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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - KNOW LABS, INC.knwn_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - KNOW LABS, INC.knwn_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - KNOW LABS, INC.knwn_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - KNOW LABS, INC.knwn_ex311.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
     QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2020
 
      TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
 
For the transition period from _______ to ________
 
Commission File number               000-30262    
 
 
KNOW LABS, INC.
(Exact name of registrant as specified in charter)
 
Nevada
 
 90-0273142
 (State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification No.)
 
  500 Union Street, Suite 810, Seattle, Washington USA
 
  98101
 (Address of principal executive offices) 
 
 (Zip Code)
 
206-903-1351
 (Registrant's telephone number, including area code)
 
 
 (Former name, address, and fiscal year, if changed since last report)
  
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2
 
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No
 
The number of shares of common stock, $.001 par value, issued and outstanding as of May 15, 2020: 23,679,245 shares. 
 

 
 
 
TABLE OF CONTENTS
 
 
Page Number
 
 
PART I    FINANCIAL INFORMATION
 
 
 
ITEM 1 Financial Statements (unaudited except as noted)
 3
 
 
Consolidated Balance Sheets as of March 31, 2020 and September 30, 2019 (audited)
 3
 
 
Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019
 4
 
 
Consolidated Statements of Changes in Stockholders’ Deficit
 5
 
 
Consolidated Statements of Cash Flows for the three and six months ended March 31, 2020 and 2019
6
 
 
Notes to the Financial Statements 
 7
 
 
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operation
 20
 
 
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
 29
 
 
ITEM 4 Controls and Procedures
 29
 
 
PART II    OTHER INFORMATION
 
 
 
ITEM 1A. Risk Factors 
 31
 
 
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
 40
 
 
ITEM 3 Defaults upon Senior Securities
 41
 
 
ITEM 4 Mine Safety Disclosures
 41
 
 
ITEM 5 Other Information
 41
 
 
ITEM 6 Exhibits
 41
 
 
SIGNATURES
 44
 
 
2
 

ITEM 1. FINANCIAL STATEMENTS
 
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
 
March 31,
2020
 
 
September 30,
2019
 
ASSETS
 
 
 
 
 (Audited)
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash and cash equivalents
 $776,752 
 $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
  776,752 
  1,977,423 
 
    
    
PROPERTY AND EQUIPMENT, NET
  119,774 
  130,472 
 
    
    
OTHER ASSETS
    
    
Intangible assets
  187,780 
  274,446 
Other assets
  13,766 
  13,766 
Operating lease right of use asset
  130,100 
  243,526 
 
    
    
TOTAL ASSETS
 $1,228,172 
 $2,639,633 
 
    
    
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
    
    
 
    
    
CURRENT LIABILITIES:
    
    
Accounts payable - trade
 $693,598 
 $810,943 
Accounts payable - related parties
  8,439 
  7,048 
Accrued expenses
  118,633 
  460,055 
Accrued expenses - related parties
  677,918 
  458,500 
Convertible notes payable
  2,739,330 
  3,954,241 
Current portion of operating lease right of use liability
  118,568 
  124,523 
Total current liabilities
  4,356,486 
  5,815,310 
 
    
    
NON-CURRENT PORTION OF OPERATING LEASE RIGHT OF USE LIABILITY
  12,906 
  121,613 
 
    
    
COMMITMENTS AND CONTINGENCIES (Note 14)
  - 
  - 
 
    
    
STOCKHOLDERS' DEFICIT
    
    
Preferred stock - $0.001 par value, 5,000,000 shares authorized, 0 shares issued and
    
    
outstanding at 3/31/2020 and 9/30/2019 respectively
  - 
  - 
Series A Convertible Preferred stock - $0.001 par value, 23,334 shares authorized, 0 shares
    
    
issued and outstanding at 3/31/2020 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 3/31/2020 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 3/31/2020 and 9/30/2019, respectively
  1,015 
  1,015 
Common stock - $0.001 par value, 100,000,000 shares authorized, 23,324,128 and 18,366,178
    
    
shares issued and outstanding at 3/31/2020 and 9/30/2019, respectively
  23,324 
  18,366 
Additional paid in capital
  45,581,817 
  39,085,179 
Accumulated deficit
  (48,749,166)
  (42,403,640)
Total stockholders' deficit
  (3,141,220)
  (3,297,290)
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 $1,228,172 
 $2,639,633 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 
 
KNOW LABS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
 
 
 
  Three Months Ended,
 
 
  Six Months Ended,
 
 
 
  March 31, 2020
 
 
  March 31, 2019
 
 
  March 31, 2020
 
 
  March 31, 2019
 
 
 
   
 
 
   
 
 
   
 
 
   
 
REVENUE
 $4,546 
 $593,712 
 $121,939 
 $1,195,921 
COST OF SALES
  3,791 
  454,839 
  69,726 
  927,125 
GROSS PROFIT
  755 
  138,873 
  52,213 
  268,796 
RESEARCH AND DEVELOPMENT EXPENSES
  447,165 
  184,024 
  938,303 
  391,014 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  1,622,941 
  1,003,504 
  2,543,492 
  1,692,950 
OPERATING LOSS
  (2,069,351)
  (1,048,655)
  (3,429,582)
  (1,815,168)
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
Interest expense
  (1,301,674)
  (400,201)
  (2,981,164)
  (409,327)
Other income
  40,512 
  6,618 
  65,220 
  13,054 
Total other (expense), net
  (1,261,162)
  (393,583)
  (2,915,944)
  (396,273)
 
    
    
    
    
LOSS BEFORE INCOME TAXES
  (3,330,513)
  (1,442,238)
  (6,345,526)
  (2,211,441)
 
    
    
    
    
Income taxes - current provision
  - 
  - 
  - 
  - 
 
    
    
    
    
NET LOSS
 $(3,330,513)
 $(1,442,238)
 $(6,345,526)
 $(2,211,441)
 
    
    
    
    
Basic and diluted loss per share
 $(0.16)
 $(0.08)
 $(0.33)
 $(0.12)
 
    
    
    
    
Weighted average shares of common stock outstanding- basic and diluted
  20,424,329 
  18,094,492 
  19,412,240 
  17,829,909 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 
 
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

   
 
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
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  171,499 
  - 
  171,499 
Conversion of Series A Convertible Preferred Stock
  - 
  - 
    
    
    
    
  279,929 
  280 
  (280)
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (769,203)
  (769,203)
Balance as of December 31, 2018
  20,000 
  11 
  1,785,715 
  1,790 
  1,016,004 
  1,015 
  17,811,451 
  17,811 
  32,334,605 
  (35,560,527)
  (3,205,295)
Stock compensation expense - employee options
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  91,648 
  - 
  91,648 
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)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,570,049 
  - 
  1,570,049 
Issuance of warrants to debt holders (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,244,263 
  - 
  1,244,263 
Issuance of warrants for services related to debt offering (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  988,876 
  - 
  988,876 
Stock based compensation- warrants
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  30,325 
  - 
  30,325 
Issuance of common stock for warrant exercise
  - 
  - 
  - 
  - 
  - 
  - 
  56,518 
  56 
  (56) 
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (1,442,238)
  (1,442,238)
Balance as of March 31, 2019
  - 
  - 
  1,785,715 
  1,790 
  1,016,004 
  # 1,015 
  18,192,969 
  18,192 
  36,608,296 
  (37,002,765) 
  (373,472)
Balance as of October 1, 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
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  399,897 
  - 
  399,897 
Stock option exercise
  - 
  - 
  - 
  - 
  - 
  - 
  73,191 
  73 
  (73) 
  - 
  - 
Beneficial conversion feature (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  330,082 
  - 
  330,082 
Issuance of warrants to debt holders (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  168,270 
  - 
  168,270 
Issuance of warrants for services related to debt offering (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  160,427 
  - 
  160,427 
Issuance of common stock for exercise of warrants
  - 
  - 
  - 
  - 
  - 
  - 
  28,688 
  29 
  (29)
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,015,013)
  (3,015,013)
Balance as of December 31, 2019
  - 
  - 
  1,785,715 
  1,790 
  1,016,004 
  1,015 
  18,468,057 
  18,468 
  40,143,753 
  (45,418,653)
  (5,253,627)
Stock compensation expense - employee options
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  165,829 
  - 
  165,829 
Conversion of debt offering and accrued interest (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  4,114,800 
  4,115 
  4,110,685 
  - 
  4,114,800 
Beneficial conversion feature (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  105,535 
  - 
  105,535 
Issuance of warrants to debt holders (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  21,214 
  - 
  21,214 
Issuance of warrants for services related to debt offering (Note 10)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  9,542 
  - 
  9,542 
Issuance of common stock for services
  - 
  - 
  - 
  - 
  - 
  - 
  540,000 
  540 
  1,025,460 
  - 
  1,026,000 
Issuance of common stock for exercise of warrants
  - 
  - 
  - 
  - 
  - 
  - 
  201,271 
  201 
  (201) 
  - 
  0 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,330,513) 
  (3,330,513) 
Balance as of March 31, 2020
  - 
 $- 
  1,785,715 
 $1,790 
  1,016,004 
 $1,015 
 $23,324,128 
 $23,324 
 $45,581,817 
 $(48,749,166)
 $(3,141,220)
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 
 
