | ) |
|
| 7,417 |
|
|
| 49.7 | % |
Loss before income taxes |
|
| (20,071 | ) |
|
| (25,360 | ) |
|
| 5,289 |
|
|
| 20.9 | % |
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.0 | % |
Net loss |
| $ | (20,071 | ) |
| $ | (25,360 | ) |
| $ | 5,289 |
|
|
| 20.9 | % |
Revenues. Revenue- digital asset sales for the year ended September 30, 2020 decreased $
Research and Development Expenses
Selling, General and Administrative Expenses
Selling and Transactional Costs for Digital Asset Sales.Selling and transactional costs for digital asset sales were $3,430,000 for the year ended September 30, 2022. Our Artificial Intelligence (AI) deep learning platform has generated revenue- digital asset sales of $4,360,000 from Non-Fungible Token (NFT) sales. Such costs included digital asset conversion loss, consulting, bonus compensation transaction fees, taxes, royalties and other costs.
Other (Expense), Net
The other expense, net for the year ended September 30, 2021 included interest expense related to convertible notes payable and the amortization of the beneficial conversion feature and value of warrants issued.
During the year ended September 30, 2020, we closed a private placement and received gross proceeds ofNet Loss
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The net loss for the year ended September 30, 2019
Liquidity and (vi) offset by
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.
As of September 30, 2022, we had cash and cash equivalents of approximately $
We believe that our cash on hand will be sufficient to fund our operations through September 30, 2021.
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.
On September 20, 2022, we completed a public offering of our common stock pursuant to which we sold 4,140,000 shares of common stock, at a purchase price of $2.00 per share, for total gross proceeds of $8,280,000. After deducting underwriting commissions and other offering expenses, we received net proceeds of $7,425,000.
On March 15, 2021, we closed private placement for gross proceeds of $14,209,000 in exchange for issuing subordinated convertible notes and warrants to purchase 3,552,250 shares of our common stock in a private placement to accredited investors. These convertible notes were automatically converted into shares of our common stock at a conversion price of $2.00 per share starting on March 9, 2022. The convertible notes had an original principal amount of $14,209,000 with an annual interest of 8%. Both the principal amount and the interest were payable on a payment-in-kind basis in shares of our common stock.
The proceeds of warrants currently outstanding, which are not expected to be exercised on a cashless couldbasis, may generate potential proceeds of up to $8,519,000.
Operating Activities
Net cash used in operating activities for the yearsyear ended September 30,
The net cash used in operating activities for the year ended September 30, 2021 was primarily related to (i) a net loss of $25,360,000; offset by (ii) working capital changes of $810,000; and (ii) non-cash expenses of $13,050,000. The non-cash items include (iii) depreciation and amortization of $201,000; (iv) issuance for capital stock for services and expenses of $203,000; (v) stock based compensation- warrants of $2,547,000; (vi) stock based compensation- stock options of $1,029,000; (vii) amortization of debt discount as interest expense of $13,722,000; and offset by (viii) other of $1,000.
Investing Activities
Net cash used in investing activities for the yearsyear ended September 30,
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Financing Activities
Net cash provided by financing activities for the yearsyear ended September 30,
The net cash provided by financing activities for the year ended September 30, 2021 was primarily related to (i) issuance of Simple Agreements for future Equity of $340,000; (ii) $14,209,000 related to proceeds from convertible notes payablepayable; (iii) proceeds from notes payable- PPP of $5,640,000; (ii)$206,000; (iv) proceeds from the issuance of common stock for warrant exercisesthe exercise of $8,000; (iii)warrants of $1,313,000; (v) proceeds from the issuance of common stock for the exercise of stock option grants of $23,000; and offset by (vi) payment of issuance costs from notes payable of $226,000; (iv) proceeds for$727,000 and (vii) repayments on Simple Agreements for Future EquityEquity.
On March 15, 2021, we closed private placement for gross proceeds of $785,000;$14,209,000 in exchange for issuing Subordinated Convertible Notes and proceeds from issuance3,552,250 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 will be automatically converted to our Common Stock at $2.00 per share on the one year anniversary starting on March 15, 2022.
The Convertible Notes had an original principal amount of $14,209,000 and bear annual interest of 8%. Both the principal amount and the interest are payable on a payment-in-kind basis in shares related to debt settlement of $125,000; offset by (v) payments of issuance costs from convertible notes payable of $480,000.
Our contractual cash obligations as of
September 30,Less Than | Greater Than | ||||
| Contractual Cash Obligations (1) | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years |
| Operating leases | $137,521 | $113,553 | $23,968 | $- | $- |
| Convertible notes payable | 7,894,566 | 7,894,566 | - | - | - |
$8,032,087 | $8,008,119 | $23,968 | $- | $- |
|
|
|
|
| Less Than |
|
|
|
|
|
|
|
| Greater Than |
| |||||
Contractual Cash Obligations (1) |
| Total |
|
| 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| 5 Years |
| |||||
Operating leases |
| $ | 386,701 |
|
| $ | 275,332 |
|
| $ | 111,369 |
|
| $ | - |
|
| $ | - |
|
Convertible notes payable |
|
| 2,255,066 |
|
|
| 2,255,066 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| $ | 2,641,767 |
|
| $ | 2,530,398 |
|
| $ | 111,369 |
|
| $ | - |
|
| $ | - |
|
(1) | Convertible notes payable includes $2,255,066 that can be converted into common stock upon demand. We expect to incur capital expenditures related to the development of the “Bio-RFID™” and “ChromaID” technologies. None of the expenditures are contractual obligations as of September 30, 2022. |
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.
Critical Accounting Policies
The applicationfollowing discussion relates to critical accounting policies for our company. The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluaterequires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
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Revenue Recognition. We determine revenue recognition from contracts with customers through the following steps:
· | identification of the contract, or contracts, with the customer; | |
· | identification of the performance obligations in the contract; | |
· | determination of the transaction price; | |
· | allocation of the transaction price to the performance obligations in the contract; and | |
· | recognition of the revenue when, or as, our company satisfies a performance obligation. | |
Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. During the year ended September 30, 2022, our artificial intelligence (AI) deep learning platform began generating revenue from digital asset sales of NFT’s. Our engineering team, using its research date, AI and proprietary algorithms, produced NFT’s in the form of digital art. The NFT’s produced had no recorded cost basis.
Digital Asset Sales. Revenue includes sale of NFT’s in the form of digital art generated from our artificial intelligence deep learning platform. We use the NFT exchange, OpenSea, to facilitate the transaction with the customer. Through OpenSea, we have custody and control of the NFT prior to the delivery to the customer and record revenue at the point in time when the NFT is delivered to the customer and the customer pays. We have no obligations for returns, refunds or warranty after the NFT sale. The customer pays in the form of transferring the crypto currency digital asset, Ethereum. The value of the sale is determined based on historicalthe value of the Ethereum crypto currency received as consideration. Payment is required before the NFT is delivered. Each NFT that is generated produces a unique identifying code. We also earn a royalty of up to 10%, when an NFT is resold by its owner in a secondary market transaction. We recognize this royalty as revenue when the transaction is consummated, and they receive compensation.
After the sale of the NFT, the Ethereum is converted to US dollars as soon as practically possible. We record the total value of the gross NFT sale in revenue. Costs incurred in connection with the NFT transaction are recorded in the statement of operations as Selling and Transactional Cost of Digital Assets and include costs to outside consultants, estimated employee and CEO special bonus compensation, cost of converting digital assets to cash and estimated sales and use tax.
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. 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 also are actively involved in identifying new applications. Our current internal team along with outside consultants has considerable experience working with the application of our technologies and various other factors that are believedtheir applications. We engage third party experts as required to be reasonable under the circumstances.
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 following policies involve a higher degreestraight-line method over the estimated useful lives or lease period of judgment and/or complexity:
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Fair Value Measurements and Financial Instruments
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, 2022 and 2021 are based upon the short-term nature of the assets and liabilities.
We have a money market account which is considered a level 1 asset. The balance as of September 30, 2022 and 2021 was $11,821,931 and $12,217,714, respectively.
Derivative Financial Instruments –
Stock Based Compensation
Convertible Securities
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full text of our audited consolidated financial statements beginningbegins on page F-1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
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 September 30, 20202022 that our disclosure controls and procedures were not effective at the reasonable assurance level duelevel.
During the quarter ended September 30, 2022, we implemented internal control procedures to address the previously identified material weaknesses in ourby hiring a full time CFO and expanded the role of the financial reporting consultant, strengthening internal controls over financial reporting discussed immediately below.
(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
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Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting.
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 quarter ended September 30, 2022, we implemented internal control procedures to address the previously identified material weaknesses by hiring a full time CFO and expanded the role of the financial reporting consultant, strengthening internal controls over financial reporting. Implementation of a full time CFO enhances the Company’s internal control environment, by: (i) providing sufficient oversight of accounting personnel and activities related to our internal control over financial reporting; (ii) providing increased segregation of duties; (iii) implementing and enhancing key controls over financial reporting; and (iv) conducting technical accounting training of key financial and accounting staff members involved in preparation and review of financial reporting and interpretation of technical accounting guidance.
During the three months ended September 30, 2020,2022, there were no other changes in our internal controls over financial reporting, during this fiscal quarterwhich were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect,material effect on our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
We have no disclosures of any information to disclose that was required to be fileddisclosed in a report on Form 8-K during the three months ended September 30, 2020 that werefourth quarter of fiscal year 2022 but was not filed.
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PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth certain information about our current directors and executive officers:
Name | Age | Position | ||
Directors- | ||||
Ronald P. Erickson | 78 | Chairman | ||
Phillip A. Bosua | 48 | Chief Executive Officer and Director | ||
Peter Conley | 67 | Chief Financial Officer and SVP Intellectual Property | ||
William A. Owens | 82 | Director |
Jon Pepper | 71 | Director | ||
Ichiro Takesako | 63 | Director |
Set forth below is information regarding our directors and executive officers as of the Compensation Committee.
Ronald P. Erickson
.Mr. Ericksonhas been a directorPhillip A. Bosua
. Mr. Bosua was appointed a director and Chief Executive Officer ofPeter J. Conley.Mr. Conley has served as our Chief Financial Officer and SVP Intellectual Property since May 2022.In addition, Mr. Conley currently serves as Senior Managing Director and Head of Intellectual Property Banking at Boustead Securities, LLC, a position he has held since October 2014, where he provides equity financing and M&A advisory services to small-cap public companies. Prior to that, from 2012 to 2016, Mr. Conley was a cofounder and Chief Operating Officer of ipCreate, a global IP development and innovation services company serving large multinational companies. He also served as managing director of ipCapital Venture Group, where he provided IP strategy and venture advisory services. During his career spanning more than 35 years, Mr. Conley has held leadership roles at MDB Capital Group, The Analytiq Group / RDEX Research, Roth Capital Partners, and Lehman Brothers. He was on the founding team and Head of Equity Capital Markets at E*Offering, the investment bank of E*Trade. Mr. Conley attended the University of Hawaii at Manoa and the University of London, Center for Financial & Management Studies, SOAS.
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William A. Owens. Admiral Owens has served as an independent director since December 28, 2012. Mr. TakesakoMay 2018. Since June 2012, Admiral Owens has heldserved as the co- founder and executive positionschairman of Red Bison Advisory Group, a company which identifies opportunities with Sumitomo Precision Products Co.proven enterprises in Asia, the Middle East, and the United States and creates dynamic partnerships focusing on natural resources (oil, gas and fertilizer plants), Ltd or Sumitomo since 1983. Mr. Takesako graduatedreal estate, and information and communication technology. From 2017 to present he serves as the Exec Chair of Red Bison Technology Group. From 2009 to 2017, he was the chairman of the board of CenturyLink Telecom, the third largest telecommunications company in the United States and was on the advisory board of SAP USA from Waseda University, Tokyo, Japan where he majored2012 to 2017. Admiral Owens also serves on the boards of the following private companies: Carillon Technologies, Prism, TruU, JennyCo, Know Labs, Tethr, Red Bison, Axxess, CDAQ, Newsight and Siply. He is also a member of the Council of Foreign Relations. From 2007 to 2015, Admiral Owens was the Chairman and Senior Partner of AEA Investors Asia, a private equity firm located in SocialHong Kong, and Vice Chairman of the NYSE for Asia. Admiral Owens also served as the Chairman of Eastern Airlines. He has served on over 20 public boards including Daimler, British American Tobacco, Telstra, Nortel Networks, and Polycom. He was the CEO/Chairman of Teledesic LLC, a Bill Gates/Craig McCaw company bringing worldwide broadband through an extensive satellite network and prior, was the President, COO/Vice Chairman of Science Applications International Corporation (SAIC). He has also served on the boards of the non-for-profit organizations Fred Hutchinson Cancer Research Center, Carnegie Corporation of New York, Brookings Institution, and graduatedRAND Corporation. Admiral Owens is a four-star US Navy veteran and was Vice Chairman of the Joint Chiefs of Staff, the second-ranking United States military officer with responsibility for reorganizing and restructuring the armed forces in the post- Cold War era. He is widely recognized for bringing commercial high-grade technology into the Department of Defense for military applications. Admiral Owens is a 1962 honor graduate of the United States Naval Academy with a Degreebachelor’s degree in mathematics, bachelor’s and master’s degrees in politics, philosophy and economics from Oxford University, and a master’s degree in management from George Washington University. He has written more than fifty articles on national security and authored the books “China US 2039: the Endgame?”, and “High Seas.” His book, “Lifting the Fog of BachelorWar,” was published in April 2000 with a revision published in Mandarin in 2009. Admiral Owens has received numerous recognitions and awards: the “Légion d’Honneur” by France, and the highest awards given to foreigners by the countries of Social Science.
Jon Pepper
.Mr. Pepperhas served as an independent director since April 2006. Mr. Pepper founded Pepcom,Ichiro Takesako. Mr. Takesako has served as an independenta director since May 24, 2018. Admiral William A. Owens is currentlyDecember 2012. Mr. Takesako has held executive positions with Sumitomo Precision Products Co., Ltd, or Sumitomo, and its affiliates since 1983. In the co- founderpast few years, Mr. Takesako has held the following executive position in Sumitomo and executive chairmanits affiliates: in June 2008, he was appointed as General Manager of Red Bison Advisory Group,Sales and Marketing Department of Micro Technology Division; in April 2009, he was appointed as General Manager of Overseas Business Department of Micro Technology Division, in charge of M&A activity of certain business segment and assets of Aviza Technology, Inc.; in July 2010, he was appointed as Executive Director of SPP Process Technology Systems, a 100% owned subsidiary of Sumitomo Precision Products at the time; in August 2011, he was appointed as General Manager, Corporate Strategic Planning Group; in January 2013, he was appointed as Chief Executive Officer of M2M Technologies, Inc., a company which identifies opportunities with proven enterprisesinvested by Sumitomo Precision products; in China, the Middle East, and the United States and creates dynamic partnerships focusing on natural resources (oil, gas and fertilizer plants), real estate, and information and communication technology. Most recently,April 2013, has was appointed as General Manager of Business Development Department, in parallel of CEO of M2M Technologies, Inc.; in April 2014, he was relieved from General Manager of Business Development Department and is responsible for M2M Technologies Inc. as its CEO; in March 2017, he established At Signal, Inc. which took over the chairmanentire business operation from M2M Technologies, Inc.; and in April 2017, he was appointed as Chief Executive Officer of At Signal Inc. Mr. Takesako graduated from Waseda University, Tokyo, Japan where he majored in Social Science and graduated with a Degree of Bachelor of Social Science. Mr. Takesako was appointed as a director based on his previous position with Sumitomo and Sumitomo’s previous significant partnership with our company.
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Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the board of CenturyLink Telecom, the third largest telecommunications company in the United States and was on the advisory board of SAP USA. Owens serves on the board of directors at Wipro Technologies and Know Labs Inc. Owens is on the advisory board of the following private companies: Carillon Technologies, Platform Science, Prism, Sarcos, Sierra Nevada Corporation and Vodi. Owens is on the board of trustees at EastWest Institute, Seattle University, and an advisor to the Post COVID-19 Debt Initiative (PCDI). He is also a member of the Council of Foreign Relations.
Family Relationships
There are no family relationships among any of our directors and executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, except as described below, none of our directors or executive officers has, during the past ten years:
· |
· | ||
· | been subject |
· | ||
· | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or | |
· | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. | |
Corporate Governance
Governance Structure
We chose to facilitate and assistappoint a separate Chairman of the Board who is not our Chief Executive Officer. Our board of directors has made this decision based on their belief that a separate Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director.
