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. , formerlyVisualant, Incorporated , was incorporated under the laws of theState 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 a proprietary technologies which are capable of uniquely authenticating or diagnosing almost any substance or material using electromagnetic energy to create, record and detect the unique "signature" of the substance. We call these our "ChromaID™" and "Bio-RFID™" technologies.
Overview
Historically, the Company focused on the development of our proprietary ChromaID technology. Using light from low-cost LEDs (light emitting diodes) we map the color of substances, fluids and materials and with our proprietary processes we can authenticate, identify and diagnose based upon the color that is present. The color is both visible to us as humans but also outside of the humanly visible color spectrum in the near infra-red and near ultra-violet and beyond. Our ChromaID scanner sees what we like to call "Nature's Color Fingerprint." Everything in nature has a unique color identifier and with ChromaID we can see it, and identify, authenticate and diagnose based upon the color that is present. Our ChromaID scanner is capable of uniquely identifying and authenticating almost any substance or liquid using light to create, record and detect its unique color signature. We will continue to develop and enhance our ChromaID technology and extend its capacity. More recently, we have focused upon extensions and new inventions that are derived from and extend beyond our ChromaID technology. We call this 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. We will also, as resources permit, pursue licensing opportunities with third parties who have ready applications for our technologies. In 2010, we acquiredTransTech 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 continue to closely monitor this subsidiary. We expect it to wind down completely prior to the end of our current fiscal year.
The Know Labs Technology
We have internally and under contract with third parties developed proprietary platform technologies to uniquely authenticate or diagnose almost any material and substance. Our technology utilizes electromagnetic energy at various points along the electromagnetic spectrum to perform analytics which allow the user to identify, authenticate and diagnose depending upon the application and the unique field of use. The Company's proprietary platform technologies are called ChromaID and Bio-RFID. The 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 diagnostic applications. 22 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 theChromaID Reference 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 theChromaID Reference Libraries can become a significant asset of the Company, providing valuable information in numerous fields of use.The Reference Libraries for our newly developed Bio-RFID will have a similar promise regarding their utility and value. The Company's latest technology platform is called Bio-RFID. Working in our lab over the past year and a half, 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 several months 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 real time calorie counter. It is a wearable product which will be worn on the wrist and communicate with a smart phone device via Bluetooth connectivity. It will provide the user with real time information on their caloric consumption from carbohydrates. 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. Our technology is fundamentally differentiated from these industry leaders as it is completely non-invasive. We expect to begin the process of obtainingUS Food and Drug Administration (FDA) approval of our non-invasive continuous blood glucose monitoring device during calendar year 2019. To guide us in that undertaking we have announced the hiring of a Chief Medical Officer and formed aMedical 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.
ChromaID and Bio-RFID: Foundational Platform Technologies
Our ChromaID and Bio-RFID 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. ChromaID and Bio-RFID 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 a significant business can be built. As with other foundational technologies, a single application may reach across multiple industries. 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 can identify pure water from water with contaminants present. It can provide real time detection of liquid medicines such as morphine that have been adulterated or compromised. It can 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 clear liquids. Similarly, 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. 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 12 patents. We currently have more than 20 patents pending. We possess all right, title and interest to the issued patents. Ten of the pending patents are licensed exclusively to us in perpetuity by our strategic partner, Allied Inventors, a spin-off entity ofIntellectual Ventures , an intellectual property fund.
Our Patents and Intellectual Property
We believe that our 12 patents, more than 20 patent applications, three 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 2033. 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. 23
The issued patents cover the fundamental aspects of the Know Labs ChromaID technology and a growing number of unique applications ranging, to date, from invisible bar codes to tissue and liquid analysis. We have filed patents on Bio-RFID technology and will continue to expand the Company's patent portfolio over time through internal development efforts as well as through licensing opportunities with third parties. Additionally, significant aspects of our technology are trade secrets which may not be disclosed through the patent filing process. We intend to be diligent in maintaining our trade secrets.
The patents that have been issued to
OnAugust 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 theUnited States Office of Patents and Trademarks . The patent expiresAugust 24, 2029 . OnDecember 13, 2011 , we were issued US Patent No. 8,076,630 B2 entitled "System and Method of Evaluating an Object Using Electromagnetic Energy" by theUnited States Office of Patents and Trademarks . The patent expiresNovember 7, 2028 .