KNOW LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
  Six Months Ended,
 
 
 
  March 31, 2020
 
 
  March 31, 2019
 
 
 
   
 
 
   
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
 
   
 
Net loss
 $(6,345,526)
 $(2,211,441)
Adjustments to reconcile net loss to net cash (used in) operating activities
    
    
Depreciation and amortization
  120,745 
  133,019 
Issuance of capital stock for services and expenses
  1,026,000 
  348,900 
Stock based compensation- warrants
  - 
  30,325 
Stock based compensation- stock option grants
  565,726 
  263,147 
Amortization of debt discount
  2,792,398 
  361,534 
Provision on loss on accounts receivable
  2,439 
  8,728 
Right of use, net
  (1,236)
  - 
Loss on sale of assets
  4,358 
  - 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  60,610 
  118,438 
Prepaid expenses
  6,435 
  7,296 
Inventory
  7,103 
  102,593 
Other assets
  - 
  (8,697)
Accounts payable - trade and accrued expenses
  72,618 
  (245,393)
Deferred revenue
  - 
  (55,959)
 NET CASH (USED IN) OPERATING ACTIVITIES
  (1,688,330)
  (1,147,510)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Investment in research and development equipment
  (27,739)
  (74,556)
NET CASH (USED IN) INVESTING ACTIVITIES:
  (27,739)
  (74,556)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repayments on line of credit
  - 
  (92,094)
Proceeds from convertible notes payable
  715,000 
  3,809,976 
Payments for issuance costs from notes payable
  (123,015)
  (368,322)
NET CASH PROVIDED BY FINANCING ACTIVITIES
  591,985 
  3,349,560 
 
    
    
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
  (1,124,084)
  2,127,494 
 
    
    
CASH AND CASH EQUIVALENTS, beginning of period
  1,900,836 
  934,407 
 
    
    
CASH AND CASH EQUIVALENTS, end of period
 $776,752 
 $3,061,901 
 
    
    
Supplemental disclosures of cash flow information:
    
    
Interest paid
 $- 
 $7,750 
Taxes paid
 $- 
 $- 
 
    
    
Non-cash investing and financing activities:
    
    
 Beneficial conversion feature
 $435,617 
 $1,570,049 
Issuance of warrants to debt holders
 $189,484 
 $1,244,263 
Issuance of warrants for services related to debt offering
 $169,969 
 $988,876 
Cashless warant exercise (fair value)
 $57,490 
 $84,107 
Cashless stock options exercise (fair value)
 $18,298 
 $- 
Conversion of debt offering
 $3,800,424 
 $- 
Conversion of accrued interest
 $314,376 
 $- 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6
 
 
KNOW LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The accompanying unaudited consolidated condensed financial statements have been prepared by Know Labs, Inc, formerly Visualant, Incorporated (“the Company”, “us,” “we,” or “our”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows for the fiscal periods presented have been included.
 
These financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended September 30, 2019, filed with the Securities and Exchange Commission (“SEC”) on December 27, 2019. The results of operations for the six months ended March 31, 2020 are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period. 
 
1. ORGANIZATION
 
Know Labs, Inc. (the “Company”) was incorporated under the laws of the State of Nevada in 1998. The Company has authorized 105,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares preferred stock, par value $0.001 per share. 
 
The Company is focused on the development, marketing and sales of proprietary technologies which are capable of uniquely identifying or authenticating almost any substance or material using electromagnetic energy to record, detect, and identify the unique “signature” of the substance or material. We call these our “Bio-RFID™” and “ChromaID™” technologies.
 
Historically, the Company focused on the development of our proprietary ChromaID technology. Using light from low-cost LEDs (light emitting diodes) the ChromaID technology maps the color of substances, fluids and materials. With the Company’s proprietary processes, the Company 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. The Company’s ChromaID scanner sees what we like to call “Nature’s Color Fingerprint.” Everything in nature has a unique color identifier and with ChromaID the Company can see, and identify, and authenticate based upon the color that is present. The Company’s ChromaID scanner is capable of uniquely identifying and authenticating almost any substance or liquid using light to record, detect and identify its unique color signature. More recently, the Company has focused upon extensions and new inventions that are derived from and extend beyond our ChromaID technology. The Company calls this new technology “Bio-RFID.” The rapid advances made with our Bio-RFID technology in our laboratory have caused us to move quickly into the commercialization phase of our Company as the Company works to create revenue generating products for the marketplace. Today, the sole focus of the Company is on its Bio-RFID technology and its commercialization.
 
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct to the Company’s business. TransTech is a distributor of products for employee and personnel identification and authentication. TransTech has historically provided substantially all of the Company’s revenues. The financial results from our TransTech subsidiary have been diminishing as vendors of their products increasingly move to the Internet and direct sales to their customers. While it does provide the Company’s current revenues, it is not central to the Company’s current focus. Moreover, the Company has written down any goodwill associated with this acquisition. The Company expects to shut down TransTech completely by June 30, 2020.
 
The Company is in the process of commercializing its Bio-RFID technology. The Company plans its first commercial applications to be a wearable non-invasive Continuous Glucose Monitor. This product will require approval from the United States Food and Drug Administration prior to introduction to the market. In addition, it has a technology license agreement with Allied Inventors, formerly Xinova and Invention Development Management Company, a subsidiary of Intellectual Ventures.
 
The Company believes that its commercialization success is dependent upon its ability to significantly increase the number of customers that are purchasing and using its products. To date the Company has generated minimal revenue from sales of products derived from its ChromaID and Bio-RFID technology. The Company is currently not profitable. Even if the Company succeeds in introducing its technology and related products to its target markets, the Company may not be able to generate sufficient revenue to achieve or sustain profitability. Regulatory requirements may also inhibit the speed with which the Company’s products can enter the marketplace.
 
ChromaID was invented by scientists under contract with the Company. Bio-RFID was invented by individuals working for the Company. The Company actively pursues a robust intellectual property strategy and has been granted fourteen patents. The Company also has several patents pending. The Company possesses all right, title and interest to the issued patents. Nine additional issued and pending patents are licensed exclusively to the Company in perpetuity by the Company’s strategic partner, Allied Inventors. 
 
 
7
 
 
2. GOING CONCERN
 
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses $6,345,526, $7,612,316 and $3,257,597 for the six months ended March 31, 2020 and the years ended September 30, 2019 and 2018, respectively. Net cash used in operating activities was $1,668,330, $3,104,035 and $1,117,131 for the six months ended March 31, 2020 and the years ended September 30, 2019 and 2018, respectively. During the six months ended March 31, 2020 and 2019, the Company incurred non-cash expenses of $4,510,430 and $1,145,653.
 
The Company anticipates that it will record losses from operations for the foreseeable future. As of March 31, 2020, the Company’s accumulated deficit was $48,749,166  The Company has limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings and loans from Ronald P. Erickson, the Company’s Chairman of the Board and Interim Chief Financial Officer, or entities with which he is affiliated. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by the Company’s independent registered public accounting firm relating to our consolidated financial statements for the year ended September 30, 2019 includes an explanatory paragraph expressing the substantial doubt about the Company’s ability to continue as a going concern.
 
The Company believes that its cash on hand and received since March 31, 2020 will be sufficient to fund our operations until early 2021. The Company needs additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution to the Company’s then-existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, the Company may be required to delay, scale back, eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.
 
3. SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
 
Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these unaudited condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
 
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries, TransTech Systems, Inc and RAAI Lighting, Inc. Inter-Company items and transactions have been eliminated in consolidation.
 
Cash and Cash Equivalents – The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.  At March 31, 2020, the Company had uninsured deposits in the amount of $526,752.
 
Accounts Receivable and Revenue – The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which requires the application of the five-step-principles-based-accounting-model for revenue recognition. These steps include (1) a legally enforceable contract, written or unwritten is identified; (2) performance obligations in the contracts are identified; (3) the transaction price reflecting variable consideration, if any, is identified; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when the control of goods is transferred to the customer at a particular time or over time. For TransTech, the Company extends thirty day terms to some customers. Accounts receivable are reviewed periodically for collectability.
 
TransTech Systems Inc. sells products directly to customers. Our products are typically sold pursuant to purchase orders placed by our customers, and our terms and conditions of sale do not require customer acceptance. We account for a contract with a customer when there is a legally enforceable contract, which could be the customer’s purchase order, the rights of the parties are identified, the contract has commercial terms, and collectability of the contract consideration is probable. The majority of our contracts have a single performance obligation to transfer products and are short term in nature, usually less than one year. Our revenue is measured based on the consideration specified in the contract with each customer in exchange for transferring products that is generally based upon a negotiated, formula, list or fixed price. Revenue is recognized when control of the promised goods is transferred to our customer, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods.
 
 
8
 
 
Allowance for Doubtful Accounts - We maintain an allowance for uncollectible accounts receivable. It is our practice to regularly review and revise, when deemed necessary, our estimates of uncollectible accounts receivable, which are based primarily on actual historical return rates. We record estimated uncollectible accounts receivable as selling, general and administrative expense. As of March 31, 2020 and September 30, 2019, there was a reserve for sales returns of $0 and $40,000, respectively, which is minimal based upon our historical experience.
 