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The Board’s Role in Risk Oversight
The board of directors oversees that the executionassets of our company are properly safeguarded, that the appropriate financial and other controls are maintained, and that our business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the board’s oversight of the various risks facing our company. In this regard, our board seeks to understand and oversee critical business risks. Our board does not view risk in isolation. Risks are considered in virtually every business decision and as part of our business strategy. Our board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for our company to be competitive on a global basis and to achieve its responsibilities.objectives.
While the board oversees risk management, company management is charged with managing risk. Management communicates routinely with the board and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management.
Our board administers its risk oversight function as a whole by making risk oversight a matter of collective consideration; however, much of the work is delegated to committees, which will meet regularly and report back to the full board. The committees are currentlyaudit committee oversees risks related to our financial statements, the Audit Committee,financial reporting process, accounting and legal matters, the Nominatingcompensation committee evaluates the risks and Corporate Governance Committee,rewards associated with our compensation philosophy and programs, and that the Compensation Committee. The Committees were formed in July 2010. The Auditnominating and Compensation Committees are comprised solelycorporate governance committee evaluates risk associated with management decisions and strategic direction.
Independent Directors
NYSE American’s rules generally require that a majority of non-employee,an issuer’s board of directors must consist of independent directors. The NominatingOur board of directors currently consists of five (5) directors, three (3) of whom, Messrs. Owens, Pepper and Corporate Governance CommitteeTakesako, are independent within the meaning of NYSE American rules.
Committees of the Board of Directors
Our board has two management directors, Ronald P. Erickson as Chairmanestablished an audit committee, a compensation committee and Phillip A. Bosua as a member. Charters fornominating and corporate governance committee, each committee arewith its own charter approved by the board. Each committee’s charter available on our website at www.knowlabs.co. The discussion below describes current membership forIn addition, our board of directors may, from time to time, designate one or more additional committees, which shall have the duties and powers granted to it by our board of directors.
Audit Committee
William A. Owens, Jon Pepper and Ichiro Takesako, each of whom satisfies the standing Board committees.
The audit committee is responsible for, among other things: (i) retaining and overseeing our independent accountants; (ii) assisting the fiscal year ended September 30, 2020 served as an officer, former officer, or employeeboard in its oversight of the Company or participated in a related party transaction that would be requiredintegrity of our financial statements, the qualifications, independence and performance of our independent auditors and our compliance with legal and regulatory requirements; (iii) reviewing and approving the plan and scope of the internal and external audit; (iv) pre-approving any audit and non-audit services provided by our independent auditors; (v) approving the fees to be disclosed in this prospectus. Further, during this period, nopaid to our independent auditors; (vi) reviewing with our chief executive officer and principal financial officer and independent auditors the adequacy and effectiveness of our internal controls; (vii) reviewing hedging transactions; and (viii) reviewing and assessing annually the audit committee’s performance and the adequacy of its charter.
Compensation Committee
William A. Owens, Jon Pepper and Ichiro Takesako, each of whom satisfies the “independence” requirements of Rule 10C-1 under the Exchange Act and NYSE American’s rules, serve on our compensation committee, with Mr. Owens serving as the chairman. The members of the Company served as:
The compensation committee is responsible for, among other things: (i) reviewing and approving the remuneration of our executive officers; (ii) making recommendations to the board regarding the compensation of our independent directors; (iii) making recommendations to the board regarding equity-based and incentive compensation plans, policies and programs; and (iv) reviewing and assessing annually the compensation committee’s performance and the adequacy of its charter.
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Nominating and Corporate Governance Committee
William A. Owens, Jon Pepper and Ichiro Takesako, each of whom satisfies the “independence” requirements of NYSE American’s rules, serve on our nominating and corporate governance committee, with Mr. Pepper serving as the chairman. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees.
The nominating and corporate governance committee will be responsible for, among other things: (i) identifying and evaluating individuals qualified to become members of the board by reviewing nominees for election to the board submitted by stockholders and recommending to the board director nominees for each annual meeting of stockholders and for election to fill any vacancies on the board; (ii) advising the board with respect to board organization, desired qualifications of board members, the membership, function, operation, structure and composition of committees (including any committee authority to delegate to subcommittees), and self-evaluation and policies; (iii) advising on matters relating to corporate governance and monitoring developments in the law and practice of corporate governance; (iv) overseeing compliance with the our code of ethics; and (v) approving any related party transactions.
The nominating and corporate governance committee’s methods for identifying candidates for election to our board of directors (other than those proposed by our stockholders, as discussed below) will include the solicitation of ideas for possible candidates from a number of sources - members of our board of directors, our executives, individuals personally known to the members of our board of directors, and other research. The nominating and corporate governance committee may also, from time-to-time, retain one or more third-party search firms to identify suitable candidates.
In making director recommendations, the nominating and corporate governance committee may consider some or all of the following factors: (i) the candidate’s judgment, skill, experience with other organizations of comparable purpose, complexity and size, and subject to similar legal restrictions and oversight; (ii) the interplay of the candidate’s experience with the experience of other board members; (iii) the extent to which the candidate would be a desirable addition to the board and any committee thereof; (iv) whether or not the person has any relationships that might impair his or her independence; and (v) the candidate’s ability to contribute to the effective management of our company, taking into account the needs of our company and such factors as the individual’s experience, perspective, skills and knowledge of the industry in which we operate.
A stockholder may nominate one or more persons for election as a director at an annual meeting of stockholders if the stockholders comply with the notice and information provisions contained in our bylaws. Such notice must be in writing to our Company not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one-hundred-twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made or as otherwise required by the Exchange Act. In addition, stockholders furnishing such notice must be a holder of record on both (i) the date of delivering such notice and (ii) the record date for the determination of stockholders entitled to vote at such meeting.
Code of Ethics
We have adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and ethics standards titledpolicies, including disclosure requirements under the federal securities laws, and reporting of violations of the code.
A copy of the code of ethics which is available at www.knowlabs.co. These standards were adopted by our Board of Directors to promote transparency and integrity. The standards applyhas been filed as an exhibit to our Board of Directors, executivesregistration statement on Form S-1, as amended, July 29, 2022, and employees. Waivers of the requirementsis also available on our website as www.knowlabs.io. We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or associated polices with respectpersons performing similar functions. We intend to membersuse our website as a method of disseminating this disclosure as well as by SEC filings, as permitted or required by applicable SEC rules. Any such disclosure will be posted to our website within four (4) business days following the date of any such amendment to, or waiver from, a provision of our Boardcode of Directors orethics.
| 44 |
| Table of Contents |
Section 16(a) Beneficial Ownership Reporting Compliance
Our executive officers, directors and 10% stockholders are subject to approvalrequired under Section 16(a) of the full board.
Based solely on a review of copies of reports furnished to us, as of September 30, 2022 our executive officers, directors and 10% holders complied with all filing requirements except as follows:
Jon Pepper filed a Form 4 on January 10, 2022 that was required to be filed on January 7, 2022.
Ichiro Takesako-
Filed a Form 4 on January 10, 2022 that was required to be filed on January 7, 2022.
Filed a Form 4 on March 2, 2022 that was required to be filed on February 24, 2022.
Filed a Form 4 on June 7, 2022 that was required to be filed on May 30, 2022.
William A. Owens-
Filed a Form 4 on January 10, 2022 that was required to be filed on January 7, 2022.
Filed a Form 4 on February 4, 2022 that was required to be filed on January 27, 2022.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation DiscussionTable - Years Ended September 30, 2022 and Analysis
The following table sets forth information concerning all cash and Analysis describes the material elements ofnon-cash compensation awarded to, earned by or paid to each of our executive officersthe named persons for services rendered in the Compensation Table under “Remuneration of Executive Officers” (the “Named Executive Officers”) who servedall capacities during the year ended September 30, 2020. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure. The principles and guidelines discussed herein would also apply to any additional executive officers that the Company may hire in the future.
|
|
|
|
|
|
|
|
|
|
|
| Stock |
|
| Option |
|
| All Other |
|
|
|
| ||||||
|
|
|
|
|
| Salary |
|
| Bonus |
|
| Awards |
|
| Awards |
|
| Compensation |
|
| Total |
| ||||||
Name |
| Principal Position |
|
| ($) |
|
| ($) |
|
| ($) |
|
| ($) (4) |
|
| ($) |
|
| ($) |
| |||||||
Salary- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ronald P. Erickson (1) |
| Chairman of the Board |
| 9/30/22 |
| $ | 474,475 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,748,231 |
|
| $ | - |
|
| $ | 2,222,706 |
|
|
|
|
| 9/30/21 |
| $ | 366,042 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,811,691 |
|
| $ | - |
|
| $ | 2,177,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip A. Bosua (2) |
| Chief Executive Officer |
| 9/30/22 |
| $ | 339,998 |
|
| $ | - |
|
| $ | - |
|
| $ | 865,601 |
|
| $ | 1,189,428 |
|
| $ | 2,395,027 |
|
|
|
|
| 9/30/21 |
| $ | 413,760 |
|
| $ | 250,000 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 663,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter J. Conley (3) |
| Chief Financial Officer and SVP Intellectual Property |
| 9/30/22 |
| $ | 110,000 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 110,000 |
|
|
|
|
| 9/30/21 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
(1) During the years ended September 30, 20202022 and 2019,2021, the Compensation Committee and the Board compensated Ronald P. Erickson its Chairman of the Board and Interim Financial Officer, with an annual salary of $180,000$215,000 from October 1, 20182020 to March 4, 2019, from
(2) During the years ended September 30, 20202022 and 2019,2021, the Compensation Committee and the Board compensated Phillip A. Bosua its Chief Executive Officer, withat an annual salary of $225,000$260,000 from October 1, 20182020 to March 4, 2019, from
(3) Mr. Peter J. Conley has served as our Chief Financial Officer and SVP Intellectual Property since May 2022.During the year ended September 30, 2022, the Compensation Committee and the Board compensated Mr. Conley with an annual salary of $300,000 from May 20, 2022 to September 30, 2022.
(4) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
| 45 |
| Table of Contents |
Employment Agreements
On April 10, 2018, we entered into an amended employment agreement for Ronald P. Erickson which amends our employment agreement with him dated July 1, 2017. The employment agreement provides for a base salary of $180,000 per year, which was increased to $215,000 from May 1, 2020 to March 31, 2021 and to $300,000 from April 1, 2021 to March 15, 2022 and to $325,000 from March 15, 2022 to September 30, 2022. The compensation committee and the board of Particle compensated Mr. Erickson with an annual salary of $120,000 from June 1, 2020.
On April 10, 2018, we entered into an employment agreement with Phillip A. Bosua was paidreflecting his appointment as Chief Executive Officer. The employment agreement provides for a base salary of $225,000 per year, which was increased to $260,000 from May 1, 2020 to March 31, 2021 and to $350,000 from April 1, 2021 to September 30, 2022. The compensation committee and the board of directors of Particle compensated Phillip A. Bosua with an annual salary of $120,000 from June 1, 2020 to August 15, 2021. Mr. Bosua also received 500,000 shares of common stock valued at $0.33 per share and may be entitled to bonuses and equity awards at the discretion of the Boardboard or a committee of the Board. The Employment Agreement provides for severance pay equal to 12 months of base salary if Mr. Bosua is terminated without “cause” or voluntarily terminates his employment for “good reason.”
On April 10, 2018,May 13, 2022, we entered into an Amended Employment Agreementemployment agreement with Peter J. Conley reflecting his appointment as our Chief Financial Officer and Senior Vice President, Intellectual Property. The employment agreement provides for Ronald P. Erickson which amends the Employment Agreement dated July 1, 2017. The Agreement expires March 21, 2019.
| 46 |
| Table of Contents |
Outstanding Equity Awards at any time for “Good Reason” or due to a “Disability”, Mr. Erickson will be entitled to receive (i) his Base Salary amount for one year; and (ii) medical benefits for eighteen months.
The following table providesincludes certain information concerning remunerationwith respect to the value of the chief executive officer, the chief financial officerall unexercised options and another named executive officer for the fiscal years ended September 30, 2020 and 2019:
All | |||||||||
Stock | Option | Other | |||||||
Salary | Bonus | Awards | Awards | Compensation | Total | ||||
| Name | Principal Position | ($) | ($) | ($) (3) | ($) | ($) | ($) | ||
| Salary- | |||||||||
| Ronald P. Erickson (1) | Chairman of the Board and Interim Chief Financial Officer | 9/30/20 | $243,333 | $- | $190,000 | $394,000 | $- | $827,333 | |
9/30/19 | $188,750 | $- | $102,000 | $- | $- | $290,750 | |||
| Phillip A. Bosua (2) | Chief Executive Officer | 9/30/20 | $288,333 | $- | $285,000 | $394,000 | $- | $967,333 | |
9/30/19 | $233,750 | $- | $- | $- | $- | $233,750 |
All Other | ||||||||||||
All Other | Option Awards; | |||||||||||
Estimated Future Payouts Under | Estimated Future Payouts Under | Stock Awards; | Number of | |||||||||
Non-Equity Incentive Plan | Equity Incentive Plan | Number of | Securities | Exercise or | Grant Date | |||||||
Awards | Awards | Shares of | Underlying | Base Price of | Fair Value of | |||||||
| Grant | Threshold | Target | Maximum | Threshold | Target | Maximum | Stock or Units | Options | Option Awards | Stock and | ||
| Name | Date | ($) | ($) | ($) | (#) | (#) | (#) | (#) | (#) | ($/Sh) (3) | Option Awards | |
| Ronald P. Erickson (1) | 11/4/19 | $- | $- | $- | - | - | - | - | 1,200,000 | $1.100 | $- | |
| 7/2/20 | $- | $- | $- | - | - | - | - | 1,500,000 | $0.100 | 0.788 | ||
| Phillip A. Bosua (2) | 11/4/19 | $- | $- | $- | - | - | - | - | 1,200,000 | $1.100 | $- | |
| 7/2/20 | $- | $- | $- | - | - | - | - | 1,500,000 | $0.100 | 0.788 | ||
|
| Option Awards | |||||||||||||
|
| Number of |
|
| Number of |
|
|
|
|
|
| ||||
|
| Securities |
|
| Securities |
|
|
|
|
|
| ||||
|
| Underlying |
|
| Underlying |
|
|
|
|
|
| ||||
|
| Unexercised |
|
| Unexercised |
|
| Option |
|
|
| ||||
|
| Options |
|
| Options |
|
| Exercise |
|
| Option | ||||
|
| Exercisable |
|
| Unexerciseable |
|
| Price |
|
| Expiration | ||||
Name |
| (#) |
|
| (#) |
|
| ($) (4) |
|
| Date | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Ronald P. Erickson (1) |
|
| 1,200,000 |
|
|
| - |
|
| $ | 1.10 |
|
| 11/4/24 | |
|
|
| - |
|
|
| 1,865,675 |
|
| $ | 1.53 |
|
| 12/15/25 | |
|
|
| 266,525 |
|
|
| 1,599,150 |
|
| $ | 1.53 |
|
| 12/15/25 | |
|
|
| 2,000,000 |
|
|
| - |
|
| $ | 1.53 |
|
| 12/15/25 | |
|
|
| 187,500 |
|
|
| 812,500 |
|
| $ | 2.09 |
|
| 12/16/26 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Phillip A. Bosua (2) |
|
| 1,000,000 |
|
|
| - |
|
| $ | 1.28 |
|
| 7/30/23 | |
|
|
| - |
|
|
| 1,200,000 |
|
| $ | 1.10 |
|
| 11/4/24 | |
|
|
| - |
|
|
| 2,132,195 |
|
| $ | 1.53 |
|
| 12/15/25 | |
|
|
| 304,600 |
|
|
| 1,827,600 |
|
| $ | 1.53 |
|
| 12/15/25 | |
|
|
| 243,750 |
|
|
| 1,056,250 |
|
| $ | 2.09 |
|
| 12/16/26 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Peter J. Conley (3) |
|
| - |
|
|
| 1,000,000 |
|
| $ | 1.48 |
|
| 5/20/27 | |
(1)
(2) On July 30, 2018, Mr. Bosua was awarded a stock option grant for 1,000,000 Particle options are milestone based and expense will be recognized when the milestone is met or likely to be met.
(3) Mr. Peter J. Conley has served as our Chief Financial Officer and SVP Intellectual Property since May 2022. On May 20, 2022, we issued a stock option grant to Mr. Conley for 1,000,000 Particle options are milestone based and expense will be recognized whenshares at an exercise price of $1.48 per share. The stock option grant expires in five years. The stock option grant vests quarterly over four years, with no vesting during the milestone is met or likely to be met.