On
OnOctober 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 theUnited States Office of Patents and Trademarks . The patent expiresJuly 31, 2027 . OnFebruary 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 theUnited States Office of Patents and Trademarks . The patent expiresJuly 31, 2027 .
On
On
OnMarch 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 theUnited States Office of Patents and Trademarks . The patent expiresJuly 31, 2027 . OnMay 26, 2015 , we were issued US Patent No. 9,041,920 B2 entitled "Device for Evaluation of Fluids using Electromagnetic Energy" by theUnited States Office of Patents and Trademarks . The patent expiresMarch 12, 2033 . This patent describes a ChromaID fluid sampling devices. OnApril 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 theUnited States Office of Patents and Trademarks . The patent expiresMarch 12, 2033 . This patent describes an enhancement to the foundational ChromaID technology. OnApril 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 expiresJuly 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. OnApril 4, 2018 , we were issued US Patent No. 9,869,636 B2, entitled "Device for Evaluation of Fluids Using Electromagnetic Energy." The patent expires approximatelyApril 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.
We continue to pursue a patent strategy to expand our unique intellectual
property in
24 Product Strategy We are currently undertaking internal development work on potential products for the consumer marketplace. This development work was previously being performed through our Consulting Agreement with Blaze Clinical, andPhillip A. Bosua , who served as our Chief Product Officer. In his current role as Chief Executive Officer,Mr. Bosua continues to lead these efforts. We have announced the development of our UBAND Calorie Counter and our UBAND CGM. We have also recently announced the engagement of a manufacturing partner we will work with to bring these products to market. We will make further announcements regarding these products as development and manufacturing work on them progresses. As time and resources permit, we also will engage with partners through licensing our technology in various fields of use, entering into joint venture agreements to develop specific applications of our technology, and in certain specific instances develop our own products for the marketplace.
Currently we are focusing our current efforts on productizing our Bio-RFID technology as we move it out of the research laboratory and into the marketplace.
Research and Development
Our current research and development efforts are primarily focused improving our Bio-RFID technology, extending its capacity and developing new and unique applications for the technology. As part of this effort, we conduct on-going laboratory testing to ensure that application methods are compatible with the end-user and regulatory requirements, and that they can be implemented in a cost-effective manner. We are also actively involved in identifying new applications. Our current internal team along with outside consultants have considerable experience working with the application of our technologies and their application. We engage third party experts as required to supplement our internal team. We believe that continued development of new and enhanced technologies is essential to our future success. We incurred expenses of$391,014 ,$570,514 and$79,405 for the six months endedMarch 31, 2019 and years endedSeptember 30, 2018 and 2017, respectively, on development activities, OnJuly 6, 2017 , we entered into a Consulting Agreement withPhillip A. Bosua , our Chief Product Officer to lead our development efforts. He has continued in that role with expanded responsibilities upon his appointment as Chief Executive Officer onApril 19, 2018 .
Merger with
OnApril 10, 2018 , we entered into an Agreement and Plan of Merger with 500 Union Corporation, aDelaware corporation and a wholly owned subsidiary of the Company, andRAAI Lighting, Inc. , aDelaware corporation. Pursuant to the Merger Agreement, we have 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) were cancelled and we issued 2,000,000 shares of our common stock. As a result, we issued 2,000,000 shares of its common stock toPhillip 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 forU.S. federal income tax purposes. As a result of the Merger, the Company received certain intellectual property, related to RAAI.
Merger with
OnMay 1, 2018 ,Know Labs, Inc. , aNevada corporation incorporated onApril 3, 2018 , and our wholly-owned subsidiary, merged with and into the Company pursuant to an Agreement and Plan of Merger datedMay 1, 2018 . In connection with the merger, our Articles of Incorporation were effectively amended to change our name toKnow 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 theNevada Secretary of State and became effective onMay 1, 2018 .
Corporate Name Change and Symbol Change
OnMay 24, 2018 , theFinancial Industry Regulatory Authority ("FINRA") announced the effectiveness of a change in our name fromKnow Labs Incorporated toKnow Labs, Inc. and a change in our ticker symbol from VSUL to the new trading symbol KNWN which became effective on the opening of trading as ofMay 25, 2018 . In addition, in connection with the name change and symbol change, we were assigned the CUSIP number of 499238103.