Inventories – Inventories consist primarily of printers and consumable supplies, including ribbons and cards, badge accessories, capture devices, and access control components held for resale and are stated at the lower of cost or market on the first-in, first-out (“FIFO”) method.  Inventories are considered available for resale when drop shipped and invoiced directly to a customer from a vendor, or when physically received by TransTech.  The Company records a provision for excess and obsolete inventory whenever an impairment has been identified. There is a $0 and $28,000 reserve for impaired inventory as of March 31, 2020 and September 30, 2019.
 
Equipment – Equipment consists of machinery, leasehold improvements, furniture and fixtures and software, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 2-10 years, except for leasehold improvements which are depreciated over 5 years. 
 
Long-Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
 
Intangible Assets – Intangible assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets.
 
Research and Development Expenses – Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes as well as materials, supplies and facilities used in producing prototypes.
 
The Company’s current research and development efforts are primarily focused on improving our Bio-RFID technology, extending its capacity and developing new and unique applications for this technology. As part of this effort, the Company conducts on-going laboratory testing to ensure that application methods are compatible with the end-user and regulatory requirements, and that they can be implemented in a cost-effective manner. The Company also is actively involved in identifying new applications. The Company’s current internal team along with outside consultants has considerable experience working with the application of the Company’s technologies and their applications. The Company engages third party experts as required to supplement our internal team. The Company believes that continued development of new and enhanced technologies is essential to our future success. We incurred expenses of $938,303, $1,257,872 and $570,514 for the six months ended March 31, 2020 and the years ended September 30, 2019 and 2018, respectively, on development activities.
 
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 March 31, 2020 and September 30, 2019 are based upon the short-term nature of the assets and liabilities. 
 
The Company has a money market account which is considered a level 1 asset. The balance as of March 31, 2020 and September 30, 2019 was $651,722 and $1,901,278, respectively.
 
 
9
 
 
Derivative Financial Instruments –Pursuant to ASC 815 “Derivatives and Hedging”, the Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company then determines if embedded derivative must bifurcated and separately accounted for. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
 
The Company determined that none of the conversion features within its currently outstanding convertible notes payable must be bifurcated and thus there was no derivative liability as of March 31, 2020 and September 30, 2019.
 
Stock Based Compensation - The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.  
 
Convertible Securities Based upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities. We will evaluate our contracts based upon the earliest issuance date. In the event partial reclassification of contracts subject to ASC 815-40-25 is necessary, due to our inability to demonstrate we have sufficient shares authorized and unissued, shares will be allocated on the basis of issuance date, with the earliest issuance date receiving first allocation of shares. If a reclassification of an instrument were required, it would result in the instrument issued latest being reclassified first.
 
Net Loss per Share – Under the provisions of ASC 260, “Earnings Per Share,” basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. As of March 31, 2020, there were options outstanding for the purchase of 4,891,334 common shares (including unearned stock option grants totaling 2,680,000 shares related to performance targets), warrants for the purchase of 17,755,448 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 had 10,167,804 common shares (9,020,264 common shares at the current price of $0.25 per share and 1,147,540 common shares at the current price of $1.00 per share) and are issuable upon conversion of convertible debentures of $3,402,606. All of which could potentially dilute future earnings per share.
 
As of March 31, 2019, there were options outstanding for the purchase of 2,282,668 common shares, warrants for the purchase of 17,572,583 common shares, and 4,894,071 shares of the Company’s common stock issuable upon the conversion of Series A, Series C and Series D Convertible Preferred Stock. In addition, the Company currently has 12,829,329 common shares (9,020,264 common shares at the current price of $0.25 per share and 3,808,975 common shares at the current price of $1.00 per share) and are issuable upon conversion of convertible debentures of $6,060,041. All of which could potentially dilute future earnings per share.
 
Dividend Policy – The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
 
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Recent Accounting Pronouncements
 
Based on the Company’s review of accounting standard updates issued since the filing of the 2019 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.
 
 
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4.  ACCOUNTS RECEIVABLE/CUSTOMER CONCENTRATION
 
Accounts receivable were $0 and $63,049, net of allowance, as of March 31, 2020 and September 30, 2019, respectively. The Company has a total allowance for bad debt in the amount of $0 and $40,000 as of March 31, 2020 and September 30, 2019, respectively. The decrease in accounts receivable related to the winddown of TransTech.
 
5.  INVENTORIES
 
Inventories were $0 and $7,103 as of March 31, 2020 and September 30, 2019, respectively. Inventories consisted primarily of printers and consumable supplies, including ribbons and cards, badge accessories, capture devices, and access control components held for resale. There was a $0 and $28,000 reserve for impaired inventory as of March 31, 2020 and September 30, 2019, respectively. The decrease in inventory related to the winddown of TransTech.
  
6. FIXED ASSETS
 
Fixed assets, net of accumulated depreciation, was $119,774 and $130,472 as of March 31, 2020 and September 30, 2019, respectively. Accumulated depreciation was $221,490 and $379,259 as of March 31, 2020 and September 30, 2019, respectively. Total depreciation expense was $34,079 and $18,491 for the six months ended March 31, 2020 and 2019, respectively. All equipment is used for selling, general and administrative purposes and accordingly all depreciation is classified in selling, general and administrative expenses. 
 
Property and equipment as of March 31, 2020 and September 30, 2019 was comprised of the following: 
 
 
Estimated
 
  March 31,
 
 
September 30, 
 
 
Useful Lives
 
2020
 
 
2019
 
Machinery and equipment
2-10 years
 $310,797 
 $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
 
  (221,490)
  (379,259)
 
 $119,774 
 $130,472 
 
The Company retired assets at TransTech with a net book value of $4,358 as of March 31, 2020.
 
 
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7.  INTANGIBLE ASSETS
 
Intangible assets as of March 31, 2020 and September 30, 2019 consisted of the following: 
 
 
Estimated
 
March 31,
 
 
September 30,
 
 
Useful Lives
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
Technology
3 years
 $520,000 
 $520,000 
Less: accumulated amortization
 
  (332,220)
  (245,554)
    Intangible assets, net
 
 $187,780 
 $274,446 
 
Total amortization expense was $86,666 for the six months ended March 31, 2020 and 2019, respectively.
 
Merger with RAAI Lighting, Inc.
 
On April 10, 2018, the Company entered into an Agreement and Plan of Merger with 500 Union Corporation, a Delaware corporation and a wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a Delaware corporation. Pursuant to the Merger Agreement, the Company acquired all the outstanding shares of RAAI’s capital stock through a merger of Merger Sub with and into RAAI (the “Merger”), with RAAI surviving the Merger as a wholly owned subsidiary of the Company.
 
Under the terms of the Merger Agreement, each share of RAAI common stock issued and outstanding immediately before the Merger (1,000 shares) was cancelled and the Company issued 2,000,000 shares of the Company’s common stock. As a result, the Company issued 2,000,000 shares of its common stock to Phillip A. Bosua, formerly the sole stockholder of RAAI. The consideration for the Merger was determined through arms-length bargaining by the Company and RAAI. The Merger was structured to qualify as a tax-free reorganization for U.S. federal income tax purposes. As a result of the Merger, the Company received certain intellectual property, related to RAAI.
 
RAAI had no outstanding indebtedness or assets at the closing of the Merger. The 2,000,000 shares of the Company’s common stock issued for RAAI’s shares were recorded at the fair value at the date of the merger at $520,000 and the value assigned to the technology acquired with RAAI.
 
The fair value of the intellectual property associated with the assets acquired was $520,000 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
 
Merger with Know Labs, Inc.
 
On May 1, 2018, Know Labs, Inc., a Nevada corporation incorporated on April 3, 2018, and our wholly-owned subsidiary, merged with and into the Company pursuant to an Agreement and Plan of Merger dated May 1, 2018. In connection with the merger, our Articles of Incorporation were effectively amended to change our name to Know Labs, Inc. by and through the filing of Articles of Merger. This parent-subsidiary merger was approved by us, the parent, in accordance with Nevada Revised Statutes Section 92A.180. Stockholder approval was not required. This amendment was filed with the Nevada Secretary of State and became effective on May 1, 2018.
 
 
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8. ACCOUNTS PAYABLE
 
Accounts payable were $693,598 (including $308,641 related to TransTech) and $810,943 as of March 31, 2020 and September 30, 2019, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases and technology development, external audit, legal and other expenses incurred by the Company. The Company expects to settle the TransTech accounts payable during 2020. The Company expects to shut down TransTech completely by June 30, 2020.
 
9. LEASES
 
The Company has entered into operating leases for office and development facilities. These leases have terms which range from two to three years and include options to renew. These operating leases are listed as separate line items on the Company's March 31, 2020 and September 30, 2019 Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's March 31, 2020 and September 30, 2019 Consolidated Balance Sheets. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $250,000 on October 1, 2018. Operating lease right-of-use assets and liabilities commencing after October 1, 2018 are recognized at commencement date based on the present value of lease payments over the lease term. During the six months ended March 31, 2020 and the year ended September 30, 2019, the Company had one lease expire and recognized the rent payments as an expense in the current period. As of March 31, 2020 and September 30, 2019, total right-of-use assets and operating lease liabilities for remaining long term lease was approximately $130,000 and $246,000, respectively. In the six months ended March 31, 2020 and 2019, the Company recognized approximately $67,914 and $100,482, respectively in total lease costs for the leases.
 