(4) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
| 47 |
| Table of Contents |
Additional Narrative Disclosure
Retirement Benefits
We have the following outstanding equity awards as of September 30, 2020.
Option Awards | ||||
Number of | Number of | |||
Securities | Securities | |||
Underlying | Underlying | |||
Unexercised | Unexercised | Option | ||
Options | Options | Exercise | Option | |
Exercisable | Unexerciseable | Price | Expiration | |
| Name | (#) | (#) | ($) (3) | Date |
| Ronald P. Erickson (1) | - | 1,200,000 | $1.10 | 11/4/24 |
500,000 | 1,000,000 | $0.10 | 7/2/25 | |
| Phillip A. Bosua (2) | - | 1,200,000 | $1.10 | 11/4/24 |
500,000 | 1,000,000 | $0.10 | 7/2/25 | |
Potential Payments upon Termination or Change in Control
We have the following potential payments upon termination or change in control with Ronald P. Erickson:
Early | Not For Good | Change in | |||
| Executive | For Cause | or Normal | Cause | Control | Disability |
| Payments Upon | Termination | Retirement | Termination | Termination | or Death |
| Separation | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 |
| Compensation: | |||||
| Base salary (1) | $- | $- | $215,000 | $215,000 | $- |
| Performance-based incentive | |||||
| compensation (2) | $- | $- | $- | $- | $- |
| Stock options | $- | $- | $2,202,000 | $2,202,000 | $- |
| Benefits and Perquisites: | |||||
| Health and welfare benefits (3) | $- | $- | $26,388 | $26,388 | $- |
| Accrued vacation pay | $- | $- | $72,769 | $72,769 | $- |
| Total | $- | $- | $2,516,157 | $2,516,157 | $- |
|
|
|
|
| Early |
|
| Not For Good |
|
| Change in |
|
|
|
| |||||
Executive |
| For Cause |
|
| or Normal |
|
| Cause |
|
| Control |
|
| Disability |
| |||||
Payments Upon |
| Termination |
|
| Retirement |
|
| Termination |
|
| Termination |
|
| or Death |
| |||||
Separation |
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
| |||||
Compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Base salary (1) |
| $ | - |
|
| $ | - |
|
| $ | 325,000 |
|
| $ | 325,000 |
|
| $ | - |
|
| Performance-based incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Stock options (2) |
| $ | - |
|
| $ | - |
|
| $ | 4,618,649 |
|
| $ | 4,618,649 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Perquisites: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health and welfare benefits (3) |
| $ | - |
|
| $ | - |
|
| $ | 25,524 |
|
| $ | 25,524 |
|
| $ | - |
|
Accrued vacation pay |
| $ | - |
|
| $ | - |
|
| $ | 40,385 |
|
| $ | 40,385 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | - |
|
| $ | - |
|
| $ | 5,009,558 |
|
| $ | 5,009,558 |
|
| $ | - |
|
(1)
(2)
(3)
| 48 |
| Table of Contents |
We have the following potential payments upon termination or change in control with Phillip A. Bosua:
Early | Not For Good | Change in | |||
Executive | For Cause | or Normal | Cause | Control | Disability |
Payments Upon | Termination | Retirement | Termination | Termination | or Death |
Separation | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 | on 9/30/2020 |
| Compensation: | |||||
| Base salary (1) | $- | $- | $260,000 | $260,000 | $- |
| Performance-based incentive | |||||
| compensation (2) | $- | $- | $- | $- | $- |
| Stock options | $- | $- | $2,202,000 | $2,202,000 | $- |
| Benefits and Perquisites: | |||||
| Health and welfare benefits (3) | $- | $- | $22,572 | $22,572 | $- |
| Accrued vacation pay | $- | $- | $- | $- | $- |
| Total | $- | $- | $2,484,572 | $2,484,572 | $- |
|
|
|
| Early |
|
| Not For Good |
|
| Change in |
|
|
| |||||||
Executive |
| For Cause |
|
| or Normal |
|
| Cause |
|
| Control |
|
| Disability |
| |||||
Payments Upon |
| Termination |
|
| Retirement |
|
| Termination |
|
| Termination |
|
| or Death |
| |||||
Separation |
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
| |||||
| Compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Base salary (1) |
| $ | - |
|
| $ | - |
|
| $ | 350,000 |
|
| $ | 350,000 |
|
| $ | - |
|
Performance-based incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| Stock options (2) |
| $ | - |
|
| $ | - |
|
| $ | 6,652,556 |
|
| $ | 6,652,556 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Benefits and Perquisites: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Health and welfare benefits (3) |
| $ | - |
|
| $ | - |
|
| $ | 13,806 |
|
| $ | 13,806 |
|
| $ | - |
|
| Accrued vacation pay |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | - |
|
| $ | - |
|
| $ | 7,016,362 |
|
| $ | 7,016,362 |
|
| $ | - |
|
(1)
(2)
(3)
|
|
|
|
| Early |
|
| Not For Good |
|
| Change in |
|
|
|
| |||||
Executive |
| For Cause |
|
| or Normal |
|
| Cause |
|
| Control |
|
| Disability |
| |||||
Payments Upon |
| Termination |
|
| Retirement |
|
| Termination |
|
| Termination |
|
| or Death |
| |||||
Separation |
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
|
| on 9/30/2022 |
| |||||
Compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Base salary (1) |
| $ | - |
|
| $ | - |
|
| $ | 300,000 |
|
| $ | 300,000 |
|
| $ | - |
|
Performance-based incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Stock options (2) |
| $ | - |
|
| $ | - |
|
| $ | 979,000 |
|
| $ | 979,000 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Perquisites: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health and welfare benefits |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Accrued vacation pay |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | - |
|
| $ | - |
|
| $ | 1,279,000 |
|
| $ | 1,279,000 |
|
| $ | - |
|
(1) Reflects a salary for twelve months.
(2) Reflects the vesting of stock option grants- non cash.
Director Compensation
Our independent non-employee directors are not have any potential payments upon termination or changecompensated in control with our other Named Executive Officers.
| 49 |
| Table of Contents |
The table below sets forth the compensation paid to our non-employee directors during the fiscal year ended September 30, 2020,2022. Ronald P. Erickson and Phillip A. Bosua did not receive any compensation for his servicetheir services as a director.directors. The compensation disclosed in the Summary Compensation Table on page 36above represents the total compensation for Mr. Erickson and Mr. Bosua.
|
| Stock |
|
| Option |
|
| Other |
|
|
|
| ||||
Name |
| Awards (4) |
|
| Awards (4) |
|
| Compensation |
|
| Total |
| ||||
Jon Pepper (1) |
| $ | 51,000 |
|
| $ | 23,740 |
|
| $ | 10,000 |
|
| $ | 84,740 |
|
Ichiro Takesako (2) |
|
| 51,000 |
|
|
| 23,740 |
|
|
| 10,000 |
|
|
| 84,740 |
|
William A. Owens (3) |
|
| 51,000 |
|
|
| 23,740 |
|
|
| 10,000 |
|
|
| 84,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 153,000 |
|
| $ | 71,220 |
|
| $ | 30,000 |
|
| $ | 254,220 |
|
(1) | The stock award for 30,000 shares was issued on January 5, 2022 to Jon Pepper and was valued at $1.70 per share. The stock option grant for 20,000 shares of common stock was issued on January 5, 2022 to Mr. Pepper and was valued at the black scholes value of $1.187 per share. Mr. Pepper was paid $10,000 for board services. |
(2) | The stock award for 30,000 shares was issued on January 5, 2022 to Ichiro Takesako and was valued at $1.70 per share. The stock option grant for 20,000 shares of common stock was issued on January 5, 2022 to Mr. Takesako and was valued at the black scholes value of $1.187 per share. Mr. Takesako was paid $10,000 for board services. |
(3) | The stock award for 30,000 shares was issued on January 5, 2022 to William A. Owens and was valued at $1.70 per share. The stock option grant for 20,000 shares of common stock was issued on January 5, 2022 to Mr. Owens and was valued at the black scholes value of $1.187 per share. Mr. Owens was paid $10,000 for board services. |
(4) | These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718. |
On January 5, 2022, we issued 30,000 shares each to Board Members
On January 5, 2022, we issued 20,000 warrants to purchase common stock each to three directors shares at $1.70 per share. The warrants expire on January 5, 2027.
2021 Equity Incentive Plan
On August 12, 2021, we established the Know Labs, Inc. 2021 Equity Incentive Plan, or the 2021 Plan, which was adopted by our stockholders on October 15, 2021. The following summary briefly describes the principal features of the 2021 Plan and is qualified in its entirety by reference to the full text of the 2021 Plan, which is filed as an exhibit to this report.
Awards that may be granted include: (a) incentive stock options, (b) non-qualified stock options, (c) stock appreciation rights, (d) restricted awards, (e) performance share awards, and (f) performance compensation awards. These awards offer our officers, employees, consultants and directors the possibility of future value, depending on the long-term price appreciation of our common stock and the award holder’s continuing service with our company. All of the permissible types of awards under the 2021 Plan are described in more detail below.
Purposes of 2021 Plan: The purposes of the 2021 Plan are to attract and retain officers, employees and directors for our company and our subsidiaries; motivate them by means of appropriate incentives to achieve long-range goals; provide incentive compensation opportunities; and further align their interests with those of our stockholders through compensation that is based on our common stock.
Administration of the 2021 Plan: The 2021 Plan is administered by our compensation committee (which we refer to as the plan administrator). Among other things, the plan administrator has the authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards, and to establish the terms, conditions, performance criteria, restrictions and other provisions of awards. The plan administrator has authority to establish, amend and rescind rules and regulations relating to the 2021 Plan.
Eligible Recipients: Persons eligible to receive awards under the 2021 Plan will be those officers, employees, consultants, and directors of our company and our subsidiaries who are selected by the plan administrator.
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Shares Available Under the 2021 Plan: 20,000,000 shares of our common stock were originally authorized as the maximum number of shares of our common stock that may be delivered to participants under the 2021 Plan, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. This number was increased to 22,000,000 shares of common stock as of January 1, 2022 as a result of the automatic share reserve increase discussed below. Shares subject to an award under the 2021 Plan for which the award is canceled, forfeited or expires again become available for grants under the 2021 Plan. Shares subject to an award that is settled in cash will not compensatedagain be made available for grants under the 2021 Plan. As of the date of this report, all shares remain available for issuance under the 2021 Plan. The 2021 Plan also authorizes for issuance the sum of (A) any shares of our common stock that, as of the date of stockholder approval of the 2021 Plan, have been reserved but not issued pursuant to any awards granted under our 2011 Stock Incentive Plan and (B) any shares of our common stock subject to stock options or similar awards granted under our 2011 Stock Incentive Plan that, after the date of stockholder approval of the 2021 Plan, expire or otherwise terminate without having been exercised in cash.full and shares of our common stock issued pursuant to awards granted under our 2011 Stock Incentive Plan that are forfeited to or repurchased by us, with the maximum number of shares of our common stock to be added to the 2021 Plan pursuant to clause (B) equal to 13,816,370.
Automatic Share Reserve Increase: Subject to the provisions of Section 14 of the 2021 Plan, the number of shares available for issuance under the 2021 Plan will be increased on the first day of each calendar year beginning January 1, 2022 and ending on and including January 1, 2030 in an amount equal to the least of (i) 2,000,000 shares of our common stock, (ii) four percent (4%) of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year or (iii) such number of shares of our common stock determined by our board of directors; provided, that such determination under clause (iii) will be made no later than the last day of the immediately preceding fiscal year.
Stock Options:Stock options give the option holder the right to acquire from us a designated number of shares of common stock at a purchase price that is fixed upon the grant of the option. The exercise price will not be less than the market price of the common stock on the date of grant. Stock options granted may be either tax-qualified stock options (so-called “incentive stock options”) or non-qualified stock options.
General. Subject to the provisions of the 2021 Plan, the plan administrator has the authority to determine all grants of stock options. That determination will include: (i) the number of shares subject to any option; (ii) the exercise price per share; (iii) the expiration date of the option; (iv) the manner, time and date of permitted exercise; (v) other restrictions, if any, on the option or the shares underlying the option; and (vi) any other terms and conditions as the plan administrator may determine.
Option Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less than the fair market value on the date of grant. As a matter of tax law, the exercise price for any incentive stock option awarded may not be less than the fair market value of the shares on the date of grant. However, incentive stock option grants to any person owning more than 10% of our voting stock must have an exercise price of not less than 110% of the fair market value on the grant date.
Exercise of Options. An option may be exercised only compensation generally has beenin accordance with the terms and conditions for the option agreement as established by the plan administrator at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price. Payments may be made in cash or, at the option of the plan administrator, by actual or constructive delivery of shares of common stock to the holder of the option based upon the fair market value of the shares on the date of exercise.
Expiration or Termination. Options, if not previously exercised, will expire on the expiration date established by the plan administrator at the time of grant. In the case of incentive stock options, such term cannot exceed ten years provided that in the case of holders of more than 10% of our voting stock, such term cannot exceed five years. Options will terminate before their expiration date if the holder’s service with our company or a subsidiary terminates before the expiration date. The option may remain exercisable for specified periods after certain terminations of employment, including terminations as a result of death, disability or retirement, with the precise period during which the option may be exercised to be established by the plan administrator and reflected in the grant evidencing the award.
Incentive and Non-Qualified Options. As described elsewhere in this summary, an incentive stock option is an option that is intended to qualify under certain provisions of the Internal Revenue Code of 1986, as amended, or the Code, for more favorable tax treatment than applies to non-qualified stock options. Any option that does not qualify as an incentive stock option will be a non-qualified stock option. Under the Code, certain restrictions apply to incentive stock options. For example, the exercise price for incentive stock options may not be less than the fair market value of the shares on the grant date and the term of the option may not exceed ten years. In addition, an incentive stock option may not be transferred, other than by will or the laws of descent and distribution, and is exercisable during the holder’s lifetime only by the holder. In addition, no incentive stock options may be granted to a holder that is first exercisable in a single year if that option, together with all incentive stock options previously granted to the holder that also first become exercisable in that year, relate to shares having an aggregate market value in excess of $100,000, measured at the grant date.
| 51 |
| Table of Contents |
Stock Appreciation Rights: Stock appreciation rights, or SARs, which may be granted alone or in tandem with options, have an economic value similar to that of options. When a SAR for a particular number of shares is exercised, the holder receives a payment equal to the difference between the market price of the shares on the date of exercise and the exercise price of the shares under the SAR. The exercise price for SARs normally is the market price of the shares on the date the SAR is granted. Under the 2021 Plan, holders of SARs may receive this payment — the appreciation value — either in cash or shares of common stock valued at the fair market value on the date of exercise. The form of payment will be determined by us.
Stock Awards: Restricted shares are shares of common stock awarded to participants at no cost. Restricted shares can take the form of awards of restricted stock, which represent issued and outstanding shares of our common stock subject to vesting criteria, or restricted stock units, which represent the right to receive shares of our common stock, subject to satisfaction of the vesting criteria. Those may include requirements for continuous service and/or the achievement of specified performance goals. Restricted shares are forfeitable and non-transferable until the shares vest. The vesting date or dates and other conditions for vesting are established when the shares are awarded.
Cash Awards: A cash award is an award that may be in the form of stock awards. There is no formal stock compensation plan for independent non-employee directors. Our non-employee directors received the following compensation during the year ended September 30, 2020.
Stock | Option | Other | ||
| Name | Awards | Awards (4) | Compensation | Total |
| Jon Pepper (1) | $76,000 | $52,815 | $- | $128,815 |
| Ichiro Takesako (2) | 76,000 | 52,815 | - | 128,815 |
| William A. Owens (3) | 76,000 | - | - | 76,000 |
| Total | $228,000 | $105,630 | $- | $333,630 |
Section 162(m) of the Code: Section 162(m) of the Code limits publicly-held companies to Mr. Pepperan annual deduction for U.S. federal income tax purposes of $1.0 million for compensation paid to each of their principal executive officer or principal financial officer and was valuedtheir three highest compensated executive officers (other than the principal executive officer or principal financial officer) determined at the black scholes valueend of $1.006 per share.
Performance Criteria: Under the 2021 Plan, one or more performance criteria will be used by the plan administrator in establishing performance goals. Any one or more of the performance criteria may be used on an absolute or relative basis to measure the performance of our company, as the plan administrator may deem appropriate, or as compared to the performance of a group of comparable companies or published or special index that the plan administrator deems appropriate. In determining the actual size of an individual performance compensation award, the plan administrator may reduce or eliminate the amount of the award through the use of negative discretion if, in its sole judgment, such reduction or elimination is appropriate. The plan administrator shall not have the discretion to (i) grant or provide payment in respect of performance compensation awards if the performance goals have not been attained or (ii) increase a performance compensation award above the maximum amount payable under the 2021 Plan.