THE COMPANY'S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol "KNWN." OnMay 1, 2018 , we filed a corporate action withFINRA to effectively change the Company's OTC trading symbol and change our name to "Know Labs, Inc. " Our name change fromKnow Labs, Incorporated toKnow Labs, Inc. and symbol change from VSUL to KNWN was announced byFINRA declared effective on the opening of trading as ofMay 25, 2018 . 25 EMPLOYEES
As ofMarch 31, 2019 , we had twelve full-time employees and two consultants or consulting groups. Our senior management is located in theSeattle, Washington office. WEBSITE ACCESS TOUNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS We file annual and quarterly reports, proxy statements and other information with theSecurities and Exchange Commission ("SEC"). You may read and copy any document we file at theSEC's Public Reference Room at100 F Street, N.E. ,Washington D.C. 20549. Please call theSEC at 1-800-SEC -0330 for further information on the public reference room. TheSEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.knowlabs.co that provides additional information about our Company and links to documents we file with theSEC . The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-Q.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional financing, the sale of significant numbers of our shares and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part II, Item 1A. RESULTS OF OPERATIONS The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from period-to-period. (dollars in thousands) Three Months Ended March 31, 2019 2018 $ Variance % Variance (Restated) Revenue$594 $1,092 $(498) -45.6% Cost of sales 455 866 (411) 47.5% Gross profit 139 226 (87) -38.5%
Research and development expenses 184 153 31
-20.3%
Selling, general and administrative expenses 1,004 578 426
-73.7% Operating loss (1,049) (505) (544) 55.5% Other (expense) income: Interest expense (400) (793) 393 49.6% Other income (expense) 7 (1) 8 800.0% Total other income (expense) (393) (794) 401 50.5% (Loss) before income taxes (1,442) (1,299) (143) -11.0%
Income taxes - current (benefit) - - -
0.0% Net loss$(1,442) $(1,299) $(143) -11.0%
THREE MONTHS ENDED
Sales Net revenue for the three months endedMarch 31, 2019 decreased$498,000 to$594,000 as compared to$1,092,000 for the three months endedMarch 31, 2018 . The decrease was due to lower sales by TransTech. We have focused TransTech on maximizing profits at the lower sales level.
Cost of Sales
Cost of sales for the three months endedMarch 31, 2019 decreased$411,000 to$455,000 as compared to$866,000 for the three months endedMarch 31, 2018 . The decrease was due to lower sales by TransTech. We have focused TransTech on maximizing profits at the lower sales level. 26 Gross profit was$139,000 for the three months endedMarch 31, 2019 as compared to$226,000 for the three months endedMarch 31, 2018 . Gross profit was 22.5% for the three months endedMarch 31, 2019 as compared to 20.8% for the three months endedMarch 31, 2018 . We have focused TransTech on maximizing profits at the current sales level.
Research and Development Expenses
Research and development expenses for the three months endedMarch 31, 2019 increased$31,000 to$184,000 as compared to$153,000 for the three months endedMarch 31, 2018 . The increase was due to expenditures related to the development of our Bio-RFID™ technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedMarch 31, 2019 increased$426,000 to$1,004,000 as compared to$578,000 for the three months endedMarch 31, 2018 . The increase primarily was due to (i) increased stock based compensation of$293,000 and (ii) increased other expenses of$133,000 ; As part of the selling, general and administrative expenses for the three months endedMarch 31, 2019 , we recorded$406,000 of investor relation expenses and business development expenses.
Other Income (Expense)
Other expense for the three months endedMarch 31, 2019 was$393,000 as compared to other expense of$794,000 for the three months endedMarch 31, 2018 . The other expense for the three months endedMarch 31, 2019 included (i) interest expense of$400,000 ; offset by (ii) other income of$7,000 . The other expense for the three months endedMarch 31, 2018 included (i) interest expense of$793,000 ; and (ii) other expense of$1,000 . The interest expense related to senior convertible exchangeable debentures issued onFebruary 28, 2018 in conjunction with a Securities Purchase Agreement datedAugust 14, 2017 . Net Loss Net loss for the three months endedMarch 31, 2019 was$1,442,000 as compared to a net loss of$1,299,000 for the three months endedMarch 31, 2018 . The net loss for the three months endedMarch 31, 2019 , included non-cash expenses of$911,000 . The non-cash items include (i) depreciation and amortization of$71,000 ; (ii) stock based compensation of$91,000 ; (iii) issuance of capital stock for services and expenses of$349,000 ; (if) amortization of debt discount of$362,000 ; and (v) other of$38,000 . TransTech's net loss from operations was$7,000 for the three months endedMarch 31, 2019 as compared to a net income from operations of$17,000 for the three months endedMarch 31, 2018 .