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
 
Information related to the Company's operating right-of-use assets and related lease liabilities as of and for the six months ended March 31, 2020 was as follows:
 
Cash paid for ROU operating lease liability $66,998
Weighted-average remaining lease term 2 years
Weighted-average discount rate 10%
 
The minimum future lease payments as of March 31, 2020 are as follows:
 
Year
 
$
 
2021
 $133,996 
2022
  12,086 
2023
  0 
2024
  - 
 
  146,082 
Imputed interest
  (14,608)
Total lease liability
 $131,474 
 
 
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10. CONVERTIBLE NOTES PAYABLE
 
Convertible notes payable as of March 31, 2020 and September 30, 2019 consisted of the following:
 
Convertible Promissory Notes with Clayton A. Struve
 
The Company owes Clayton A. Struve $1,071,000 under convertible promissory or OID notes. The Company recorded accrued interest of $67,801 and $62,171 as of March 31, 2020 and September 30, 2019, respectively. On May 8, 2019, the Company signed Amendment 2 to the convertible promissory or OID notes, extending the due dates to September 30, 2019. On November 26, 2019, the Company signed Amendments to the convertible promissory or OID notes, extending the due dates to March 31, 2020. Mr. Struve also invested $1,000,000 in the May 2019 Debt Offering. On May 11, 2020, the Company signed Amendments to the convertible promissory or OID notes, extending the due dates to September 30, 2020.
 
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 $109,583 and $73,964 as of March 31, 2020 and September 30, 2019, respectively. On May 8, 2019, the Company signed Amendment 1 to the convertible redeemable promissory notes, extending the due dates to September 30, 2019 and increasing the interest rate to 6%. On November 26, 2019, the Company signed Amendment 2 to the convertible promissory or OID notes, extending the due dates to March 31, 2020. On May 11, 2020, the Company signed Amendment 3 to the convertible promissory or OID notes, extending the due dates to September 30, 2020.
 
Debt Offering which Closed May 28, 2019
 
On May 28, 2019, the Company closed additional rounds of a debt offering and received gross proceeds of $4,242,515 in exchange for issuing Subordinated Convertible Notes (the “Convertible Notes”) and Warrants (the “Warrants”) in a private placement to 54 accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes will be automatically converted to Common Stock at $1.00 per share on the one year anniversary starting on February 15, 2020.
 
The Convertible Notes had an original principal amount of $4,242,515 and bear annual interest of 8%. Both the principal amount and the interest are payable on a payment-in-kind basis in shares of Common Stock of the Company (the “Common Stock”).
 
The Warrants were granted on a 1:0.5 basis (one-half Warrant for each full share of Common Stock into which the Convertible Notes are convertible). The Warrants have a five-year term and an exercise price equal to 120% of the per share conversion price of the Qualified Financing or other mandatory conversion.
 
The Convertible Notes are initially convertible into 4,242,515 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 2,121,258 shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments.
 
In connection with the debt offering, the placement agent for the Convertible Notes and the Warrants received a cash fee of $361,401 and warrants to purchase 542,102 shares of the Company’s common stock, all based on 8-10% of gross proceeds to the Company. The placement agent has also received a $25,000 advisory fee. The warrants issued for these services had a fair value of $1,072,095 at the date of issuance. The fair value of the warrants was recorded as debt discount (with an offset to APIC) and will be amortized over the one-year term of the Convertible Notes. The $361,401 cash fee was recorded as issuance costs and will be amortized over the one-year term of the related Convertible Notes.
 
As part of the Purchase Agreement, the Company entered into a Registration Rights Agreement, which grants the investors “demand” and “piggyback” registration rights to register the shares of Common Stock issuable upon the conversion of the Convertible Notes and the exercise of the Warrants with the Securities and Exchange Commission for resale or other disposition. In addition, the Convertible Notes are subordinated to certain senior debt of the Company pursuant to a Subordination Agreement executed by the investors.
 
 
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The Convertible Notes and Warrants were issued in transactions that were not registered under the Securities Act of 1933, as amended (the “Act”) in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the Act.
 
In accordance to ASC 470-20-30, Debt with Conversion and Other Options, the guidance therein applies to both convertible debt and other similar instruments, including convertible preferred shares. The guidance states that “the allocation of proceeds shall be based on the relative fair values of the two instruments at time of issuance. When warrants are issued in conjunction with a debt instrument as consideration in purchase transactions, the amounts attributable to each class of instrument issued shall be determined separately, based on values at the time of issuance. The debt discount or premium shall be determined by comparing the value attributed to the debt instrument with the face amount thereof.
 
In conjunction with the issuance of Convertible Notes and the Warrants, the Company recorded a debt discount of $2,857,960 associated with a beneficial conversion feature on the debt, which is being accreted using the effective interest method over the one-year term of the Convertible Notes. Intrinsic value of the beneficial conversion feature was calculated at the commitment date as the difference between the conversion price and the fair value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. In accordance to ASC 470-20-30, if the intrinsic value of the beneficial conversion feature is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the beneficial conversion feature shall be limited to the amount of the proceeds allocated to the convertible instrument.
 
The Warrants were indexed to our own stock and no down round provision was identified. The Warrants were not subject to ASC 718. Therefore, the Company concluded that based upon the conversion features, the Warrants should not be accounted for as derivative liabilities. The fair value of the Warrants was $1,384,530 and was recorded as Debt Discount (with an offset to APIC) on the date of issuance and amortized over the one-year term of the notes.
 
During the six months ended March 31, 2020, the Company issued 4,114,800 shares of common stock related to the automatic conversion of Convertible Notes and interest from a private placement to accredited investors in 2019. The Convertible Notes and interested were automatically converted to Common Stock at $1.00 per share on the one year anniversary starting on February 15, 2020.
 
Debt Offering during the Six Months Ended March 31, 2020
 
During the six months ended March 31, 2020, the Company closed additional rounds of a debt offering and received gross proceeds of $715,000 in exchange for issuing Subordinated Convertible Notes and Warrants in a private placement to accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents.
 
The Convertible Notes are initially convertible into 715,000 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 357,500 shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments.
 
The fair value of the Warrants issued to debt holders was $230,955 on the date of issuance and will be amortized over the one-year term of the Convertible Notes.
 
In connection with the debt offering, the placement agent for the Convertible Notes and the Warrants received a cash fee of $123,015 and warrants to purchase 94,800 shares of the Company’s common stock, all based on 8% of gross proceeds to the Company. The warrants issued for these services had a fair value of $118,956 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 $123,015 cash fee was recorded as issuance costs and will be amortized over the one-year term of the related Convertible Notes.
 
The Company recorded a debt discount of $105,535 associated with a beneficial conversion feature on the debt, which is being accreted using the effective interest method over the one-year term of the Convertible Notes.
 
During the six months ended March 31, 2020, amortization related to the 2019 and 2020 debt offerings of $2,792,398 of the beneficial conversion feature, warrants issued to debt holders and placement agent was recognized as interest expense in the consolidated statements of operations.
 
 
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Convertible notes payable as of March 31, 2020 and September 30, 2019 are summarized below:
 
         
 
March 31,
2020
 
 
September 30,
2019
 
 Convertible note- Clayton A. Struve    
 $1,071,000 
 $1,071,000 
 Convertible note- Ronald P. Ericksin    
  1,184,066 
  1,184,066 
 2019 Debt offering        
  4,242,490 
  4,242,515 
 2020 Debt offering        
  715,000 
  - 
 less conversions        
  (3,809,975)
  - 
 less debt discount - beneficial conversion feature  
  (316,894)
  (1,273,692)
 less debt discount - warrants      
  (169,635)
  (616,719)
 less debt discount - warrants issued for services related to debt offering
  (176,722)
  (652,919)
         
 $2,739,330 
 $3,954,251 
 
11. EQUITY
 
Authorized Capital Stock
 
The Company authorized 105,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares preferred stock, par value $0.001 per share.
 
As of March 31, 2020, the Company had 23,324,128 shares of common stock issued and outstanding, held by 135 stockholders of record. The number of stockholders, including beneficial owners holding shares through nominee names, is approximately 2,300. Each share of common stock entitles its holder to one vote on each matter submitted to the stockholders for a vote, and no cumulative voting for directors is permitted.  Stockholders do not have any preemptive rights to acquire additional securities issued by the Company.  As of March 31, 2020, there were options outstanding for the purchase of 4,891,334 common shares (including unearned stock option grants totaling 2,680,000 shares), warrants for the purchase of 17,755,448 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 has 10,167,804 common shares (9,020,264 common shares at the current price of $0.25 per share and 1,147,540 common shares at the current price of $1.00 per share) and are issuable upon conversion of convertible debentures of $3,402,606. All of which could potentially dilute future earnings per share.
 
Voting Preferred Stock
 
The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $0.001.
 