Other Material Provisions: Awards will be evidenced by a written agreement, in such form as may be approved by the plan administrator. In the event of various changes to the capitalization of our company, such as stock splits, stock dividends and similar re-capitalizations, an appropriate adjustment will be made by the plan administrator to the number of shares covered by outstanding awards or to the exercise price of such awards. The plan administrator is also permitted to include in the written agreement provisions that provide for certain changes in the award for 40,000 shares was issued on January 1, 2020 to Ichiro Takesako and was valued at $1.90 per share. The stock option grant for 52,500 sharesin the event of common stock was issued on November 4, 2019 to Mr. Takesako and was valueda change of control of our company, including acceleration of vesting. Except as otherwise determined by the plan administrator at the black scholes valuedate of $1.006 per share.
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| Table of Contents |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regardingwith respect to the beneficial ownership of our common stock as of September 30, 2020 by:
Shares Beneficially Owned | ||
Amount | Percentage | |
| Directors and Officers- | ||
| Ronald P. Erickson (1) | 8,089,015 | 25.7% |
| Phillip A. Bosua (2) | 3,567,500 | 14.1% |
| Jon Pepper (3) | 278,000 | 1.1% |
| Ichiro Takesako (4) | 190,000 | * |
| William A. Owens (5) | 690,000 | 2.8% |
| Total Directors and Officers (5 in total) | 12,814,515 | 51.7% |
|
| Shares Beneficially Owned (1) (2) |
| |||||
Name of Beneficial Owner |
| Amount |
|
| Percentage |
| ||
Directors and Officers- |
|
|
|
|
|
| ||
Ronald P. Erickson (3) |
|
| 11,768,040 |
|
|
| 20.1 | % |
Phillip A. Bosua (4) |
|
| 4,553,350 |
|
|
| 9.2 | % |
Peter J. Conley (5) |
|
| 10,000 |
|
|
| - |
|
William A. Owens (6) |
|
| 901,670 |
|
|
| 1.9 | % |
Jon Pepper (7) |
|
| 505,500 |
|
|
| 1.0 | % |
Ichiro Takesako (8) |
|
| 148,500 |
|
|
| 0.3 | % |
All executive officers and directors (6 persons) |
|
| 17,887,060 |
|
|
| 16.6 | % |
* Less than 1%
(1) | Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares that such person or any member of such group has the right to acquire within sixty (60) days. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within sixty (60) days of September 30, 2022 are deemed to be outstanding for such person, but not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership by any person. |
(2) | Based on 48,156,062 shares of common stock issued and outstanding as of September 30, 2022. |
(3) | Consists of (i) 1,483,085 shares of shares of our common stock beneficially owned by Ronald P. Erickson or entities controlled by Mr. Erickson, (ii) 1,654,025 shares of our common stock issuable upon the exercise of options exercisable within 60 days, (iii) 3,894,666 shares of our common stock issuable upon the exercise of warrants that are exercisable within 60 days, and (iv) 4,736,264 shares of our common stock issuable upon the conversion of convertible notes that are convertible within 60 days. |
(4) | Consists of (i) 3,005,000 shares of shares of our common stock held directly by Phillip A. Bosua and (ii) 1,548,350 shares of our common stock issuable upon the exercise of options that are exercisable within 60 days. |
(5) | Consists of 10,000 shares of shares of our common stock beneficially owned by Peter J. Conley. Mr. Peter J. Conley has served as our Chief Financial Officer and SVP Intellectual Property since May 2022. |
(6) | Consists of (i) 630,420 shares of our common stock held directly by William A Owens and (ii) 271,250 shares of our common stock issuable upon the exercise of warrants that are exercisable within 60 days. |
(7) | Consists of (i) 388,000 shares of our common stock held directly by Jon Pepper, (ii) 52,500 shares of our common stock issuable upon the exercise of options exercisable within 60 days and (iii) 65,000 shares of our common stock issuable upon the exercise of warrants exercisable within 60 days. |
(8) | Consists of (i) 56,000 shares of our common stock held directly by Ichiro Takesako, (ii) 52,500 shares of our common stock issuable upon the exercise of options exercisable within 60 days and (iii) 40,000 shares of our common stock issuable upon the exercise of warrants exercisable within 60 days. |
| 53 |
| Table of Contents |
|
| Shares Beneficially Owned |
| |||||
|
| Amount |
|
| Percentage |
| ||
Greater Than 5% Ownership |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Clayton A. Struve (1) |
|
| 19,511,071 |
|
|
| 29.2 | % |
|
| Blocker at 4.99% | ||||||
|
|
|
|
|
|
|
|
|
Ronald P. Erickson (2) |
|
| 11,768,040 |
|
|
| 20.1 | % |
|
|
|
|
|
|
|
|
|
Phillip A. Bosua (3) |
|
| 4,553,350 |
|
|
| 9.2 | % |
|
|
|
|
|
|
|
|
|
Todd Baszucki (4) |
|
| 4,879,000 |
|
|
| 9.9 | % |
(1) Consists of shares of common stock beneficially owned by Ronald P. Erickson or entities controlled by Mr. Erickson and warrants to purchase 1,894,666(i) 849,000 shares of our common stock, that are exercisable within 60 days, and also includes 4,736,264(ii) 6,269,715 shares of our common stock related to convertible debt that are exercisable within 60 days. The addressissuable upon the exercise of Mr. Erickson is 500 Union Street, Suite 810, Seattle, WA 98101.
Shares Beneficially Owned | ||
Amount | Percentage | |
| Greater Than 5% Ownership | ||
| Clayton A. Struve (1) | 20,758,075 | 46.7% |
Blocker at 4.99% | ||
| Ronald P. Erickson (2) | 8,089,015 | 25.7% |
| Phillip A. Bosua (3) | 3,567,500 | 14.1% |
| Dale Broadrick (4) | 2,726,036 | 10.5% |
(2) Reflects 1,458,085 shares of shares of common stock beneficially owned bySee above for Ronald P. Erickson or entities controlled by Mr. Erickson and warrants to purchase 1,894,666Erickson.
(3) See above for Phillip A. Bosua.
(4) Consists of (i) 3,879,000 shares of our common stock that are exercisable within 60 days,held directly and also includes 4,736,264(ii) 1,000,000 shares of our common stock related to convertible debt that are exercisable within 60 days.issuable upon the exercise of warrants. The address for Mr. Baszucki is 519 Loma Alta Road, Carmel, CA 93923.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information about the securities authorized for issuance under our incentive plans as of Mr. Erickson is 500 Union Street, Suite 810, Seattle, WA 98101.
|
| (a) |
|
| (b) |
|
| (c) |
| |||
|
|
|
|
|
|
|
| Number of securities |
| |||
|
|
|
|
|
|
|
| remaining available |
| |||
|
| Number of securities |
|
| Weighted-average |
|
| for future issuance |
| |||
|
| to be issued upon |
|
| exercise price of |
|
| under equity compensation |
| |||
|
| exercise of outstanding |
|
| outstanding options, |
|
| plan (excluding securities |
| |||
Plan Category |
| options, warrants and rights |
|
| warrants and rights |
|
| reflected in column (a)) |
| |||
Equity compensation plan |
|
|
|
|
|
|
|
|
| |||
approved by shareholders |
|
| 20,792,370 |
|
| $ | 1.618 |
|
|
| 15,841,457 |
|
Equity compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
not approved by shareholders |
|
| - |
|
|
| - |
|
|
| - |
|
Total |
|
| 20,792,370 |
|
| $ | 1.618 |
|
|
| 15,841,457 |
|
On August 12, 2021, we established the 2021 Plan, which was adopted by our stockholders on October 15, 2021. The maximum number of shares of common stock beneficially owned by Phillip A. Bosuathat may be issued pursuant to awards granted under the 2021 Plan is 22,000,000 shares and vested stock option grantsall of these shares remained available for issuance as of September 30, 2022. See Item 11 “Executive Compensation—2021 Equity Incentive Plan” for a complete description of the 2021 Plan.
On January 23, 2019, the Board approved an amendment to purchase 562,500its 2011 Stock Incentive Plan increasing the number of shares of our common stock that are exercisable within 60 days. The addressreserved 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 Mr. Bosua is 500 Union Street, Suite 810, Seattle, WA 98101.
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| Table of Contents |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The following includes a summary of determining director independence, we have appliedtransactions since the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which sharesbeginning of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the Companyour 2021 fiscal year, or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Transactions with Clayton Struve
On May 3, 2022, we approved the Extension of Warrant Agreement with Clayton Struve, extending the exercise dates as follows:
Warrant No./Class | Issue Date | No. Warrant Shares | Exercise Price | Original Expiration Date | Amended Expiration Date |
Clayton A. Struve Warrant
| 08-14-2017 | 1,440,000 | $0.25 | 08-13-2023 | 08-13-2024 |
Clayton A. Struve Warrant
| 12-12-2017 | 1,200,000 | $0.25 | 12-11-2023 | 12-11-2024 |
Clayton A. Struve Warrant
| 08-04-2016 | 1,785,715 | $0.25 | 08-04-2023 | 08-04-2024 |
Clayton A. Struve Warrant
| 02-28-2018 | 1,344,000 | $0.25 | 02-28-2023 | 02-28-2024 |
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 warrants for 187,500 and 187,500 that were previously extended. We recorded interest expense of $244,260 during the year ended September 30, 2021 related to the extension of the warrants.
Convertible Promissory Notes with Clayton A. Struve
We owe Clayton A. Struve, a significant stockholder, $1,071,000 under convertible promissory or OID notes. We recorded accrued interest of $71,562$86,562 and $62,171$71,562 as of
Series C and D Preferred Stock and Warrants
On August 5, 2016, we 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 2019 there are 1,785,715 Series C Preferred shares outstanding.
As of September 30, 2022 and 2021, we have 1,106,014$750,000 of
See “Description of Securities” for the stated valueterms of our series C convertible preferred stock 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 Seriesseries 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.
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| Table of Contents |
Debt Offering
Mr. Struve invested $1,000,000 in the Debt Offeringour debt offering which closed in May 2019. On March 18, 2020, Mr. Struve received 1,080,000 shares of common stock related to the automatic conversion of the $1,000,000 invested in the Debt Offering.
Transactions with Ronald P. Erickson
On March 16, 2018, we entered into a Note and Account Payable Conversion Agreement pursuant to which (a) all $664,233 currently owing under the J3E2A2Z Notes was converted to a Convertible Redeemable Promissory Note in the principal amount of $664,233, and (b) all $519,833 of the J3E2A2Z Account Payable was converted into a Convertible Redeemable Promissory Note in the principal amount of $519,833 together with a warrant to purchase up to 1,039,666 shares of our 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 CompanyWe recorded accrued interest of $73,964$287,290 and $216,246 as of September 30, 2019.2022 and 2021, respectively. On May 8, 2019,December 7, 2022, we signed Amendment 1approved Amendments to the convertible redeemable promissory notes with Ronald P. Erickson and J3E2A2Z, extending the due dates to SeptemberJanuary 30, 2019 and increasing the interest rate to 6%. On November 26, 2019, we signed Amendment 2 to the convertible promissory or OID notes, extending the due dates to March 31, 2020. On May 11, 2020, we signed Amendment 3 to the convertible promissory or OID notes, extending the due dates to September 30, 2020. On December 8, 2020, we signed Amendment 4 to the convertible promissory or OID notes, extending the due dates to March 31, 2021.
On November 4, 2019, we granted a stock option grant to Ronald P. Erickson for 1,200,000 shares with an exercise price of $1.10 per share. The performance grant expires November 4, 2024 and vests upon uplisting to the NASDAQ or NYSE exchanges.
On January 1, 2020, we issued 100,000 shares of restricted common stock to Ronald P. Erickson. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $1.90 per share, the market price of our common stock, or $190,000.
On June 1, 2020, Mr. Erickson received a salary of $10,000 per month for work on Particle, Inc.
On July 2, 2020, Particle issued a stock option grant for 1,500,000 shares at $0.10 per share to Ronald P. Erickson. The stock option grant vests (i) 33.3% upon issuance; (ii) 33.3% after the first sale; and (iii) 33.4% after one million in sales are achieved.
On December 15, 2020, we issued a stock option grant to Ronald P. Erickson for 1,865,675 shares at an exercise price of $1.53 per share. The stock option grant expires in five years. The grant vests in increments if the market capitalization of our commons stock exceeds for 20 consecutive trading days starting at $100 million to $1 billion. The Company estimated at grant date the fair value of these options at approximately $520,869 which is being amortized over 5 years. As of September 30, 2022, we recorded a cumulative expense of $186,657. We are valuing this stock option using the Monte Carlo pricing model which included key assumptions of 100% stock volatility, five year life and no forfeitures. The stock option grant was not vested as of September 30, 2022.
On December 15, 2020, we issued a stock option grant to Ronald P. Erickson for 1,865,675 shares at an exercise price of $1.53 per share. The stock option grant expires in five years. Our common stock began trading on NYSE American under the symbol “KNW” on September 16, 2022 and we expensed $263,593 during the year ended September 30, 2022. The stock option grants vest when earned based on certain performance criteria. On December 15, 2020, we issued a fully vested warrant to Ronald P. Erickson for 2,000,000 shares of common stock. The five-year warrant is exercisable for cash or non-cash at $1.53 per share and was valued using a Black-Scholes model at $1,811,691.
On December 15, 2020, we issued warrants to Ronald P. Erickson for 2,000,000 shares of common stock. The five year warrant is immediately vested and exercisable on a cash or cashless basis at $1.53 per share and was valued using a Black-Scholes model at $1,811,691.
We paid $120,000 and $272,500 of salaries and vacation pay to Mr. Erickson during the year ended September 30, 2022 and 2021 that were previously accrued and reported but were deferred.,
On December 16, 2021, we issued a stock option grant to Ronald P. Erickson for 1,000,000 shares at an exercise price of $2.09 per share. The stock option grant expires in five years. The stock option grant vests quarterly over four years.
Mr. Erickson and/or entities with which he is affiliated also have accrued compensation, travel and interest of approximately $295,418 and $421,599 as of September 30, 2022 and 2021, respectively.
| 56 |
| Table of Contents |
Transactions with Phillip A. Bosua
On November 4, 2019, we granted a stock option grant to Philip A. Bosua for 1,200,000 shares with an exercise price of $1.10 per share. The performance grant expires November 4, 2024 and vests upon FDA approval of the UBAND blood glucose monitor.
On January 1, 2020, we issued 150,000 shares of restricted common stock to
Phillip A.On June 1, 2020, Mr. Bosua received a salary of $10,000 per month for work on Particle, Inc.
On July 2, 2020, Particle issued a stock option grant for 1,500,000 shares at $0.10 per share to Philip A. Bosua.Bosua. The stock option grant vests (i) 33.3% upon issuance; (ii) 33.3% after the first sale; and (iii) 33.4% after one million in sales are achieved.
On December 15, 2020, we issued a stock option grantsgrant to Phillip A. Bosua for 100,0002,132,195 shares of common stock at $3.03 per share.
On December 15, 2020, we issued a stock option grant to Phillip A. Bosua for 2,132,195 shares at an exercise price of $1.53 per share. The stock option grants expire in five years. The stock option grants vested immediately.
On March 18, 2021, we approved a $250,000 bonus for Mr. Bosua. The bonus was paid during April 2021.
On December 16, 2021, we issued a stock option grant to Phillip A. Bosua for 1,300,000 shares at an exercise price of $2.09 per share. The stock option grant expires in five years. The stock option grant vests quarterly over four years.
Our sales of NFT’s are generated using the NFT digital exchange, OpenSea. Customers purchasing the NFT’s must make payments in the crypto currency, Ethereum. The Ethereum is received into a digital wallet and then moved to an account at Coinbase where the Ethereum is converted to U.S. dollars. Initially we were not able to establish a digital wallet and corporate account at Coinbase in order to receive the Ethereum. We used the digital wallet and Coinbase account of our CEO. The Company and the CEO executed an assignment of his account to us while we established our own Coinbase account. All proceeds received from the sale of NFT were deposited in the CEO’s personal digital accounts.
As compensation for the development of the NFT sales, Mr. Bosua was paid $1,087,928 in compensation and $91,500 for rent expense during the year ended September 30, 2022.