The net loss for the three months ended
27 We expect losses to continue as we commercialize our ChromaID™ and Bio-RFID™ technology. (dollars in thousands) Six Months Ended March 31, 2019 2018 $ Variance % Variance (Restated) Revenue$ 1,196 $ 2,325 $ (1,129) -48.6% Cost of sales 927 1,851 (924) 49.9% Gross profit 269 474 (205) -43.2%
Research and development expenses 391 241 150
-62.2%
Selling, general and administrative expenses 1,693 992 701
-70.7% Operating loss (1,815) (759) (1,056) 89.7% Other (expense) income: Interest expense (409) (1,087) 678 62.4% Other income (expense) 13 19 (6) -31.6% Total other income (expense) (396) (1,068) 672 62.9% (Loss) before income taxes (2,211) (1,827) (384) -21.0%
Income taxes - current (benefit) - - -
0.0% Net loss$ (2,211) $ (1,827) $ (384) -21.0%
SIX MONTHS ENDED
Sales
Net revenue for the six months endedMarch 31, 2019 decreased$1,129,000 to$1,196,000 as compared to$2,325,000 for the six months endedMarch 31, 2018 . The decrease was due to lower sales by TransTech. We have focused TransTech on maximizing profits at the lower sales level.
Cost of Sales
Cost of sales for the six months ended
Gross profit was$269,000 for the six months endedMarch 31, 2019 as compared to$474,000 for the six months endedMarch 31, 2018 . Gross profit was 23.4% for the six months endedMarch 31, 2019 as compared to 20.4% for the six months endedMarch 31, 2018 . We have focused TransTech on maximizing profits at the current sales level.
Research and Development Expenses
Research and development expenses for the six months endedMarch 31, 2019 increased$150,000 to$391,000 as compared to$241,000 for the six months endedMarch 31, 2018 . The increase was due to expenditures related to the development of our Bio-RFID™ technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months endedMarch 31, 2019 increased$1,376701,000 to$2,3681,693,000 as compared to$992,000 for the six months endedMarch 31, 2018 . The increase primarily was due to (i) increased corporate development expense of$38921,000 ; (ii) increased stock based compensation of$835286,000 ;(iii) increased issuance of capital stock for shares and services of$278,000 ; and (iv) increased other expenses of$152116,000 . As part of the selling, general and administrative expenses for the six months endedMarch 31, 2019 , we recorded$467,000 of investor relation expenses and business development expenses.
Other Income (Expense)
Other expense for the six months ended
28 The other expense for the six months endedMarch 31, 2018 included (i) interest expense of$1,087,000 ; offset by (ii) other income of$19,000 . The interest expense related a senior convertible exchangeable debenture issued onDecember 12, 2017 andFebruary 28, 2018 in conjunction with a Securities Purchase Agreement datedAugust 14, 2017 .
Net Loss
Net loss for the six months endedMarch 31, 2019 was$2,211,000 as compared to a net loss of$1,827,000 for the six months endedMarch 31, 2018 . The net loss for the six months endedMarch 31, 2019 , included non-cash expenses of$1,146,000 . The non-cash items include (i) depreciation and amortization of$133,000 ; (ii) stock based compensation of$293,000 ; (iii) issuance of capital stock for services and expenses of$349,000 ;(iv) amortization of debt discount of$362,000 ;and (v) other of$9,000 . TransTech's net loss from operations was$36,000 for the six months endedMarch 31, 2019 as compared to a net income from operations of$38,000 for the six months endedMarch 31, 2018 . The net loss for the six months endedMarch 31, 2018 , included non-cash expenses of non-cash items of$1,272,000 . The non-cash items include (i) depreciation and amortization of$30,000 ; (ii) stock based compensation of$71,000 ; (iii) conversion of interest and amortization of debt discount of$475,000 ; (iv) conversion of accrued liabilities of$492,000 ; (v) issuance of warrants for debt conversion of$110,000 ; and (vi) other of$30,000 .