 
16
 
 
Series C and D Preferred Stock and Warrants
 
On August 5, 2016, the Company closed a Series C Preferred Stock and Warrant Purchase Agreement with Clayton A. Struve, an accredited investor for the purchase of $1,250,000 of preferred stock with a conversion price of $0.70 per share. The preferred stock has a yield of 8% and an ownership blocker of 4.99%. In addition, Mr. Struve received a five-year warrant to acquire 1,785,714 shares of common stock at $0.70 per share. On August 14, 2017, the price of the Series C Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. On March 31, 2020 and September 30, 2019 there are 1,785,715 Series C Preferred shares outstanding.
 
As of March 31, 2020, and September 30, 2019, the Company has 1,106,014 of Series D Preferred Stock outstanding with Clayton A. Struve, an accredited investor. On August 14, 2017, the price of the Series D Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments.
 
The Series D Preferred Stock is convertible into shares of common stock at a price of $0.25 per share or by multiplying the number of Series D Preferred Stock shares by the stated value and dividing by the conversion price then in effect, subject to certain diluted events, and has the right to vote the number of shares of common stock the Series D Preferred Stock would be issuable on conversion, subject to a 4.99% blocker. The Preferred Series D has an annual yield of 8% The Series D Preferred Stock is convertible into shares of common stock at a price of $0.25 per share or by multiplying the number of Series D Preferred Stock shares by the stated value and dividing by the conversion price then in effect, subject to certain diluted events, and has the right to vote the number of shares of common stock the Series D Preferred Stock would be issuable on conversion, subject to a 4.99% blocker. The Preferred Series D has an annual yield of 8% if and when dividends are declared.
 
Series F Preferred Stock
 
On August 1, 2018, the Company filed with the State of Nevada a Certificate of Designation establishing the Designations, Preferences, Limitations and Relative Rights of Series F Preferred Stock. The Designation authorized 500 shares of Series F Preferred Stock. The Series F Preferred Stock shall only be issued to the current Board of Directors on the date of the Designation’s filing and is not convertible into common stock. As set forth in the Designation, the Series F Preferred Stock has no rights to dividends or liquidation preference and carries rights to vote 100,000 shares of common stock per share of Series F upon a Trigger Event, as defined in the Designation. A Trigger Event includes certain unsolicited bids, tender offers, proxy contests, and significant share purchases, all as described in the Designation. Unless and until a Trigger Event, the Series F shall have no right to vote. The Series F Preferred Stock shall remain issued and outstanding until the date which is 731 days after the issuance of Series F Preferred Stock (“Explosion Date”), unless a Trigger Event occurs, in which case the Explosion Date shall be extended by 183 days. As of March 31, 2020 and September 30, 2019, there are no Series F shares outstanding.
 
Securities Subject to Price Adjustments
 
In the future, if the Company sells its common stock at a price below $0.25 per share, the exercise price of 8,108,356 outstanding shares of Series C and D Preferred Stock that adjust below $0.25 per share pursuant to the documents governing such instruments. In addition, the conversion price of a Convertible Note Payable of $3,402,606 (9,020,264 common shares at the current price of $0.25 per share and 1,147,540 shares at $1.00 per share) and the exercise price of additional outstanding warrants to purchase 12,838,286 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments. Warrants totaling 2,755,717 would adjust below $1.20 per share pursuant to the documents governing such instruments.
 
Common Stock
 
All of the offerings and sales described below were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities, the offerings and sales were made to a limited number of persons, all of whom were accredited investors and transfer was restricted by the company in accordance with the requirements of Regulation D and the Securities Act. All issuances to accredited and non-accredited investors were structured to comply with the requirements of the safe harbor afforded by Rule 506 of Regulation D, including limiting the number of non-accredited investors to no more than 35 investors who have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of an investment in our securities.
 
The following equity issuances occurred during the six months ended March 31, 2020:
 
On November 9, 2019, a former employee exercised stock option grants on a cashless basis. The former employee received 73,191 shares of common stock for vested stock option grants. The stock option grant had an exercise price of $0.25 per share. The former employee forfeited stock option grants 226,809 at an exercise price of $0.25 per share, 150,000 at an exercise price of $1.28 per share and,130,000 at an exercise price of $1.50 per share.
 
On January 1, 2020, the Company issued 540,000 shares of restricted common stock to two Named Executive Officer, three directors and one consultant for services. 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 $1,026,000.
 
 
17
 
 
During the six months ended March 31, 2020, the Company issued 4,114,800 shares of common stock related to the automatic conversion of Convertible Notes and interest from a private placement to accredited investors in 2019. The Convertible Notes and interested were automatically converted to Common Stock at $1.00 per share on the one year anniversary starting on February 15, 2020.
 
During the six months ended March 31, 2020, the Company issued 229,529 shares of common stock at $0.979 per share to five investors related to the cashless exercise of warrants.
 
Warrants to Purchase Common Stock
 
The following warrant transactions occurred during the six months ended March 31, 2020:
 
During the six months ended March 31, 2020, the Company issued 229,529 shares of common stock at $0.979 per share and cancelled warrants to purchase 213,893 shares of common stock at $1.065 per share to five investors related to the cashless exercise of warrants.
 
Debt Offering Warrants
 
The Warrants issued for the 2019 and 2020 Debt Offering were granted on a 1:0.5 basis (one-half Warrant for each full share of Common Stock into which the Convertible Notes are convertible). The Warrants have a five-year term and an exercise price equal to 120% of the per share conversion price of the Qualified Financing or other mandatory conversion.
 
Warrants issued in connection with 2020 debt offering are initially exercisable for 357,500 shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments.
 
In connection with the 2020 debt offering, the placement agent for the Convertible Notes and the Warrants received warrants to 94,800 shares of the Company’s common stock, all based on 8% of gross proceeds to the Company.
 
A summary of the warrants outstanding as of March 31, 2020 were as follows:
 
 
 
March 31, 2020
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Average
 
 
 
 
 
 
Exercise
 
 
 
Shares
 
 
Price
 
Outstanding at beginning of period
  17,747,090 
 $0.455 
Issued
  452,300 
  1.200 
Exercised
  (229,959)
  (0.979)
Forfeited
  (213,983)
  (1.065)
Expired
  - 
  - 
Outstanding at end of period
  17,755,448 
 $0.460 
Exerciseable at end of period
  17,755,448 
    
 
 
18
 
 
The following table summarizes information about warrants outstanding and exercisable as of March 31, 2020:
 
 
 
March 31, 2020
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
Weighted
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
Number of
 
 
Remaining
 
 
Exercise
 
 
Shares
 
 
Exercise
 
 
Warrants
 
 
Life ( In Years)
 
 
Price
 
 
Exerciseable
 
 
Price
 
  13,333,286 
  2.53 
 $0.250 
  13,333,286 
 $0.250 
  714,286 
  1.33 
  0.700 
  714,286 
  0.700 
  882,158 
  1.62 
  1.000 
  882,158 
  1.000 
  2,805,718 
  4.04 
  1.20-1.50 
  2,805,718 
  1.20-1.50 
  20,000 
  3.87 
  2.34-4.08 
  20,000 
  2.34-4.08 
    
    
    
    
    
  17,755,448 
  3.00 
 $0.460 
  17,755,448 
 $0.460 
 
The significant weighted average assumptions relating to the valuation of the Company’s warrants for the six months ended March 31, 2020 were as follows:
 
Assumptions
 
Dividend yield
0%
Expected life
5 years
Expected volatility
176%-177%
Risk free interest rate
1.51%-1.71%
 
There were vested and in the money warrants of 14,047,572 as of March 31, 2020 with an aggregate intrinsic value of $8,809,493.
 
12. STOCK OPTIONS
 
On March 21, 2013, an amendment to the Stock Option Plan was approved by the stockholders of the Company, increasing the number of shares reserved for issuance under the Plan to 93,333 shares. On April 10, 2018, the Board approved an amendment to its 2011 Stock Incentive Plan increasing the number of shares of common stock reserved under the Incentive Plan from 93,333 to 1,200,000. On August 7, 2018, the Board approved an amendment to its 2011 Stock Incentive Plan increasing the number of shares of common stock reserved under the Incentive Plan from 1,200,000 to 2,000,000 to common shares. 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. There were options outstanding for the purchase of 4,891,334 common shares (including unearned stock option grants totaling 2,680,000 shares related to performance targets).
 
 
19
 
 
Determining Fair Value under ASC 718
 
The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding.  The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
 
Stock Option Activity
 
The Company had the following stock option transactions during the six months ended March 31, 2020:
 
During the six months ended March 31, 2020, the Company granted stock option grants to executives, directors and consultants for 3,020,000 shares with an exercise price of $1.125 per share. The grants expire in five years and generally vest quarterly over four years. Stock option grants totaling 2,680,000 shares of common stock are performance stock option grants and are not vested until the performance is achieved.
 
During the six months ended March 31, 2020, two executives and three employees voluntarily cancelled stock option grants for 2,588,143 shares with an exercise price of $2.65 per share.
 
On November 9, 2019, a former employee exercised stock option grants on a cashless basis. The former employee received 73,191 shares of common stock for vested stock option grants totaling 93,750 shares. The stock option grant had an exercise price of $0.25 per share. The former employee forfeited stock option grants 226,809 at an exercise price of $0.25 per share, 150,000 at an exercise price of $1.28 per share and 130,000 at an exercise price of $1.50 per share.
 