Transactions with Peter J. Conley
On May 20, 2022, we issued a stock option grant to Mr. Conley for 1,000,000 shares at an exercise price of $1.48 per share. The stock option grant expires in five years. The stock option grant vests quarterly over four years, with no vesting during the first six months.
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Stock Issuances to Named Executive Officers and Directors
On January 1, 2020,15, 2021, we issued 120,00030,000 shares each to three directors shares at an exercise price of restricted$2.00 per share.
On January 15, 2021, we issued 20,000 warrants to purchase common stock each to
three directorsOn January 5, 2022, we issued 30,000 shares were issued in accordance with the 2011 Stock Incentive Plan and were valuedeach to three directors shares at $1.90 per share, the marketan exercise price of the Company’s$1.70 per share.
On January 5, 2022, we issued 20,000 warrants to purchase common stock or $228,000.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit the Company'sour financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During the year ended September 30, 2020,2022, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting Firm
The Audit Committee engaged BPM LLP to perform an annual audit of our financial statements for the fiscal year ended September 30, 2020. BPM did not perform any services prior to September 30, 2019. Previously the Audit Committee engaged SD Mayer2022 and Associates, LLP to perform an annual audit of our financial statements for the fiscal years ended September 30, 2018; SD Mayer was dismissed on October 3, 2019.2021. The following is the breakdown of aggregate fees paid for the last two fiscal years. The audit fees listed below are those billed in the respective fiscal year but generally relate to the prior fiscal year:
Year Ended | Year Ended | |
September 30, 2020 | September 30, 2019 | |
| Audit fees | $178,325 | $53,620 |
| Audit related fees | 48,150 | 26,000 |
| Tax fees | 14,150 | 7,500 |
| All other fees | 14,615 | 7,800 |
$255,240 | $94,920 |
|
| Year Ended |
|
| Year Ended |
| ||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
Audit fees |
| $ | 88,275 |
|
| $ | 107,000 |
|
Audit related fees |
|
| 78,010 |
|
|
| 67,410 |
|
Tax fees |
|
| - |
|
|
| - |
|
All other fees |
|
| 69,015 |
|
|
| 22,470 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 235,300 |
|
| $ | 196,880 |
|
- “Audit Fees” are fees paid for professional services for the audit of our financial statements.
- “Audit-Related fees” are fees paid for professional services not included in the first two categories, specifically, PCAOB interim quarterly, SEC filings and consents, and accounting consultations on matters addressed during the audit or interim reviews, and review work related to quarterly filings.
- “Tax Fees” are fees primarily for tax compliance in connection with filing US income tax returns.
- “All other fees” related to the reviews of Registration Statements on Form S-1.
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| Table of Contents |
PART IV
ITEM 15. EXHIBITS,EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS:
The company’sCompany’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
F-1 | ||
Consolidated Balance Sheets as of September 30, | F-2 | |
F-3 | ||
F-4 | ||
F-5 | ||
F-6 |
(2) Index to Financial Statement Schedules:
All schedules have been omitted because the required to be filed herewith by Item 601 of Regulation S-K, as describedinformation is included in the following index offinancial statements or the notes thereto, or because it is not required.
(3) Index to Exhibits:
See exhibits are attached hereto unless otherwise indicated as being incorporated by reference, as follows:
| † | ||||
| † | ||||
| 60 |
| Table of Contents |
14, 2017 by and between Know Labs, Inc. and Clayton A. Struve. (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 3, 2022) | ||||
Amendment | ||||
Lease Agreement dated September 22, 2022 by and between Know Labs, Inc. and Phil Bosua. | ||||
21.1* | Subsidiaries of the Registrant. | |||
101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document). | |||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document | |||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
104* | The Cover Page Interactive Data File, formatted in Inline XBRL (included within the Exhibit 101 attachments) | |||
*Filed Herewith. Pursuant to Regulation S-T, this interactive data file is deemed not filedherewith
† Executive compensation plan or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
| 62 |
| Table of Contents |
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 its subsidiaries (the Company) as of September 30, 20202022 and 2019,2021, and the related consolidated statements of operations, stockholders’ deficit,equity, and cash flows for each of the two years in the period ended September 30, 20202022 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, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2020,2022, in conformity with accounting principles generally accepted in the United States of America.
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.audits. 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Digital Asset Sales
As described in Note 2 to the consolidated financial statements, the Company’s artificial AI deep learning platform began generating revenue from digital asset sales of Nun-Fungible Tokens (NFT’s). The Company’s engineering team, using its research data, AI and proprietary algorithms, produced NFT’s in the form of digital art. The Company used the NFT exchange, OpenSea, to facilitate the transaction with the customer. The Company, through OpenSea, had custody and control of the NFT prior to the delivery to the customer and recorded revenue at the point in time when the NFT was delivered to the customer and the customer paid. The customer pays in the form of transferring the crypto currency digital asset, Ethereum. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Payment is required before the NFT is delivered. Each NFT that is generated produces a unique identifying code. The Company also earns a royalty of up to 10% when an NFT is resold by its owner in a secondary market transaction. The Company recognizes this royalty as revenue when the transaction is consummated, and they receive compensation.
We identified digital asset sales as a critical audit matter due to the nature and extent of audit effort required to obtain sufficient appropriate audit evidence to address the risks of material misstatements related to the existence and proper recognition of revenue. The nature and extent of audit effort required to address the matter includes involvement of more experienced engagement team members and discussions and consultations with internal subject matter experts related to the matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included consultation with internal subject matter experts regarding our planned audit responses to address risks of material misstatement, tracing NFT sales activity to a third party platform and the digital wallets, recalculating royalties earned on secondary sales, tracing Ethereum balance held in digital wallets to the online portal and we obtained evidence that management has control of the passwords or private keys required to access the third party platform and digital accounts.
/s/ BPM LLP
BPM LLP
We have served as the Company’s auditor since October 2019
Walnut Creek, California
December 29, 2020
| Table of Contents |
September 30, 2020 | September 30, 2019 | |
| 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 |
KNOW LABS, INC.
CONSOLIDATED BALANCE SHEETS
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 12,593,692 |
|
| $ | 12,258,218 |
|
Total current assets |
|
| 12,593,692 |
|
|
| 12,258,218 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET |
|
| 862,977 |
|
|
| 328,504 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Other assets |
|
| 13,767 |
|
|
| 13,767 |
|
Operating lease right of use asset |
|
| 287,930 |
|
|
| 289,002 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 13,758,366 |
|
| $ | 12,889,491 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable - trade |
| $ | 526,968 |
|
| $ | 419,093 |
|
Accrued expenses |
|
| 462,940 |
|
|
| 893,137 |
|
Accrued expenses - related parties |
|
| 348,264 |
|
|
| 421,599 |
|
Convertible notes payable, net |
|
| 2,255,066 |
|
|
| 9,191,155 |
|
Current portion of operating lease right of use liability |
|
| 215,397 |
|
|
| 112,371 |
|
Total current liabilities |
|
| 3,808,635 |
|
|
| 11,037,355 |
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Notes payable- PPP loans |
|
| - |
|
|
| 431,803 |
|
Operating lease right of use liability, net of current portion |
|
| 87,118 |
|
|
| 178,170 |
|
Total non-current liabilities |
|
| 87,118 |
|
|
| 609,973 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Preferred stock - $0.001 par value, 5,000,000 shares authorized, Series C and D shares issued and outstanding as follows: |
|
|
|
|
|
|
|
|
Series C Convertible Preferred stock $0.001 par value, 1,785,715 shares authorized, |
|
|
|
|
|
|
|
|
1,785,715 shares issued and outstanding at 9/30/2022 and 9/30/2021, 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 9/30/2022 and 9/30/2021, respectively |
|
| 1,015 |
|
|
| 1,015 |
|
Common stock - $0.001 par value, 200,000,000 shares authorized, 48,156,062 and 35,166,551 |
|
|
|
|
|
|
|
|
shares issued and outstanding at 9/30/2022 and 9/30/2021, respectively |
|
| 48,158 |
|
|
| 35,168 |
|
Additional paid in capital |
|
| 111,209,388 |
|
|
| 82,530,684 |
|
Accumulated deficit |
|
| (101,397,738 | ) |
|
| (81,326,494 | ) |
Total stockholders' equity |
|
| 9,862,613 |
|
|
| 1,242,163 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 13,758,366 |
|
| $ | 12,889,491 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| Table of Contents |
Years Ended, | ||
September 30, 2020 | September 30, 2019 | |
| 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 |
KNOW LABS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Years Ended, |
| |||||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
| ||
REVENUE- DIGITAL ASSET SALES |
| $ | 4,360,087 |
|
| $ | - |
|
OPERATING EXPENSES- |
|
|
|
|
|
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES |
|
| 5,385,586 |
|
|
| 3,969,972 |
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
|
| 8,118,137 |
|
|
| 6,476,176 |
|
SELLING AND TRANSACTIONAL COSTS FOR DIGITAL ASSETS |
|
| 3,430,438 |
|
|
| - |
|
Total operating expenses |
|
| 16,934,161 |
|
|
| 10,446,148 |
|
OPERATING LOSS |
|
| (12,574,074 | ) |
|
| (10,446,148 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
Interest expense |
|
| (8,018,798 | ) |
|
| (14,914,065 | ) |
Other income |
|
| 521,628 |
|
|
| - |
|
Total other (expense), net |
|
| (7,497,170 | ) |
|
| (14,914,065 | ) |
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES |
|
| (20,071,244 | ) |
|
| (25,360,213 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (20,071,244 | ) |
| $ | (25,360,213 | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
| $ | (0.50 | ) |
| $ | (0.86 | ) |
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding- basic and diluted |
|
| 40,370,473 |
|
|
| 29,370,596 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| Table of Contents |
Series A Convertible | Series C Convertible | Series D Convertible | Additional | Total | |||||||
Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders' | |||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (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) | |
KNOW LABS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |||||||||||||||||||
|
| Series C Convertible Preferred Stock |
|
| Series D Convertible Preferred Stock |
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated |
|
| Stockholders' Equity |
| ||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Amount |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| (Deficit) |
| |||||||||
Balance as of October 1, 2020 |
|
| 1,785,715 |
|
| $ | 1,790 |
|
|
| 1,016,004 |
|
| $ | 1,015 |
|
| $ | 24,804,874 |
|
| $ | 24,807 |
|
| $ | 54,023,758 |
|
| $ | (55,966,281 | ) |
| $ | (1,914,911 | ) |
Stock compensation expense - employee options |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,028,522 |
|
|
| - |
|
|
| 1,028,522 |
|
Conversion of debt offering and accrued interest (Note 7) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,090,660 |
|
|
| 6,091 |
|
|
| 6,091,968 |
|
|
| - |
|
|
| 6,098,058 |
|
Beneficial conversion feature (Note 7) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 9,769,683 |
|
|
| - |
|
|
| 9,769,683 |
|
Issuance of warrants to debt holders (Note 7) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,439,317 |
|
|
| - |
|
|
| 4,439,317 |
|
Issuance of warrants for services related to debt offering (Note 7) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,667,281 |
|
|
| - |
|
|
| 1,667,281 |
|
Issuance of common stock for services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 97,000 |
|
|
| 97 |
|
|
| 202,723 |
|
|
| - |
|
|
| 202,820 |
|
Issuance of common stock warrant for services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,547,436 |
|
|
| - |
|
|
| 2,547,436 |
|
Issuance of common stock for exercise of warrants |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,676,542 |
|
|
| 3,675 |
|
|
| 1,309,528 |
|
|
| - |
|
|
| 1,313,203 |
|
Issuance of common stock for stock option exercises |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 16,875 |
|
|
| 17 |
|
|
| 23,327 |
|
|
| - |
|
|
| 23,344 |
|
Issuance of shares and warrants for conversion of Simple Agreements for Future Equity |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 480,600 |
|
|
| 481 |
|
|
| 1,427,141 |
|
|
| - |
|
|
| 1,427,622 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (25,360,213 | ) |
|
| (25,360,213 | ) |
Balance as of September 30, 2021 |
|
| 1,785,715 |
|
|
| 1,790 |
|
|
| 1,016,004 |
|
|
| 1,015 |
|
|
| 35,166,551 |
|
|
| 35,168 |
|
|
| 82,530,684 |
|
|
| (81,326,494 | ) |
|
| 1,242,163 |
|
Stock compensation expense - employee options |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,421,634 |
|
|
| - |
|
|
| 4,421,634 |
|
Conversion of debt offering and accrued interest (Note 7) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,672,860 |
|
|
| 7,673 |
|
|
| 15,338,047 |
|
|
| - |
|
|
| 15,345,720 |
|
Issuance of common stock for stock option exercises |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 26,293 |
|
|
| 26 |
|
|
| 26,661 |
|
|
| - |
|
|
| 26,687 |
|
Issuance of common stock for exercise of warrants |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,045,724 |
|
|
| 1,046 |
|
|
| 837,441 |
|
|
| - |
|
|
| 838,487 |
|
Issuance of common stock for services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 104,634 |
|
|
| 105 |
|
|
| 182,895 |
|
|
| - |
|
|
| 183,000 |
|
Issuance of common stock warrant for services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 451,487 |
|
|
| - |
|
|
| 451,487 |
|
Isssuance of common stock for NYSE uplisting |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,140,000 |
|
|
| 4,140 |
|
|
| 7,420,539 |
|
|
| - |
|
|
| 7,424,679 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (20,071,244 | ) |
|
| (20,071,244 | ) |
Balance as of September 30, 2022 |
|
| 1,785,715 |
|
| $ | 1,790 |
|
|
| 1,016,004 |
|
| $ | 1,015 |
|
|
| 48,156,062 |
|
| $ | 48,158 |
|
| $ | 111,209,388 |
|
| $ | (101,397,738 | ) |
| $ | 9,862,613 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| Table of Contents |
Years Ended, | ||
September 30, 2020 | September 30, 2019 | |
| 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 | $- |
KNOW LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Years Ended, |
| |||||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (20,071,244 | ) |
| $ | (25,360,213 | ) |
Adjustments to reconcile net loss to net cash (used in) |
|
|
|
|
|
|
|
|
operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 320,995 |
|
|
| 200,807 |
|
Issuance of common stock for services |
|
| 183,000 |
|
|
| 202,820 |
|
Issuance of common stock warrants for services |
|
| 451,487 |
|
|
| 2,547,436 |
|
Gain on debt settlement |
|
| (268,872 | ) |
|
| - |
|
Stock based compensation- stock option grants |
|
| 4,421,634 |
|
|
| 1,028,522 |
|
Right of use, net |
|
| 13,046 |
|
|
| (1,493 | ) |
Gain on forgiveness of notes payable - PPP loans |
|
| (252,700 | ) |
|
| - |
|
Amortization of debt discount to interest expense |
|
| 7,272,911 |
|
|
| 13,722,672 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Other long-term assets |
|
| - |
|
|
| 11,413 |
|
Accounts payable - trade and accrued expenses |
|
| 1,009,935 |
|
|
| 797,337 |
|
NET CASH (USED IN) OPERATING ACTIVITIES |
|
| (6,919,808 | ) |
|
| (6,850,699 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of research and development equipment |
|
| (855,468 | ) |
|
| (299,525 | ) |
NET CASH (USED IN) INVESTING ACTIVITIES: |
|
| (855,468 | ) |
|
| (299,525 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock for NYSE uplisting |
|
| 8,280,000 |
|
|
| - |
|
Payments for stock issuance costs for NYSE uplisting |
|
| (855,321 | ) |
|
|
|
|
Proceeds from convertible notes payable |
|
| - |
|
|
| 14,209,000 |
|
Payments for issuance costs from notes payable |
|
| - |
|
|
| (727,117 | ) |
Proceeds from Simple Agreements for Future Equity |
|
| - |
|
|
| 340,000 |
|
Repayments on Simple Agreements for Future Equity |
|
| - |
|
|
| (253,800 | ) |
Proceeds from note payable - PPP |
|
| - |
|
|
| 205,633 |
|
Repayments of notes payable- PPP |
|
| (179,103 | ) |
|
| - |
|
Proceeds from issuance of common stock for stock options exercise |
|
| 26,687 |
|
|
| 23,344 |
|
Proceeds from issuance of common stock for warrant exercise |
|
| 838,487 |
|
|
| 1,313,203 |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
| 8,110,750 |
|
|
| 15,110,263 |
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
| 335,474 |
|
|
| 7,960,039 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
| 12,258,218 |
|
|
| 4,298,179 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
| $ | 12,593,692 |
|
| $ | 12,258,218 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | - |
|
| $ | 18,800 |
|
Taxes paid |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Beneficial conversion feature |
| $ | - |
|
| $ | 9,769,683 |
|
Issuance of warrants to debt holders |
| $ | - |
|
| $ | 4,439,317 |
|
Issuance of warrants for services related to debt offering |
| $ | - |
|
| $ | 1,667,281 |
|
Cashless warrant exercise (fair value) |
| $ | - |
|
| $ | 515,975 |
|
Conversion of debt |
| $ | 14,209,000 |
|
| $ | 5,638,275 |
|
Conversion of accrued interest |
| $ | 1,136,720 |
|
| $ | 460,185 |
|
Issuance of shares and warrants for conversion of Simple Agreements for Future Equity |
| $ | - |
|
| $ | 1,427,141 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
| Table of Contents |
KNOW LABS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Know Labs, Inc. (the “Company”) was incorporated under the laws of the State of Nevada in 1998.