We expect losses to continue as we commercialize our ChromaID™ and Bio-RFID™technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. We had cash of approximately$3,062,000 and net working capital deficit of approximately$1,308,000 (net of convertible notes payable and notes payable) as ofMarch 31, 2019 . We have experienced net losses since inception and we expect losses to continue as we commercialize our ChromaID™ technology. As ofMarch 31, 2019 , we had an accumulated deficit of$37,003,000 and net losses in the amount of$2,211,000 ,$3,258,000 and$3,901,000 for the six months endedMarch 31, 2019 and years endedSeptember 30, 2018 and 2017, respectively. We believe that our cash on hand will be sufficient to fund our operations throughDecember 31, 2019 . As ofMarch 31, 2019 , we closed rounds of a debt offering and received gross proceeds of$3,809,976 in exchange for issuing Subordinated Convertible Notes (the "Convertible Notes") and Warrants (the "Warrants") in a private placement to 35 accredited investors, pursuant to a series of substantially identical Securities Purchase Agreements, Common Stock Warrants, and related documents. The Convertible Notes have a principal amount of$3,809,976 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"). They are due and payable (in Common Stock) on the earlier of (a) mandatory and automatic conversion of the Convertible Notes into a financing that yields gross proceeds of at least$10,000,000 (a "Qualified Financing") or (b) on the one-year anniversary of the Convertible Notes (the "Maturity Date"). Investors will be required to convert their Convertible Notes into Common Stock in any Qualified Financing at a conversion price per share equal to the lower of (i)$1.00 per share or (ii) a 25% discount to the price per share paid by investors in the Qualified Financing. If the Convertible Notes have not been paid or converted prior to the Maturity Date, the outstanding principal amount of the Convertible Notes will be automatically converted into shares of Common Stock at the lesser of (a)$1.00 per share or (b) any adjusted price resulting from the application of a "most favored nations" provision, which requires the issuance of additional shares of Common Stock to investors if the Company issues certain securities at less than the then-current conversion price.
We expect to continue offering additional Convertible Notes and Warrants on
substantially the same terms until
The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year endedSeptember 30, 2018 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions. We need additional financing to implement our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion of our business. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution to our then-existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back, eliminate the development of business opportunities or file for bankruptcy and our operations and financial condition may be materially adversely affected. We have financed our corporate operations and our technology development through the issuance of convertible debentures, the issuance of preferred stock, the sale common stock, issuance of common stock in conjunction with an equity line of credit, loans by our Chairman and the exercise of warrants. 29 Operating Activities Net cash used in operating activities for the six months endedMarch 31, 2019 was$1,148,000 . This amount was primarily related to (i) a net loss of$2,211,000 ; and (ii) working capital changes of$81,000 ; offset by (iii) non-cash expenses of$1,146,000 . The non-cash items include (iv) depreciation and amortization of$133,000 ; (v) stock based compensation of$293,000 ; (vi) issuance of capital stock for services and expenses of$349,000 ;(vii) amortization of debt discount of$343,000 ; and (viii) other of$9,000 .
Investing Activities
Net cash used in investing activities for the six months endedMarch 31, 2019 was$75,000 . This amount was primarily related to the investment in equipment for research and development.
Financing Activities
Net cash provided by financing activities for the six months endedMarch 31, 2019 was$3,350,000 . This amount was primarily related to issuance of convertible notes payable for cash of$3,810,000 , offset by repayments of line of credit of$92,000 and payments for issuance costs for notes payable of$368,000 Our contractual cash obligations as ofMarch 31, 2019 are summarized in the table below: Less Than Greater Than Total 1 Year 1-3 Years 3-5 Years 5 Years Contractual Cash Obligations (1) Operating leases$ 389,994 $ 187,652 $ 196,526 $ 5,816 $ - Convertible notes payable (Restated) 6,065,042 6,065,042 -
- -$ 6,455,036 $ 6,252,694 $ 196,526 $ 5,816 $ - (1) Convertible notes payable includes$3,808,976 that converts into common stock at the maturity date during early 2020. We expect to incur capital expenditures related to the development of the "Bio-RFID™" and "ChromaID™" technologies. None of the expenditures are contractual obligations as ofMarch 31, 2019 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
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