There are currently 4,891,334 (including unearned stock option grants totaling 2,680,000 shares related to performance targets) options to purchase common stock at an average exercise price of $1.165 per share outstanding as of March 31, 2020 under the 2011 Stock Incentive Plan. The Company recorded $565,726 and $263,145 of compensation expense, net of related tax effects, relative to stock options for the six months ended March 31, 2020 and 2019 and in accordance with ASC 718. As of March 31, 2020, there is approximately $614,953, net of forfeitures, of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 4.19 years. 
 
 
20
 
 
Stock option activity for the six months ended March 31, 2020 and the years ended September 30, 2019 and 2018 was as follows:
 
   
 
 
Options
 
 
 Weighted Average
Exercise Price
 
 
 
$
 
Outstanding as of September 30, 2017
  15,404 
 $14.68 
 $226,059 
Granted  
  2,180,000 
  1.683 
  3,668,500 
Exercised  
  - 
  - 
  - 
Forfeitures  
  (12,736)
  14.764 
  (188,040)
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  
  3,020,000 
  1.125 
  3,397,600 
Exercised  
  (73,191)
  (0.250)
  (18,298)
Forfeitures  
  (2,588,143)
  (2.650)
  (6,859,712)
Outstanding as of March 31, 2020  
  4,891,334 
 $1.165 
 $5,699,959 
 
The following table summarizes information about stock options outstanding and exercisable as of March 31, 2020:
 
 
 
 
 
 
 
 
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 
  3.21 
 $0.250 
  100,625 
 $0.250 
  1.10-1.25 
  2,940,000 
  4.60 
  1.37 
  233,854 
  1.096 
  1.28-1.50 
  1,610,000 
  4.60 
  1.31 
  498,438 
  1.296 
  1.79-2.25 
  110,000 
  4.39 
  1.01 
  40,000 
  1.153 
  13.50-15.00 
  1,334 
  0.19 
  13.50 
  1,334 
  13.500 
 
  4,891,334 
  4.19 
 $1.165 
  874,251 
 $1.212 
 
There were in the money stock option grants of 230,000 shares as of March 31, 2020 with an aggregate intrinsic value of $149,500.
 
 
21
 
 
13. OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
 
Related Party Transactions with Ronald P. Erickson
 
On January 16, 2018, Mr. Erickson was issued 100,000 of restricted common stock at the grant date market value of $0.21 per share.  On January 2, 2019, Mr. Erickson was issued 100,000 shares of restricted common stock at the grant date market value of $1.02 per share.
 
On January 25, 2018, the Company entered into amendments to two demand promissory notes, totaling $600,000 with Mr. Erickson, our former Chief Executive Officer and current chairman of the board and/or entities in which Mr. Erickson has a beneficial interest. The amendments extend the due date from December 31, 2017 to September 30, 2018 and continue to provide for interest of 3% per annum and a third lien on company assets if not repaid by September 30, 2018 or converted into convertible debentures or equity on terms acceptable to the Holder. On March 16, 2018, the demand promissory notes and accrued interest were converted into convertible notes payable.
 
On March 16, 2018, the Company entered into a Note and Account Payable Conversion Agreement pursuant to which (a) all $664,233 currently owing under the J3E2A2Z Notes was converted to a Convertible Redeemable Promissory Note in the principal amount of $664,233, and (b) all $519,833 of the J3E2A2Z Account Payable was converted into a Convertible Redeemable Promissory Note in the principal amount of $519,833 together with a warrant to purchase up to 1,039,666 shares of common stock of the Company for a period of five years. The initial exercise price of the warrants described above is $0.50 per share, also subject to certain adjustments. The warrants were valued at $110,545. Because the note is immediately convertible, the warrants and beneficial conversion were expensed as interest. The Company recorded accrued interest of $73,964 as of September 30, 2019. On May 8, 2019, the Company signed Amendment 1 to the convertible redeemable promissory notes, extending the due dates to September 30, 2019 and increasing the interest rate to 6%. On November 26, 2019, the Company signed Amendment 2 to the convertible promissory or OID notes, extending the due dates to March 31, 2020. On May 11, 2020, the Company signed Amendment 3 to the convertible promissory or OID notes, extending the due dates to September 30, 2020.
 
On July 9, 2018, the Company repaid a $199,935 Business Loan Agreement with Umpqua Bank from funds previously provided by an entity affiliated with Ronald P. Erickson, our Chairman of the Board. The Company paid $27,041 and issued 800,000 shares of common stock in exchange for the conversion of this debt. Mr. Erickson is an accredited investor. These shares were issued in transactions that were not registered under the Act in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Act and/or Rule 506 of SEC Regulation D under the Act.
 
On October 4, 2019, Ronald P. Erickson voluntarily cancellated a stock option grant for 1,000,000 shares with an exercise price of $3.03 per share. The grant was related to performance and was not vested.
 
On November 4, 2019, the Company granted a stock option grant to Ronald P. Erickson for 1,200,000 shares with an exercise price of $1.10 per share. The performance grant expires November 4, 2024 and vests upon uplisting to the NASDAQ or NYSE exchanges.
 
On January 1, 2020, the Company issued 100,000 shares of restricted common stock to Ronald P. Erickson. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $1.90 per share, the market price of the Company’s common stock, or $190,000.
 
Mr. Erickson and/or entities with which he is affiliated also have accrued compensation, travel and interest of approximately $613,525 and $487,932 as of March 31, 2020 and September 30, 2019, respectively.
 
Related Party Transaction with Phillip A. Bosua
 
On February 7, 2018, the Company issued 50,000 shares of our common stock to Phillip A. Bosua under the terms of a consulting agreement dated July 6, 2017. The fair value of the shares issued was $12,000.
 
On April 10, 2018, the Company issued 2,000,000 shares of our common stock to Phillip A. Bosua under the terms of the Merger Agreement with RAAI common stock. The fair value of the shares issued was $520,000.
 
On June 25, 2018, we issued 500,000 shares of our common stock to Phillip A. Bosua under the terms of an Employment agreement dated April 10, 2018. The fair value of the shares issued was $165,000.
 
On June 25, 2018, we closed a debt conversion with an entity controlled by Phillip A. Bosua and issued 255,000 shares of common stock in exchange for the conversion of $63,750 in preexisting debt owed by the Company to this entity. 
 
On July 30, 2018, Mr. Bosua was awarded a stock option grant for 1,000,000 shares of our common stock that was awarded at $1.28 per share and was valued at the black scholes value of $0.96 per share.
 
 
22
 
 
On October 4, 2019, Philip A. Bosua voluntarily cancellated a stock option grant for 1,000,000 shares with an exercise price of $3.03 per share. The grants was related to performance and was not vested.
 
On November 4, 2019, the Company granted a stock option grant to Philip A. Bosua for 1,200,000 shares with an exercise price of $1.10 per share. The performance grant expires November 4, 2024 and vests upon FDA approval of the UBAND blood glucose monitor.
 
On January 1, 2020, the Company issued 150,000 shares of restricted common stock to Phillip A. Bosua. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $1.90 per share, the market price of the Company’s common stock, or $285,000.
 
Other Stock Option Grants and Cancellations
 
During January to May 2018, the Company issued 275,000 shares of restricted common stock to one Named Executive Officer and two directors for services during 2018. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $0.246 per share, the market price of our common stock.
 
On September 17, 2019, two directors voluntarily forfeited stock option grants for 100,000 shares of common stock with an exercise price of $3.03 per share.
 
On November 4, 2019, the Company granted stock option grants to two directors totaling 105,000 shares with an exercise price of $1.10 per share. The stock option grants expire in five years. The stock option grants vested immediately.
 
On January 1, 2020, the Company issued 120,000 shares of restricted common stock to three directors. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $1.90 per share, the market price of the Company’s common stock, or $228,000.
 
14. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
 
Legal Proceedings
 
The Company may from time to time become a party to various legal proceedings arising in the ordinary course of our business. The Company is currently not a party to any pending legal proceeding that is not ordinary routine litigation incidental to our business.
 
Employment Agreement with Phillip A. Bosua, Chief Executive Officer
 
On April 10, 2018, the Company appointed Mr. Bosua as Chief Executive Officer of the Company. Previously, Mr. Bosua served as the Company’s Chief Product Officer since August 2017. The Company entered into a Consulting Agreement with Mr. Bosua’s company, Blaze Clinical on July 7, 2017. From September 2012 to February 2015, Mr. Bosua was the founder and Chief Executive Officer of LIFX Inc. (where he developed and marketed an innovative “smart” light bulb) and from August 2015 until February 2016 was Vice President Consumer Products at Soraa (which markets specialty LED light bulbs). From February 2016 to July 2017, Mr. Bosua was the founder and CEO of RAAI, Inc. (where he continued the development of his smart lighting technology). From May 2008 to February 2013 he was the Founder and CEO of LimeMouse Apps, a leading developer of applications for the Apple App Store.
 