The Company currently has authorizedThe Company is focused on the development marketing and salescommercialization of proprietary biosensor technologies which, when paired with its artificial intelligence (“AI”) deep learning platform, are capable of uniquely identifying or authenticatingand measuring almost any substancematerial or materialanalyte using electromagnetic energy to detect, record, detect,identify and identifymeasure the unique “signature” of the substancesaid materials or material.analytes. The Company call these our “Bio-RFID™”its “Bio-RFID” technology platform when pertaining to radio and “ChromaID™” technologies.
On April 30, 2020, the Company approved and ratifiedincorporated Particle, Inc. (“Particle”) in the incorporationState of Particle, Inc., a Nevada corporation. The Company is the sole shareholder as of the date of incorporation.Nevada. Particle is now a direct, majority owned subsidiary of the Company. Particle shall utilize the same corporate offices as the Company and shall focusfocused on the development and commercialization of ourthe Company’s 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 technologyfocus. Since incorporation, Particle has engaged in research and its initial application ,development activities on threaded light bulbs that have a warm white light and can inactivate germs, including bacteria and viruses. It is now looking for partners to take the non-invasive measurement of blood glucose
On June 1, 2020,September 17, 2021, 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.
2. LIQUIDITY
The Company has cash used in operating activities was $3,913,803 and $3,104,035 for the years endedcash equivalents $12,593,692 and net working capital of $11,040,123 (exclusive of convertible notes payable) as of September 30, 2020 and 2019, respectively.
On September 20, 2022, the Company completed a going concern. The audit report prepared bypublic offering of the Company’s independent registered public accounting firm relatingcommon stock pursuant to our consolidated financial statementswhich the Company sold 4,140,000 shares of common stock, at a purchase price of $2.00 per share, for the year ended September 30, 2020 includes an explanatory paragraph expressing the substantial doubt about the Company’s abilitytotal gross proceeds of $8,280,000. After deducting underwriting commissions and other offering expenses, we received net proceeds of $7,424,679.
The proceeds of warrants currently outstanding, which could be exercised on a cash basis, may generate potential proceeds of up to continue as a going concern.
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 and its wholly owned subsidiaries,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.| F-6 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, generallyLong-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.Revenue Recognition– The Company determines revenue recognition from contracts with customers through the following steps:
· | identification of the contract, or contracts, with the customer; | |
· | identification of the performance obligations in the contract; | |
· | determination of the transaction price; | |
· | allocation of the transaction price to the performance obligations in the contract; and | |
· | recognition of the revenue when, or as, the Company satisfies a performance obligation. |
Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. During the year ended September 30, 2022, the Company’s artificial AI deep learning platform began generating revenue from digital asset sales of NFT’s. The Company engineering team, using its research data, AI and proprietary algorithms, produced NFT’s in the form of digital art. The NFT’s produced had no recorded cost basis.
Digital Asset Sales–Revenue includes sale of NFT’s in the form of digital art generated from the Company’s AI deep learning platform. The Company uses the NFT exchange, OpenSea, to facilitate the transaction with the customer. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at the point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale. The customer pays in the form of transferring the crypto currency digital asset, Ethereum. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Payment is required before the NFT is delivered. Each NFT that is generated produces a unique identifying code. The Company also earns a royalty of up to 10% when an NFT is resold by its owner in a secondary market transaction. The Company recognizes this royalty as revenue when the transaction is consummated, and they receive compensation.
| F-7 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After the sale of the NFT, the Ethereum is converted to US dollars as soon as practically possible. The Company records the total value of the gross NFT sale in revenue. Costs incurred in connection with the NFT transaction are recorded in the statement of operations as selling and transactional cost of digital assets and include costs to outside consultants, estimated employee and CEO special bonus compensation, digital asset conversion losses and estimated sales and use tax. The amount totaled $3,430,438 for the year ended September 30, 2022.
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 ourits 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 ourthe Company’s internal team. The Company believes that continued development of new and enhanced technologies is essential to ourits future success. The Company incurred expenses of $
Advertising
– Advertising costs are charged to selling, general and administrative expenses as incurred. Advertising and marketing costs for the years ended September 30,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, 20202022 and 20192021 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, 20202022 and 20192021 was $4,252,959$11,821,931 and $1,901,278,$12,217,714, respectively.
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 be 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.| F-8 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 20202022 and 2019.
Stock Based Compensation
Convertible Securities
– Based upon ASC 815-15,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, 2020,2022, the Company had 48,156,062 shares of common stock issued and outstanding. As of September 30, 2022, there were options outstanding for the purchase of 4,805,00020,792,370 common shares (including unearned stock option grants totaling 2,630,0009,704,620 shares related to performance targets), warrants for the purchase of 20,016,36721,786,313 common shares, and 8,108,356 shares of our common stock issuable upon the conversion of Series C and Series D Convertible Preferred Stock. In addition, the Company currently has 9,020,264 common shares at the current price of $0.25 per share reserved and are issuable upon conversion of convertible debentures of $2,255,066. All of the foregoing shares could potentially dilute future earnings per share but are excluded from the September 30, 2022, calculation of net loss per share because their impact is antidilutive.
As of September 30, 2021, the Company had 35,166,551 shares of common stock issued and outstanding. As of September 30, 2021, there were options outstanding for the purchase of 15,315,120 common shares (including unearned stock option grants totaling 11,775,745 shares related to performance targets), warrants for the purchase of 22,564,255 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 14,659,76416,124,764 common shares (9,020,264 common shares at the current price of $0.25 per share and 5,639,5007,104,500 common shares at the current price of $1.00$2.00 per share) reserved and are issuable upon conversion of convertible debentures of $7,894,566.$16,464,066. 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.
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,Dividend Policy
– The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development ofUse of Estimates
– The preparation of financial statements in conformity with| F-9 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In February 2016,December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. ASU 2016-02, Leases (Topic 842), which requires lessees2019-12 removes certain exceptions related to recognize leases on-balance sheetintraperiod tax allocations, foreign subsidiaries, and disclose key information about leasing arrangements.interim reporting that are present within existing GAAP rules. The new standard establishesASU also provides updated guidance regarding the tax treatment of certain franchise taxes, goodwill and nontaxable entities, among other items. In addition, ASU 2019-12 clarifies that the effect of 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 financechange in tax laws or operating, with classification affecting the pattern and classification of expense recognitionrates should be reflected in the statementannual effective tax rate computation during the interim period that includes the enactment date. We adopted ASU 2019-12 as of operations.
Based on the Company’s review of accounting standard updates issued since the filing of the 2020September 30, 2022 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.
During the year ended September 30, 2022, the Company’s AI deep learning platform began generating revenue from digital asset sales of NFT’s and had sales of $4,360,087. The Company’s sales of NFT’s are generated using the NFT digital exchange, OpenSea. Customers purchasing the NFT’s must make payments in the crypto currency, Ethereum. The Ethereum is received into a digital wallet and then moved to an account at Coinbase where the Ethereum is converted to U.S. dollars. During the three months ended December 31, 2021, the Company was not able to establish a digital wallet and corporate account at Coinbase in order to receive the Ethereum. The Company used the digital wallet and Coinbase account of the Company’s CEO. The Company and the CEO executed an assignment of his account to the Company while the Company establishes its own Coinbase account. All proceeds received from the sale of NFT were $0deposited in the CEO’s personal digital accounts.
After the sale of the NFT, the Ethereum is converted to US dollars as soon as practically possible. The Company records the total value of the gross NFT sale in revenue. Costs incurred in connection with the NFT transaction are recorded in the statement of operations as selling and $63,049, nettransactional cost of allowance, asdigital assets and include costs to outside consultants, estimated employee and CEO special bonus compensation, digital asset conversion losses and estimated sales and use tax. The amount totaled $3,430,438 for the year ended September 30, 2022. As of September 30, 20202022, accrued expenses include $343,878 of expenses, primarily sales and 2019, respectively. The Company has a total allowance for bad debt in the amount of $0use tax and $40,000 as of September 30, 2020 and 2019, respectively.
5.
Property and equipment as of September 30, 20202022 and 20192021 was comprised of the following:
| Estimated | |||
| Useful Lives | September 30, 2020 | September 30, 2019 | |
| 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 | ||
|
| Estimated Useful Lives |
| September 30, 2022 |
|
| September 30, 2021 |
| ||
Machinery and equipment |
| 2-3 years |
| $ | 1,510,265 |
|
| $ | 654,798 |
|
Leasehold improvements |
| 5 years |
|
| 3,612 |
|
|
| 3,612 |
|
Furniture and fixtures |
| 5 years |
|
| 26,855 |
|
|
| 26,855 |
|
Less: accumulated depreciation |
|
|
|
| (677,755 | ) |
|
| (356,761 | ) |
|
|
|
| $ | 862,977 |
|
| $ | 328,504 |
|
Total depreciation expense was $
| Estimated | September 30, | September 30, | |
| Useful Lives | 2020 | 2019 | |
| Technology | 3 years | $520,000 | $520,000 |
| Less: accumulated amortization | (418,886) | (245,554) | |
| Intangible assets, net | $101,114 | $274,446 |
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 SheetsCompany’s 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.Company’s consolidated balance sheets. Based on the present value of the lease payments for the remaining lease term of the Company'sCompany’s existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $250,000 on October 1, 2018.$302,000 as of September 30, 2022. 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 yearyears ended September 30, 20202022 and 2019,2021, the Company had one leaseamended three leases expire and recognized the rent payments as an expense in the current period. As of September 30, 20202022 and 2019,2021, total right-of-use assets and operating lease liabilities for remaining long term lease was approximately $132,000$302,000 and $246,000,$291,000, respectively. In the yearyears ended September 30, 20202022 and 2019,2021, the Company recognized approximately $136,718$289,018 and $133,996,$139,643, 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'sCompany’s operating right-of-use assets and related lease liabilities as of and for the year ended September 30, 20202022 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, 20202022 are as follows:
| Year | $ |
| 2021 | $113,553 |
| 2022 | 23,968 |
| Imputed interest | (5,486) |
| Total lease liability | $132,035 |
Years Ended September 30, |
| $ |
| |
2023 |
| $ | 194,537 |
|
2024 |
|
| 127,232 |
|
Total remaining payments |
|
| 321,769 |
|
Less Imputed Interest |
|
| (19,254 | ) |
Total lease liability |
| $ | 302,515 |
|
7. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible notes payable as of September 30, 20202022 and 20192021 consisted of the following:
Convertible Promissory Notes with Clayton A. Struve
The Company owes Clayton A. Struve, a significant stockholder, $1,071,000 under convertible promissory or OID notes. The CompanyWe recorded accrued interest of $71,562$86,562 and $62,171$71,562 as of
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$287,290 and $216,246 as of September 30, 2019.2022 and 2021, respectively. On May 8, 2019,December 7, 2022, the Company signed Amendment 1approved Amendments to the convertible redeemable promissory notes with Ronald P. Erickson and J3E2A2Z, extending the due dates to SeptemberJanuary 30, 2019 and increasing the interest rate to 6%. On November 26,2023. Mr. Erickson controls J3JE2A2Z.
| F-11 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Debt Offering
Beginning in 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, theentered into series of debt offerings with similar and consistent terms. 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.
During the year ended September 30, 2021, the Company issued 6,091,960 shares of common stock related to the automatic conversion of Convertible Notes will beand 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 February 15,October 17, 2020.
The Convertible Notes had an original principal amount of $4,242,515 and bear annual interest of 8%. Bothissued during 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 fair value of the Warrants issued to debt holders during the year ended September 30, 2021 was $4,439,317 on the date of issuance and was amortized over the one-year term of the Convertible Notes. The fair value of the warrants was recorded as debt discount (with an exercise priceoffset to APIC) and was amortized over the one-year term of $1.20 per share of Common Stock, also subject to certain adjustments.
In connection with the debt offering during the year ended September 30, 2021, the placement agent for the Convertible Notes and the Warrants received a cash fee of $361,401$727,117 and warrants to purchase 542,102492,090 shares of the Company’s common stock, all based on 8-10%2-8% 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$1,667,281 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$727,117 cash fee was recorded as issuance costs and will bewas amortized over the one-year term of the related Convertible Notes.
During 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.
During the year ended September 30, 2020, the Company issued
| F-12 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible notes payable as of September 30, 20202022 and 20192021 are summarized below:
September 30, 2020 | September 30, 2019 | |
| 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 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
Convertible note- Clayton A. Struve |
| $ | 1,071,000 |
|
| $ | 1,071,000 |
|
Convertible note- Ronald P. Erickson and affiliates |
|
| 1,184,066 |
|
|
| 1,184,066 |
|
2020 Convertible notes |
|
| - |
|
|
| 5,639,500 |
|
2021 Convertible notes |
|
| 14,209,000 |
|
|
| 14,209,000 |
|
Boustead fee refund (originally booked as contra debt) |
|
| - |
|
|
| 50,000 |
|
Less conversions of notes |
|
| (14,209,000 | ) |
|
| (5,639,500 | ) |
Less debt discount - BCF |
|
| - |
|
|
| (4,308,337 | ) |
Less debt discount - warrants |
|
| - |
|
|
| (1,957,590 | ) |
Less debt discount - warrants issued for services |
|
| - |
|
|
| (1,056,984 | ) |
|
| $ | 2,255,066 |
|
| $ | 9,191,155 |
|
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).On February 1, 2021, the Company received $205,633 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 September 30, 2022 and 2021, the Company recorded interest expense of $2,721 and $1,268, respectively. On June 11, 2022, the Company was notified by the SBA that the Company is required to repay principal of $78,843 and interest of $1,057. The remaining loan and accrued interest balances were forgiven.
As a result of a portion of these loans being forgiven, the Company recognized a gain on loan forgiveness of approximately $253,000 which is included in other income.
8. SIMPLE AGREEMENTS FOR FUTURE EQUITY
Through August 9, 2021, $1,125,000 had been raised through the sale of SAFE instruments. On this date, certain investors elected to convert their SAFE instruments balance and accrued interest into the Company’s common stock. The Company is utilizingissued 480,600 shares of common stock at an average price of $2.00 per share, or $961,200 related to the funds in accordance withconversion into the legal requirements and expects this loan to be forgiven. UntilCompany’s common stock. The exercise price was below the loan is legally forgiven,fair market value of the loan balance will outstanding. Company’s common stock, as such the Company recorded a beneficial conversion feature of $72,090.
The Company expectsalso issued five-year warrants to start the applicationthese investors for the loan forgiveness during the three months ended December 31, 2020.
The Company recorded interest expense of $90,000 and paid $54,108 to Boustead Securities LLC in fees during the year ended September 30, 2021 related to this transaction. The Company also issued a five-year warrant to Boustead Securities LLC for 43,254 shares of the Particle stock thatCompany’s common stock. The warrant is exercisable at $2.40 per share and was initially valued at $0.80$1.641 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 liquidityshare 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.
Authorized Capital Stock
The CompanyCompany’s authorized 105,000,000capital stock currently consists of 205,000,000 shares, consisting of 200,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares of preferred stock, par value $0.001 per share.
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.
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 2022 and September 30, 20192021 there are 1,785,715 Series C Preferred shares outstanding.
Series D Convertible Preferred Stock
As of September 30, 2019,2022 and 2021, the Company has
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, 20202022 and September 30, 2019,2021, there are no Series F shares outstanding.
Securities Subject to Price Adjustments
If in the future, if the Company sells its common stock at a price below $0.25 per share, the exerciseconversion price of 8,108,356our outstanding shares of Seriesseries C convertible preferred stock and series D Preferred Stock thatconvertible preferred stock would 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) convertible promissory notes referred to above and the exercise price of additionalcertain outstanding warrants to purchase 12,588,28610,154,381 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Warrants totaling 5,191,6364,439,707 would adjust below $1.20 per share and warrants totaling 4,465,294 would adjust below $2.40 per share, in each case pursuant to the documents governing such instruments.