On April 10, 2018, the Company entered into an Employment Agreement with Mr. Bosua reflecting his appointment as Chief Executive Officer. The Employment Agreement is for an initial term of 12 months (subject to earlier termination) and will be automatically extended for additional 12-month terms unless either party notifies the other party of its intention to terminate the Employment Agreement with at least ninety (90) days prior to the end of the Initial Term or renewal term. Mr. Bosua will be paid a base salary of $225,000 per year, received 500,000 shares of common stock valued at $0.33 per share and may be entitled to bonuses and equity awards at the discretion of the Board or a committee of the Board. The Employment Agreement provides for severance pay equal to 12 months of base salary if Mr. Bosua is terminated without “cause” or voluntarily terminates his employment for “good reason.” On March 5, 2019, Mr. Bosua’s annual compensation was increased to $240,000.
 
 
23
 
 
Employment Agreement with Ronald P. Erickson, Chairman of the Board and Interim Chief Financial Officer
 
On August 4, 2017, the Board of Directors approved an Employment Agreement with Ronald P. Erickson pursuant to which we engaged Mr. Erickson as our Chief Executive Officer through September 30, 2018. On April 10, 2018, the Company entered into an Amended Employment Agreement for Ronald P. Erickson which amends the Employment Agreement dated July 1, 2017. The Agreement expires March 21, 2019. automatically be extended for additional one (1) year periods unless either Party delivers written notice of such Party’s intention to terminate this Agreement at least ninety (90) days prior to the end of the Initial Term or renewal term.
 
Mr. Erickson’s annual compensation was $180,000. Mr. Erickson is also entitled to receive an annual bonus and equity awards compensation as approved by the Board. The bonus should be paid no later than 30 days following earning of the bonus. On March 5, 2019, Mr. Erickson’s annual compensation was increased to $195,000.
 
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.
 
If the Company terminates Mr. Erickson’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Erickson terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Erickson will be entitled to receive (i) his Base Salary amount for one year; and (ii) medical benefits for eighteen months.
 
Properties and Operating Leases
 
The Company is obligated under the following leases for its various facilities.
 
Corporate Offices
 
On April 13, 2017, the Company leased its executive office located at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101. The Company leases 943 square feet and the net monthly payment is $2,672. The monthly payment increases approximately 3% each year and the lease expires on May 31, 2022.
 
Lab Facilities and Executive Offices
 
On February 1, 2019, the Company leased its lab facilities and executive offices located at 915 E Pine Street, Suite 212, Seattle, WA 98122. The Company leases 2,642 square feet and the net monthly payment is $8,256. The monthly payment increases approximately 3% on July 1, 2019 and annually thereafter. The lease expires on June 30, 2021 and can be extended.
 
15. SEGMENT REPORTING
 
The management of the Company considers the business to have two operating segments (i) the development of the Bio-RFID™” and “ChromaID™” technologies and (ii) TransTech, a distributor of products for employee and personnel identification and authentication. TransTech has historically provided substantially all of the Company’s revenues. The financial results from our TransTech subsidiary have been diminishing as vendors of their products increasingly move to the Internet and direct sales to their customers. While it does provide our current revenues, it is not central to our current focus as a Company. Moreover, we have written down any goodwill associated with its historic acquisition. We continue to closely monitor this subsidiary and expect it to wind down completely in the near future.
 
 
24
 
 
The reporting for the three and six months ended March 31, 2020 and 2019 was as follows (in thousands):
 
 
 
 
 
 
 
 
 
Segment
 
 
 
 
 
 
 
 
 
Gross
 
 
Net
 
 
Segment
 
Segment
 
Revenue
 
 
Margin
 
 
Profit (Loss)
 
 
Assets
 
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Development of the Bio-RFID™” and “ChromaID™” technologies
 $- 
 $- 
 $(3,346)
 $1,224 
TransTech distribution business
  5 
  1 
  15 
  4 
Total segments
 $5 
 $1 
 $(3,331)
 $1,228 
 
    
    
    
    
Three Months Ended March 31, 2019
    
    
    
    
Development of the Bio-RFID™” and “ChromaID™” technologies
 $- 
 $- 
 $(1,434)
 $3,565 
TransTech distribution business
  594 
  139 
  (8)
  379 
Total segments
 $594 
 $139 
 $(1,442)
 $3,944 
 
 
 
 
 
 
 
 
 
Segment
 
 
 
 
 
 
 
 
 
Gross
 
 
Net
 
 
Segment
 
Segment
 
Revenue
 
 
Margin
 
 
Profit (Loss)
 
 
Assets
 
Six Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Development of the Bio-RFID™” and “ChromaID™” technologies
 $- 
 $- 
 $(6,418)
 $1,224 
TransTech distribution business
  122 
  52 
  72 
  4 
Total segments
 $122 
 $52 
 $(6,346)
 $1,228 
 
    
    
    
    
Six Months Ended March 31, 2019
    
    
    
    
Development of the Bio-RFID™” and “ChromaID™” technologies
 $- 
 $- 
 $(2,171)
 $3,565 
TransTech distribution business
  1,196 
  269 
  (40)
  379 
Total segments
 $1,196 
 $269 
 $(2,211)
 $3,944 
 
During the six months ended March 31, 2020, the segment development of Bio-RFID™” and “ChromaID™” incurred non-cash expenses of $4,510,430.
 
 
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16.   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 March 31, 2020, there were the following material transactions that require disclosure:
 
The Company closed additional rounds of a debt offering and received gross proceeds of $1,979,500 in exchange for issuing Subordinated Convertible Notes and Warrants in a private placement to accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes are initially convertible into 1,979,500 shares of Common Stock, subject to certain adjustments, and the Warrants are initially exercisable for 989,750 shares of Common Stock at an exercise price of $1.20 per share of Common Stock, also subject to certain adjustments. In connection with the debt offering, the placement agent for the Convertible Notes and the Warrants received a cash fee of $158,360 and warrants to purchase 237,540 shares of the Company’s common stock, all based on 8% of gross proceeds to the Company.
 
The Company issued 305,117 shares of common stock related to the automatic conversion of Convertible Notes and interest from a private placement to accredited investors in 2019. The Convertible Notes and interested were automatically converted to Common Stock at $1.00 per share on the one year anniversary starting on February 15, 2020.
 
On April 29, 2020, the Company increased the salary of Ronald P. Erickson and Phillip A. Bosua by $20,000 per year.
 
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 April 30, 2020, the Company approved and ratified the incorporation of Particle, Inc., a Nevada corporation (“Particle”). The Company is the sole shareholder as of the date of incorporation. As a result, Particle is a direct, wholly owned subsidiary of the Company. Particle shall utilize the same corporate offices as the Company and shall focus on the development and commercialization of the Company’s extensive intellectual property relating to electromagnetic energy outside of the medical diagnostic arena which remains the parent company’s singular focus with its initial product, the UBAND™ non-invasive continuous glucose monitor.
 
On May 11, 2020, the Company signed Amendment 3 to the convertible promissory or OID notes with Ronald P. Erickson and J3E2A2Z, extending the due dates to September 30, 2020.
 
On May 11, 2020, the Company signed Amendments to the convertible promissory or OID notes with Clayton A. Struve, extending the due dates to September 30, 2020.
 
 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-looking statements in this report reflect the good-faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.
 
BACKGROUND AND CAPITAL STRUCTURE
 
Know Labs, Inc. was incorporated under the laws of the State of Nevada in 1998. Since 2007, we have been focused primarily on research and development of proprietary technologies which can be used to authenticate and diagnose a wide variety of organic and non-organic substances and materials. Our Common Stock trades on the OTCQB Exchange under the symbol “KNWN.”
 
BUSINESS
 
We are focused on the development, marketing and sales of proprietary technologies which are capable of uniquely identifying or authenticating almost any substance or material using electromagnetic energy to record, detect, and identify the unique “signature” of the substance or material. We call these our “Bio-RFID™” and “ChromaID™” technologies.
 
Historically, the Company focused on the development of our proprietary ChromaID technology. Using light from low-cost LEDs (light emitting diodes) the ChromaID technology maps the color of substances, fluids and materials. With 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. The Company’s ChromaID scanner sees what we like to call “Nature’s Color Fingerprint.” Everything in nature has a unique color identifier and with ChromaID the Company can see, and identify, and authenticate based upon the color that is present. The Company’s ChromaID scanner is capable of uniquely identifying and authenticating almost any substance or liquid using light to record, detect and identify its unique color signature. More recently, the Company has focused upon extensions and new inventions that are derived from and extend beyond our ChromaID technology. The Company calls this new technology “Bio-RFID.” The rapid advances made with our Bio-RFID technology in our laboratory have caused us to move quickly into the commercialization phase of our Company as we work to create revenue generating products for the marketplace. Today, the sole focus of the Company is on its Bio-RFID technology and its commercialization.
 
In 2010, we acquired TransTech Systems, Inc. as an adjunct to our business. TransTech is a distributor of products for employee and personnel identification and authentication. TransTech has historically provided substantially all of the Company’s revenues. The financial results from our TransTech subsidiary have been diminishing as vendors of their products increasingly move to the Internet and direct sales to their customers. While it does provide our current revenues, it is not central to our current focus as a Company. Moreover, we have written down any goodwill associated with its historic acquisition. We expect to shut down TransTech completely by June 30, 2020.
 
The Know Labs Technology
 
We have internally and under contract with third parties developed proprietary platform technologies to uniquely identify or authenticate almost any material and substance. Our technology utilizes electromagnetic energy along the electromagnetic spectrum to perform analytics which allow the user to identify and authenticate substances and materials depending upon the user’s unique application and field of use. The Company’s proprietary platform technologies are called Bio-RFID and ChromaID.
 
The Company’s latest technology platform is called Bio-RFID. Working in our lab over the last two years, we have developed extensions and new inventions derived in part from our ChromaID technology which we refer to as Bio-RFID technology. We are rapidly advancing the development of this technology. We have announced over the past year that we have successfully been able to non-invasively ascertain blood glucose levels in humans. We are building the internal and external development team necessary to commercialize this newly discovered technology as well as make additional patent filings covering the intellectual property created with these new inventions. The first applications of our Bio-RFID technology will be in a product we call the UBAND™. The first UBAND product will be marketed as a Continuous Glucose Monitor. It is a wearable product which will be worn on the wrist or ankle and communicate with a smart phone device via Bluetooth connectivity. It will provide the user with real time information on their blood glucose levels. This initial product will require US Food and Drug Administration approval prior to its introduction to the market.
 
We have also announced the results of laboratory-based comparison testing between our Bio-RFID technology and the leading continuous glucose monitors from Abbott Labs (Freestyle Libre®) and DexCom (G5®). These results provide evidence of a high degree of correlation between our Bio-RFID based technology and the current industry leaders and their continuous glucose monitors. Our technology is fundamentally differentiated from these industry leaders as our UBAND continuous glucose monitor is completely non-invasive.
 
 
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We expect to begin the process of obtaining US Food and Drug Administration (FDA) approval of our non-invasive continuous blood glucose monitoring device during calendar year 2020. To guide us in that undertaking we previously announced the hiring of a Chief Medical Officer and formed a Medical and Regulatory Advisory Board to guide us through the FDA process. We are unable, however, to estimate the time necessary for such approval nor the likelihood of success in that endeavor.
 
Our ChromaID patented technology utilizes light at the photon (elementary particle of light) level through a series of emitters and detectors to generate a unique signature or “fingerprint” from a scan of almost any solid, liquid or gaseous material. This signature of reflected or transmitted light is digitized, creating a unique ChromaID signature. Each ChromaID signature is comprised of from hundreds to thousands of specific data points.
 
The ChromaID technology looks beyond visible light frequencies to areas of near infra-red and ultraviolet light and beyond that are outside the humanly visible light spectrum. The data obtained allows us to create a very specific and unique ChromaID signature of the substance for a myriad of authentication, verification and identification applications.
 
Traditional light-based identification technology, called spectrophotometry, has relied upon a complex system of prisms, mirrors and visible light. Spectrophotometers typically have a higher cost and utilize a form factor (shape and size) more suited to a laboratory setting and require trained laboratory personnel to interpret the information. The ChromaID technology uses lower cost LEDs and photodiodes and specific electromagnetic frequencies resulting in a more accurate, portable and easy-to-use solution for a wide variety of applications. The ChromaID technology not only has significant cost advantages as compared to spectrophotometry, it is also completely flexible is size, shape and configuration. The ChromaID scan head can range in size from endoscopic to a scale that could be the size of a large ceiling-mounted florescent light fixture.
 
In normal operation, a ChromaID master or reference scan is generated and stored in a database. We call this the ChromaID Reference Data Library. The scan head can then scan similar materials to identify, authenticate or diagnose them by comparing the new ChromaID digital signature scan to that of the original or reference ChromaID signature or scan result. Over time, we believe the ChromaID Reference Libraries can become a significant asset of the Company, providing valuable information in numerous fields of use. The Reference Data Libraries for our newly developed Bio-RFID will have a similar promise regarding their utility and value.
 
Bio-RFID and ChromaID: Foundational Platform Technologies
 
Our Bio-RFID and ChromaID technologies provide a platform upon which a myriad of applications can be developed. As platform technologies, they are analogous to a smartphone, upon which an enormous number of previously unforeseen applications have been developed. Bio-RFID and ChromaID technologies are “enabling” technologies that bring the science of electromagnetic energy to low-cost, real-world commercialization opportunities across multiple industries. The technologies are foundational and, as such, the basis upon which the Company believes significant businesses can be built.
 
As with other foundational technologies, a single application may reach across multiple industries. The Bio-RFID technology can non-invasively identity the presence and quantity of glucose in the human body. By extension, there may be other molecular structures which this same technology can identity in the human body which, over time, the Company will focus upon. They may include the monitoring of drug usage or the presence of illicit drugs. They may also involve identifying hormones and various markers of disease.
 
Similarly, the ChromaID technology can, for example effectively differentiate and identify different brands of clear vodkas that appear identical to the human eye. By extension, this same technology could identify pure water from water with contaminants present. It could provide real time detection of liquid medicines such as morphine that have been adulterated or compromised. It could detect if jet fuel has water contamination present. It could determine when it is time to change oil in a deep fat fryer. These are but a few of the potential applications of the ChromaID technology based upon extensions of its ability to identify different liquids.
 
The cornerstone of a company with a foundational platform technology is its intellectual property. We have pursued an active intellectual property strategy and have been granted 13 patents. We currently have a number of patents pending and continue, on a regular basis the filing of new patents. We possess all right, title and interest to the issued patents. Nine issued and pending patents are licensed exclusively to us in perpetuity by our strategic partner, Allied Inventors, a spin-off entity of Intellectual Ventures, an intellectual property fund.
 
Our Patents and Intellectual Property
 
We believe that our 14 patents, patent applications, registered trademarks, and our trade secrets, copyrights and other intellectual property rights are important assets. Our issued patents will expire at various times between 2027 and 2039. Pending patents, if and when issued, may have expiration dates that extend further in time. The duration of our trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
 
The issued patents cover the fundamental aspects of the Know Labs ChromaID technology and a number of unique applications. We have filed patents on the fundamental aspects of our Bio-RFID technology and growing number of unique applications. We will continue to expand the Company’s patent portfolio.
 
Additionally, significant aspects of our technology are maintained as trade secrets which may not be disclosed through the patent filing process. We intend to be diligent in maintaining and securing our trade secrets.
 
 
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The patents that have been issued to Know Labs and their dates of issuance are:
 
On August 9, 2011, we were issued US Patent No. 7,996,173 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks. The patent expires August 24, 2029.
 
On December 13, 2011, we were issued US Patent No. 8,076,630 B2 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires November 7, 2028.
 
On December 20, 2011, we were issued US Patent No. 8,081,304 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 28, 2030.
 
On October 9, 2012, we were issued US Patent No. 8,285,510 B2 entitled “Method, Apparatus, and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
 
On February 5, 2013, we were issued US Patent No. 8,368,878 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
 
On November 12, 2013, we were issued US Patent No. 8,583,394 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
 
On November 21, 2014, we were issued US Patent No. 8,888,207 B2 entitled “Systems, Methods, and Articles Related to Machine-Readable Indicia and Symbols” by the United States Office of Patents and Trademarks. The patent expires February 7, 2033. This patent describes using ChromaID to see what we call invisible bar codes and other identifiers.
 
On March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
 
On May 26, 2015, we were issued US Patent No. 9,041,920 B2 entitled “Device for Evaluation of Fluids using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033. This patent describes a ChromaID fluid sampling devices.
 
On April 19, 2016, we were issued US Patent No. 9,316,581 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Substances Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033. This patent describes an enhancement to the foundational ChromaID technology.
 
On April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Substances Using Electromagnetic Energy.” The patent expires July 2027. This patent pertains to the use of ChromaID technology for the identification and analysis of biological tissue. It has many potential applications in medical, industrial and consumer markets.
 
On May 30, 2017, we were issued US Patent No. 9,664.610 B2 entitled “Systems for Fluid Analysis Using Electromagnetic Energy that is reflected a Number of Times through a Fluid Contained within a Reflective Chamber.” This patent expires approximately in approximately March 2034. This patent pertains to a method for the use of the Company’s technology analyzing fluids.
 
On April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled “Device for Evaluation of Fluids Using Electromagnetic Energy.” The patent expires in approximately April 2033. This patent pertains to the use of ChromaID technology for evaluating and analyzing fluids such as those following through an IV drip in a hospital or water, for example.
 
On February 4, 2020, we were issued US Patent No. 10,548,503 B2, entitled “Health Related Diagnostics Employing Spectroscopy in Radio/Microwave Frequency Band. The patent expires in approximately May 2039. This patent pertains to the use of Bio-RFID technology for medical diagnostics.
 
We continue to pursue a patent strategy to expand our unique intellectual property in the United States and other countries.
 
 
29
 
 
Product Strategy
 
We are currently undertaking internal development work on potential products for the consumer marketplace. We have announced the development of our UBAND continuous glucose monitor and our desire to obtain US Food and Drug Administration approval for the marketing of this product to the diabetic and pre-diabetic population. We have also announced the engagement of a manufacturing partner we will work with to bring this product to market. We will make further announcements regarding this product as development, manufacturing and regulatory approval work progresses.
 
Currently we are focusing our efforts on productiz