Each share of common stock entitles its holder to one vote on each matter submitted to the offeringsstockholders for a vote, and sales described below were deemedno cumulative voting for directors is permitted. Stockholders do not have any preemptive rights 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 theacquire additional securities the offerings and sales were made to a limited number of persons, all of whom were accredited investors and transfer was restrictedissued 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.
Year Ended September 30, 2022
The former employee received 73,191Company issued 7,672,860 shares of common stock for vested stock option grants. The stock option grant had an exercise price of $0.25 per share.
The Company issued 1,045,724 shares of common stock related to warrant exercises and received $838,487.
The Company issued 26,293 shares related to the exercise of stock option grants and received $26,887.
The Company issued 104,634 shares each to three directors and three consultants at $1.749 per share.
On September 20, 2022, the Company completed a public offering of our common stock pursuant to which the Company sold 4,140,000 shares of common stock, at a purchase price of $2.00 per share, for total gross proceeds of $8,280,000. After deducting underwriting commissions and other offering expenses, the Company received net proceeds of $7,424,679.
Year Ended September 30, 2021
The Company issued 6,091,960 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 Stockcommon stock at $1.00 per share on the one yearone-year anniversary starting on February 15,October 17, 2020.
The Company issued
The Company issued 16,875 shares related to the exercise of stock option grants at $1.38 per share.
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 500,00097,000 shares of common stock. We accrued for the loss on debt settlement of $825,000 as of June 30, 2020 which represents the difference betweenrelated to services. The shares were valued at the fair market value of $202,820.
The Company issued 480,600 shares of common stock at an average price of $2.00 per share, or $961,200, related to the conversion of Particle SAFEs into the Company’s common stock.
Warrants to Purchase Common Stock
Year Ended September 30, 2022
The Company issued 389,800 warrants to purchase common stock to three directors and $125,000 paid byfour consultants at $1.899 per share. The warrants expire five years from the shareholder.
On May 3, 2022, the Company signed an extension of warrant agreement with Clayton Struve, extending the exercise dates as follows:
Warrant No./Class | Issue Date | No. Warrant Shares | Exercise Price | Original Expiration Date | Amended Expiration Date |
Clayton A. Struve Warrant
| 08-14-2017 | 1,440,000 | 0.25 | 08-13-2023 | 08-13-2024 |
Clayton A. Struve Warrant
| 12-12-2017 | 1,200,000 | 0.25 | 12-11-2023 | 12-11-2024 |
Clayton A. Struve Warrant
| 08-04-2016 | 1,785,715 | $0.25 | 08-04-2023 | 08-04-2024 |
Clayton A. Struve Warrant
| 02-28-2018 | 1,344,000 | $0.25 | 02-28-2023 | 02-28-2024 |
| F-15 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following equity issuances occurredCompany recorded interest expense of $244,260 during the year ended September 30, 2019:
Warrants to purchase 122,018 shares of common stock at $0.918 per share expired.
On September 20, 2022, pursuant to the Underwriting Agreement, the Company issued a common stock purchase warrant to Boustead Securities, LLC for the purchase of 289,800 shares of common stock at an exercise price of $2.40, subject to adjustments. The Warrant is exercisable at any time and from time to time, in whole or in part, until September 15, 2027 and may be exercised on a cashless basis. The Warrant also includes customary anti-dilution provisions and immediate piggyback registration rights with respect to the registration of the shares underlying the Warrant. The Warrant and the shares of common stock underlying the Warrant were registered as a part of the Registration Statements.
The Company issued 1,045,724 shares of common stock related to warrant exercises and received $838,487.
Year Ended September 30, 2021
The Company issued warrants to Ronald P. Erickson for 2,000,000 shares of common stock. The five year warrant is immediately vested and exercisable on a cash or cashless basis at $1.53 per share and was valued using a Black-Scholes model at $1,811,691.
The Company issued warrants to five directors and consultants for 269,510 shares of common stock. The five year warrant is convertible at $1.918 per share and was valued using a Black-Scholes model at $735,745.
The Convertible Notes issued during the year ended September 30, 2019,2021 are initially convertible into 7,104,500 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 3,552,250 shares of Common Stock.
The Company issued 509,6563,676,542 shares of common stock at $0.25an average price of $0.582 per share to consultants and investors related to the cashless exercise of warrants.
Warrants to exercise 384,359 shares of common stock were forfeited at $1.95an average of $1.155 per share.
The Company also issued a five year warrant to Boustead Securities LLC for 43,254 shares of the Company’s common stock related to the conversion of Particle Simple Agreements for Future Equity into the Company’s common shares. The warrant is exercisable at $2.40 per share. The warrant was valued at $1.770 per share.
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.
| F-16 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the warrants outstanding as of September 30, 20202022 were as follows:
September 30, 2020 | ||
Weighted | ||
Average | ||
Exercise | ||
Shares | Price | |
| 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 | |
|
| September 30, 2022 |
| |||||
|
|
|
|
| Weighted |
| ||
|
|
|
|
| Average |
| ||
|
|
|
|
| Exercise |
| ||
|
| Shares |
|
| Price |
| ||
Outstanding at beginning of period |
|
| 22,564,255 |
|
| $ | 0.998 |
|
Issued |
|
| 389,800 |
|
|
| 2.271 |
|
Exercised |
|
| (1,045,724 | ) |
|
| (0.835 | ) |
Forfeited |
|
| - |
|
|
| - |
|
Expired |
|
| (122,018 | ) |
|
| (0.918 | ) |
Outstanding at end of period |
|
| 21,786,313 |
|
| $ | 1.029 |
|
Exerciseable at end of period |
|
| 21,786,313 |
|
|
|
|
|
The following table summarizes information about warrants outstanding and exercisable as of
September 30,September 30, 2020 | ||||
Weighted | Weighted | Weighted | ||
Average | Average | Average | ||
Number of | Remaining | Exercise | Shares | Exercise |
Warrants | Life ( In Years) | Price | Exerciseable | Price |
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 |
|
|
| September 30, 2022 |
| ||||||||||||||
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| Weighted |
| |||||
|
|
| Average |
|
| Average |
|
|
|
|
| Average |
| |||||
Number of |
|
| Remaining |
|
| Exercise |
|
| Shares |
|
| Exercise |
| |||||
Warrants |
|
| Life ( In Years) |
|
| Price |
|
| Exerciseable |
|
| Price |
| |||||
| 10,569,381 |
|
|
| 1.26 |
|
| $ | 0.250 |
|
|
| 10,569,381 |
|
| $ | 0.250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,512,207 |
|
|
| 2.35 |
|
| 1.20-1.85 |
|
|
| 6,512,207 |
|
| 1.20-1.85 |
| ||
| 4,694,725 |
|
|
| 3.61 |
|
| 2.00-3.00 |
|
|
| 4,694,725 |
|
| 2.00-3.00 |
| ||
| 10,000 |
|
|
| 0.75 |
|
|
| 4.080 |
|
|
| 10,000 |
|
|
| 4.080 |
|
| 21,786,313 |
|
|
| 2.85 |
|
| $ | 1.029 |
|
|
| 21,786,313 |
|
| $ | 1.029 |
|
The significant weighted average assumptions relating to the valuation of the Company’s warrants for the year ended September 30,, 2020 2022 were as follows:
Dividend yield | 0% |
Expected life | 3-5 years |
Expected | 104% |
Risk free interest rate | 2.96% |
There were vested and in the money warrants of
10. EQUITY INCENTIVE PLANS
On August 12, 2021, the Company established its 2021 Equity Incentive Plan (the “2021 Plan”), which was adopted by stockholders on October 15, 2021. The Company initially had 20,000,000 shares of its common stock authorized as the maximum number of shares of common stock that may be delivered to participants under the 2021 Plan, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. This number was increased to 22,000,000 shares of common stock as of January 1, 2022 as a result of the automatic share reserve increase described below.
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 forOn 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 in option pool subsequent to September 30, 2020.
| F-17 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company records compensation expense associated withinitially had 20,000,000 shares of its common stock options and other equity-based compensation usingauthorized as the Black-Scholes-Merton option valuation modelmaximum number of shares of the Company’s common stock that may be delivered to participants under the 2021 Plan, subject to adjustment for estimating fair valuecertain corporate changes affecting the shares, such as stock splits. This number was increased to 22,000,000 shares of common stock options grantedas of January 1, 2022 as a result of the automatic share reserve increase. Shares subject to an award under our plan. The Company amortizes the fair value2021 Plan for which the award is canceled, forfeited or expires again become available for grants under the 2021 Plan. Shares subject to an award that is settled in cash will not again be made available for grants under the 2021 Plan. As of stock optionsthe date of this report 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 volatilityForm 10-K, 13,816,370 shares of our common stock based onremain available for issuance under the historical volatility2021 Plan. The 2021 Plan also authorizes for issuance the sum of its own common stock over the most recent period corresponding with the estimated expected life(A) any shares 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 that, as of the date of stockholder approval of the 2021 Plan, have been reserved but not issued pursuant to any awards granted under our 2011 Stock Incentive Plan, as amended, or the 2011 Plan, and does not anticipate paying(B) any cash dividendsshares of our common stock subject to stock options or similar awards granted under the 2011 Plan that, after the date of stockholder approval of the 2021 Plan, expire or otherwise terminate without having been exercised in full and shares of our common stock issued pursuant to awards granted under the foreseeable future. Consequently,2011 Plan that are forfeited to or repurchased by us, with the maximum number of shares of our common stock to be added to the 2021 Plan pursuant to clause (ii) equal to 13,816,370.
Year Ended September 30, 2022
On December 16, 2021, 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.
On December 16, 2021, the year ended September 30
On May 20, 2022, the Company issued a stock option grant to Peter Conley for 1,000,000 shares at an exercise price of $1.48 per share. The stock option grant expires in five years. The stock option grant vests quarterly over four years after two quarters.
During the year ended September 30, 2020,2022, the Company grantedalso issued stock option grants to executives, directorsnineteen employees and consultants for
During the year ended September 30, 2020, executives and employees voluntarily cancelled2022, the Company issued 26,293 shares related to the exercise of stock option grants and received $26,887.
During the year ended September 30, 2022, eight employees and consultants forfeited stock option grants for
Year Ended September 30, 2021
During the year ended September 30, 2021, the Company issued stock option grants to seventeen employees and consultants totaling 10,650,745 shares of common stock at an average price of $2.593$1.766 per share.
On November 9, 2019, a former employeeDecember 15, 2020, the Company issued stock option grants to purchase 3,997,870 shares to two officers which vest in increments if the market capitalization of the Company commons stock exceeds for 20 consecutive trading days starting at $100 million to $1 billion. The Company estimated at grant date the fair value of these options at approximately $1,116,146 which is being amortized over 5 years. As of September 30, 2022 there is expense of $716,618 to be recognized over the remaining service period. The Company valued these stock options using the Monte Carlo pricing model which included key assumptions of 100% stock volatility, five year life and no forfeitures.
| F-18 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended September 30, 2021, two consultants exercised stock option grants onfor 20,625 shares at $1.359 per share.
During the year ended September 30, 2021, an employee forfeited a cashless basis. stock option grant for 120,000 shares at $3.30 per share.
Stock option activity for the years ended September 30, 2022 and 2021 was as follows:
|
|
|
| Weighted Average |
|
|
| |||||
|
| Options |
|
| Exercise Price |
|
| Proceed $ |
| |||
Outstanding as of September 30, 2020 |
|
| 4,805,000 |
|
| $ | 1.161 |
|
| $ | 5,580,550 |
|
Granted |
|
| 10,650,745 |
|
|
| 1.766 |
|
|
| 18,807,990 |
|
Exercised |
|
| (20,625 | ) |
|
| (1.359 | ) |
|
| (28,031 | ) |
Forfeitures |
|
| (120,000 | ) |
|
| (3.300 | ) |
|
| (396,000 | ) |
Outstanding as of September 30, 2021 |
|
| 15,315,120 |
|
|
| 1.565 |
|
|
| 23,964,509 |
|
Granted |
|
| 6,636,000 |
|
|
| 1.815 |
|
|
| 12,045,330 |
|
Exercised |
|
| (26,293 | ) |
|
| (1.376 | ) |
|
| (36,170 | ) |
Forfeitures |
|
| (1,132,457 | ) |
|
| (2.057 | ) |
|
| (2,329,267 | ) |
Outstanding as of September 30, 2022 |
|
| 20,792,370 |
|
| $ | 1.618 |
|
| $ | 33,644,402 |
|
The former employee received 73,191 sharesfollowing table summarizes information about stock options outstanding and exercisable as of common stock for vestedSeptember 30, 2022:
|
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| Weighted |
| ||||||
|
|
|
|
|
| Average |
|
| Average |
|
|
|
|
| Average |
| ||||||
Range of |
|
| Number |
|
| Remaining Life |
|
| Exercise Price |
|
| Number |
|
| Exercise Price |
| ||||||
Exercise Prices |
|
| Outstanding |
|
| In Years |
|
| Outstanding |
|
| Exerciseable |
|
| Exerciseable |
| ||||||
| $ | 0.25 |
|
|
| 230,000 |
|
|
| 0.96 |
|
| $ | 0.250 |
|
|
| 215,625 |
|
| $ | 0.250 |
|
1.10-1.25 |
|
|
| 2,905,625 |
|
|
| 3.21 |
|
|
| 1.100 |
|
|
| 1,765,951 |
|
|
| 1.100 |
| |
1.28-1.67 |
|
|
| 12,320,745 |
|
|
| 2.34 |
|
|
| 1.499 |
|
|
| 1,788,625 |
|
|
| 1.380 |
| |
1.79-3.67 |
|
|
| 5,336,000 |
|
|
| 4.04 |
|
|
| 2.312 |
|
|
| 928,250 |
|
|
| 2.128 |
| |
|
|
|
|
| 20,792,370 |
|
|
| 3.93 |
|
| $ | 1.618 |
|
|
| 4,698,451 |
|
| $ | 1.452 |
|
There are stock option grants totaling 93,750 shares. The stock option grant hadof 20,792,370 shares as of September 30, 2022 with an exercise priceaggregate intrinsic value of $0.25 per share.
There are currently
As of September 30, 2019:
Weighted Average | |||
Options | Exercise Price | $ | |
| 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 |
Weighted | Weighted | Weighted | |||
Average | Average | Average | |||
Range of | Number | Remaining Life | Exercise Price | Number | Exercise Price |
Exercise Prices | Outstanding | In Years | Outstanding | Exerciseable | Exerciseable |
$0.25 | 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 |
| F-19 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Transactions with Clayton Struve
See Notes 7 and 9 for related party transactions with Clayton A. Struve, a significant stockholder.
On January 28, 2021, Clayton A. Struve exercised warrants on a cashless basis for 889,880 shares of
Weighted | Weighted | ||||
Average | Weighted | Average | |||
Range of | Number | Remaining Life | Average | Number | Exercise Price |
Exercise Prices | Outstanding | In Years | Exercise Price | Exerciseable | Exerciseable |
$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 |
Transactions with Ronald P. Erickson
See Notes 7, 9, 10 13 and 1512 for related party transactions with Ronald P. Erickson.
On November 4, 2019, the Company granted a stock option grant to Ronald P. Erickson for 1,200,000 shares with an exercise price of $1.10 per share. The performance grant expires November 4, 2024 and vests upon uplisting to the NASDAQ or NYSE exchanges.
On June 1, 2020, Mr. Erickson received a salary of $10,000 per month for work on Particle, Inc.
On December 15, 2020, the Company issued a stock option grant to Ronald P. Erickson for 1,865,675 shares at an exercise price of $1.53 per share. The stock option grant expires in five years. The grant vests in increments if the market capitalization of the Company’s commons stock exceeds for 20 consecutive trading days starting at $100 million to $1 billion. The Company estimated at grant date the fair value of these options at approximately $520,869 which is being amortized over 5 years. As of September 30, 2022, the Company recorded a cumulative expense of $186,657. The Company is valuing this stock option using the Monte Carlo pricing model which included key assumptions of 100% stock volatility, five year life and no forfeitures. The stock option grant was not vested as of September 30, 2022.
On December 15, 2020, the Company issued a stock option grant to Ronald P. Erickson for 1,865,675 shares at an exercise price of $1.53 per share. The stock option grant expires in five years. The Company’s common stock began trading on NYSE American under the symbol “KNW” on September 16, 2022 and the Company expensed $263,593 during the year ended September 30, 2022. The stock option grants vest when earned based on certain performance criteria.
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 exercisable for cash or non-cash at $1.53 per share and was valued using a Black-Scholes model at $1,811,691.
The Company paid $120,000 and $272,500 of salaries and vacation pay to Mr. Erickson during the year ended September 30, 2022 and 2021 that were previously accrued and reported but were deferred.,
Mr. Erickson and/or entities with which he is affiliated also have accrued compensation, travel and interest of approximately $597,177$295,418 and $487,932$421,599 as of September 30, 20202022 and 2019,2021, respectively.
Transactions with Phillip A. Bosua
See Notes 4, 2019, Philip A. Bosua voluntarily cancelled a stock option grant10 and 12 for 1,000,000 sharesrelated party transactions with an exercise price of $3.03 per share. The grants was related to performance and was not vested.
On June 1, 2020, Mr. Bosua received a salary of $10,000 per month for work on Particle, Inc.
On July 2,December 15, 2020, Particlethe Company issued a stock option grant to Phillip A. Bosua for 1,500,0002,132,195 shares at $0.10an exercise price of $1.53 per share to Philip A. Bosua.share. The stock option grant expires in five years. The grant vests (i) 33.3% upon issuance; (ii) 33.3% afterin increments if the first sale; and (iii) 33.4% after onemarket capitalization of the Company’s commons stock exceeds for 20 consecutive trading days starting at $100 million in sales are achieved.
On November 4, 2019,December 15, 2020, the Company grantedissued a stock option grantsgrant to two directors totaling 105,000Phillip A. Bosua for 2,132,195 shares withat an exercise price of $1.10$1.53 per share. The stock option grants expire in five years. The stock option grants vested immediately.
| F-20 |
| Table of Contents |
KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 18, 2021, the Company approved a $250,000 bonus for Mr. Bosua. The bonus was paid during April 2021.
As compensation for the development of the NFT sales, Mr. Bosua was paid $1,087,928 in compensation and $91,500 for rent expense during the year ended September 30, 2022.
Stock Issuances to Named Executive Officers and Directors
On January 1, 2020,15, 2021, the Company issued 120,00030,000 shares each to three directors shares at an exercise price of restricted$2.00 per share.
On January 15, 2021, the Company issued 20,000 warrants to purchase common stock each to
three directorsOn January 5, 2022, the Company issued 30,000 shares were issued in accordance with the 2011 Stock Incentive Plan and were valuedeach to three directors shares at $1.90 per share, the marketan exercise price of $1.70 per share.
On January 5, 2022, the Company’sCompany issued 20,000 warrants to purchase common stock or $228,000.
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 Agreements
On April 10, 2018, the Company entered into an Employment Agreementamended employment agreement for Ronald P. Erickson which amends the Company’s employment agreement with him dated July 1, 2017. The employment agreement provides for a base salary of $180,000 per year, which was increased to $215,000 from May 1, 2020 to March 31, 2021 and to $300,000 from April 1, 2021 to March 15, 2022 and to $325,000 from March 15, 2022 to September 30, 2022. The compensation committee and the board of Particle compensated Mr. Bosua reflecting his appointment as Chief Executive Officer.Erickson with an annual salary of $120,000 from June 1, 2020 to August 15, 2021. Mr. Erickson will be entitled to participate in all group employment benefits that are offered by us to our senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. The Employment Agreementemployment agreement is for an initial term of 12 months (subject to earlier termination) and will be automatically extended for additional 12-month terms unless either party notifies the other party of its intention to terminate the Employment Agreement
On April 10, 2018, the Company entered into an employment agreement with Phillip A. Bosua was paidreflecting his appointment as Chief Executive Officer. The employment agreement provides for a base salary of $225,000 per year, which was increased to $260,000 from May 1, 2020 to March 31, 2021 and to $350,000 from April 1, 2021 to September 30, 2022. The compensation committee and the board of directors of Particle compensated Phillip A. Bosua with an annual salary of $120,000 from June 1, 2020 to August 15, 2021. Mr. Bosua also received 500,000 shares of common stock valued at $0.33 per share and may be entitled to bonuses and equity awards at the discretion of the Boardboard or a committee of the Board. The Employment Agreement provides for severance pay equal to 12 months of base salary ifboard. Mr. Bosua is terminated without “cause” or voluntarily terminates his employment for “good reason.” From
| F-21 |
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KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 13, 2022, the Company entered into an employment agreement with Peter J. Conley reflecting his appointment as our Chief Financial Officer and Senior Vice President, Intellectual Property. The employment agreement provides for a base salary of $300,000 and Mr. Conley may also be entitled to bonuses from time to time as determined by our board of directors or our compensation committee in their sole discretion. Mr. Conley is eligible to participate in of all our employee benefit plans, policies and arrangements that are applicable to other executive officers, as such plans, policies and arrangements may exist or change from time to time at our discretion. We will reimburse Mr. Conley for reasonable travel, entertainment and other expenses he incurs in the furtherance of his duties under the employment agreement. The employment agreement is at will, meaning either we or Mr. Conley may terminate the employment relationship at any time, with or without cause, upon written notice to the other party. The employment agreement provides for severance pay equal to 12 months of then-in-effect base salary if Mr. Conley is terminated without “cause” or voluntarily terminates his employment for “good reason,” as defined in the employment agreement.
Properties and Operating Leases,
The Company is obligated under the following leases for its various facilities.
Corporate Offices
On April 13, 2017, the Company leased its executive office located at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101. The Company leases 943 square feet and the current net monthly payment is $2,672.$3,334. The monthly payment increases approximately 3% each year and the lease expiresexpired on May 31, 2022.
Lab Facilities and Executive Offices
On February 1, 2019,May 18, 2021, the Company leasedentered into a lease for its lab facilities and executive offices located at 915914 E Pine Street, Suite 212, Seattle, WA 98122. The Company leases98122 and leased 2,642 square feet and thefeet. The net monthly lease payment is $8,256. The monthly paymentwas $8,697 and increases approximatelyby 3% on July 1, 2019 and annually thereafter.annually. The lease expires on June 30, 2024. The lease can be extended for one additional three year term.
On October 11, 2021, the Company entered into the First Amendment of Lease and added 2,485 square feet for $5,000 per month. On September 20, 2022, the Company entered into the Second Amendment of Lease for additional space. The expanded space will be utilized for research and testing. The Amendment of Lease expires on December 31, 2023.
On September 22, 2022, the Company leased lab facilities and executive offices at 58969 Carmelita Circle, Yucca Valley, CA 92284 from Phillip Bosua, the Company’s CEO. The Company leased 1,700 square feet of the total 2,134 square feet of the premises and the current net monthly payment is $7,000. The lease expires September 30, 2023 and can be extended.
On June 26, 2020,November 22, 2022, the Company leased temporaryadditional lab facilities located at 3131 Western Avenue,123 Boylston Ave, Suite A350,C, Seattle, WA 98121.98102. The Company leased 5,7071,800 square feet and the current net monthly payment is $11,414.$2,250. The lease was terminated August 31, 2020.
13. INCOME TAXES
The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise from United States sources.
Losses arising from United States taxable operations were approximately $4,077,000$7.3 million and $2,957,000$7.5 million for the years ended September 30, 20202022 and 2019.
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KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has Federal net operating loss carryforwards of approximately $36,209,000$44.6 million which expire in 2021-2038.2028-2042. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance equal to 100% of the gross deferred tax asset of approximately $8,248,000$11.4 million and $9.7 million was established as of September 30, 2020. Additionally, under2022 and 2021, respectively. The Company does not recognize the majority of state tax loss operating loss carryforwards as a deferred tax asset given it no longer has any operation in those states.
Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control.
The principal components of the Company’s deferred tax assets at September 30, 20202022 and 20192021 are as follows:
2020 | 2019 | |
| U.S. operations loss carry forward at statutory rate of 21% | $6,536,413 | $6,763,238 |
| Deferred tax assets related to timing differences-accruals | 1,746,486 | 192,897 |
| Total | 8,282,899 | 6,956,135 |
| Less Valuation Allowance | (8,248,637) | (6,956,135) |
| Other | (34,263) | - |
| Deferred tax liabilities | (34,263) | - |
| Net Deferred Tax Assets | - | - |
| Change in Valuation allowance | $(1,292,502) | $(813,996) |
|
| 2022 |
|
| 2021 |
| ||
Net operating loss carryforward |
| $ | 9,372,000 |
|
| $ | 8,051,000 |
|
Stock based compensation |
|
| 1,677,000 |
|
|
| 975,000 |
|
Intangibles |
|
| 221,000 |
|
|
| 276,000 |
|
Accruals and reserves |
|
| 97,000 |
|
|
| 399,000 |
|
Total deferred tax asset |
|
| 11,367,000 |
|
|
| 9,701,000 |
|
Valuation allowance |
|
| (11,367,000 | ) |
|
| (9,701,000 | ) |
Net deferred tax assets |
| $ | - |
|
| $ | - |
|
Change in valuation allowance during the year |
| $ | (1,666,000 | ) |
| $ | (1,092,357 | ) |
A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended September 30, 20202022 and 20192021 are as follows:
2020 | 2019 | |
| Federal Statutory Rate | 21.0% | 21.0% |
| State Taxes | 0.9% | 0.0% |
| Meals | 0.0% | 0.0% |
| Warrants Int. Exp. | -8.8% | 0.0% |
| PY True-up | -3.8% | 0.0% |
| Increase in Income Taxes Resulting from: | ||
| Change in Valuation allowance | -9.3% | -21.0% |
| Effective Tax Rate | 0.0% | 0.0% |
|
| 2022 |
|
| 2021 |
| ||
Income tax provision at statutory rate |
|
| -21 | % |
|
| -21 | % |
Non deductible expenses paid with equity instruments |
|
| 9 | % |
|
| 12 | % |
Change in valuation allowance |
|
| 8 | % |
|
| 7 | % |
Other and prior year true up |
|
| 4 | % |
|
| 2 | % |
Effective tax rate |
|
| 0 | % |
|
| 0 | % |
As of September 30, 2020,2022, there were no uncertain tax positions. Management does not anticipate any future adjustments in the next twelve months which would result in a material change to its tax position. For the years ended September 30, 20202022 and 2019,2021, the Company did not have any interest and penalties.
14. SEGMENT REPORTING
The management of the Company considers the business to currently have two operating segments (i) the development of the Bio-RFID™” and “ChromaID™” technologies; (ii) Particle, Inc. technology; and (iii) TransTech, a distributorAI sales of products for employee and personnel identification and authentication. TransTech has historically provided substantially all of the Company’s revenues. TransTech was shut down on June 30, 2020. NFT products.
Particle commenced operations in the three monthsyear ended JuneSeptember 30, 2020.
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KNOW LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reporting for the year ended September 30, 20202022 and 20192021 was as follows (in thousands):
Segment | ||||
Gross | Operating | Segment | ||
| Segment | Revenue | Margin | Profit (Loss) | Assets |
| Year Ended September 30, 2020 | ||||
| Development of the Bio-RFID™” and “ChromaID™” technologies | $- | $- | $(5,481) | $4,360 |
| Particle, Inc. technology | - | - | (1,280) | 322 |
| TransTech distribution business | 122 | 70 | (65) | - |
| Total segments | $122 | $70 | $(6,826) | $4,682 |
| Year Ended September 30, 2019 | ||||
| Development of the Bio-RFID™” and “ChromaID™” technologies | $- | $- | $(4,935) | $2,882 |
| TransTech distribution business | 1,805 | 427 | (78) | 58 |
| Total segments | $1,805 | $427 | $(5,013) | $2,940 |
|
|
|
|
| Segment |
|
|
|
| |||
|
|
|
|
| Operating |
|
| Segment |
| |||
Segment |
| Revenue |
|
| Profit (Loss) |
|
| Assets |
| |||
Year Ended September 30, 2022 |
|
|
|
|
|
|
|
|
| |||
Development of the Bio-RFID™” and “ChromaID™” technologies |
| $ | - |
|
| $ | (13,482 | ) |
| $ | 13,360 |
|
Particle, Inc. technology |
|
| - |
|
|
| (22 | ) |
|
| - |
|
Digital asset sales |
|
| 4,360 |
|
|
| 930 |
|
|
| 398 |
|
Total segments |
| $ | 4,360 |
|
| $ | (12,574 | ) |
| $ | 13,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Development of the Bio-RFID™” and “ChromaID™” technologies |
| $ | - |
|
| $ | (9,373 | ) |
| $ | 12,867 |
|
Particle, Inc. technology |
|
| - |
|
|
| (1,073 | ) |
|
| 22 |
|
Total segments |
| $ | - |
|
| $ | (10,446 | ) |
| $ | 12,889 |
|
During years ended September 30, 20202022 and 2019,2021, the Company incurred non-cash expenses related to operations of $2,990,072$5,121,290 and $1,867,379.
15. SUBSEQUENT EVENTS
The Company evaluated subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements were issued. Subsequent to September 30, 2020,2022, there were the following material transactions that require disclosure:
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.
On December 23, 2020,October 24, 2022, the Company signed Amendments to the $1,071,000 convertible promissory or OID notes, extending the due dates to March 31, 2021.
On December 15, 2020,November 7, 2022, the Company issued 30,00050,000 shares each to three directors sharesof common stock at an exerciseaverage price of $1.53$0.25 per share.
On December 15, 2020,7, 2022, the Company issued 20,000 warrantsapproved the Amendments to purchase common stock eachthe senior secured convertible redeemable notes with Ronald P. Erickson, extending the due dates to three directors shares at $1.53 per share. The warrants expire on December 15, 2025.
On December 15, 2020,7, 2022, the Company approved the Amendments to the senior secured convertible redeemable notes with Clayton Struve, extending the due dates to September 30, 2023.
On December 7, 2022, the Company approved the Extension of Warrant Agreement with Clayton Struve, extending the exercise dates as follows:
Warrant No./Class | Issue Date | No. Warrant Shares | Exercise Price | Current Expiration Date as of 04-26-2022 | Amended Expiration Date as of 10-25-2022 |
Clayton A. Struve Warrant | 08-14-2017 | 1,440,000 | $0.25 | 08-13-2024 | 08-13-2025 |
Clayton A. Struve Warrant | 12-12-2017 | 1,200,000 | $0.25 | 12-11-2024 | 12-11-2025 |
Clayton A. Struve Warrant | 08-04-2016 | 1,785,715 | $0.25 | 08-04-2024 | 08-04-2025 |
Clayton A. Struve Warrant | 02-28-2018 | 1,344,000 | $0.25 | 02-28-2024 | 02-28-2025 |
On December 14, 2022, the Company issued a warrant for to purchase common stock for 2,000,000 shares to Ronald P. Erickson at $1.53 per share. The warrants were issued for the extension of loans and deferral of other expenses. The warrant expires on December 15, 2025.
On December 15, 2020,14, 2022, the Company issued a stock option grant to Phillip A. Bosua for 2,132,1951,250,000 shares at an exercise price of $1.53$1.41 per share. The stock option grant expires in five years. The stock option grants vest when earned based on certain performance criteria.
On December 14, 2022, the Company approved the extension of warrants with Ronald P. Erickson and/or entities with which he is affiliated for Future Equity
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Know Labs, Inc. (the "Registrant")the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 20, 2022 | KNOW LABS, INC. | ||
/s/ Phillip A. Bosua | |||
Name: Phillip A. Bosua | |||
Title: Chief Executive Officer | |||
(Principal Executive Officer) |
/s/ Peter J. Conley | |||
Name: Peter J. Conley | |||
Title: Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated:
SIGNATURE | TITLE | DATE | |||
/s/ Phillip A. Bosua | Chief Executive Officer and Director | December | |||
Phillip A. Bosua | |||||
/s/ Peter J. Conley | Chief Financial Officer (principal financial and accounting officer) | December 20, 2022 | |||
Peter J. Conley | |||||
/s/ Ronald P. Erickson | Chairman of the Board | December | |||
Ronald P. Erickson | |||||
/s/ William A. Owens | Director | December | |||
William A. Owens | |||||
/s/ Jon Pepper | Director | December 20, 2022 | |||
Jon Pepper | |||||
/s/ Ichiro Takesako | Director | December 20, 2022 | |||
Ichiro Takesako |
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SUBSIDIARIES
As of September 30, 2022, the following were the Registrant's significant operating Subsidiaries:
Name: Particle, Inc.
Country of Organization: U.S.
Percent Ownership by Registrant: 100.0% by Know Labs, Inc.
Name: AI Mind, Inc.
Country of Organization: U.S.
Percent Ownership by Registrant: 100.0% by Know Labs, Inc.
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