knwn_10q.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 December 31, 2023

☐ 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:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		KNW		NYSE American LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	x	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, $0.001 par value, issued and outstanding as of February 14, 2024: 81,346,524 shares.

DOCUMENTS INCORPORATED BY REFERENCE: None.

TABLE OF CONTENTS
		Page Number

PART I	FINANCIAL INFORMATION

ITEM 1	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of December 31, 2023 and September 30, 2023	3

	Consolidated Statements of Operations for the three months ended December 31, 2023 and 2022	4

	Consolidated Statements of Changes in Stockholders’ Equity	5

	Consolidated Statements of Cash Flows for the three months ended December 31, 2023 and 2022	6

	Notes to the Financial Statements	7

ITEM 2	Management's Discussion and Analysis of Financial Condition and Results of Operation	19

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	28

ITEM 4	Controls and Procedures	28

PART II	OTHER INFORMATION	29

ITEM 1A.	Risk Factors	29

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	45

ITEM 3	Defaults upon Senior Securities	45

ITEM 4	Other Information	45

ITEM 5	Mine Safety Disclosure	45

ITEM 6	Exhibits	46

	SIGNATURES	47

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ITEM 1. FINANCIAL STATEMENTS

KNOW LABS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Unaudited

	December 31, 2023			9/30/2023 (1)
ASSETS	Unaudited

CURRENT ASSETS:
Cash and cash equivalents	$	4,821,477		$	8,023,716
Total current assets		4,821,477			8,023,716

PROPERTY AND EQUIPMENT, NET		75,298			81,325

OTHER ASSETS
Other assets		18,767			15,766
Operating lease right-of-use asset		97,567			145,090

TOTAL ASSETS	$	5,013,109		$	8,265,897

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable - trade	$	627,058		$	1,292,861
Accrued expenses		95,952			94,062
Accrued expenses - related parties		196,241			218,334
Convertible notes payable, net		2,761,931			2,761,931
Current portion of operating lease right-of-use liability		106,038			154,797
Total current liabilities		3,787,220			4,521,985

COMMITMENTS AND CONTINGENCIES (Note 11)		-			-

STOCKHOLDERS' EQUITY
Preferred stock - $0.001 par value, 5,000,000 shares authorized, Series C and D shares issued
and outstanding as follows:
Series C Convertible Preferred stock $0.001 par value, 30,000 shares authorized,
17,858 shares issued and outstanding at 12/31/2023 and 9/30/2023, respectively		1,790			1,790
Series D Convertible Preferred stock $0.001 par value, 20,000 shares authorized,
10,161 shares issued and outstanding at 12/31/2023 and 9/30/2023, respectively		1,015			1,015
Common stock - $0.001 par value, 200,000,000 shares authorized, 81,346,524 and 80,358,463
shares issued and outstanding at 12/31/2023 and 9/30/2023, respectively		81,347			80,358
Additional paid in capital		126,492,778			125,501,537
Accumulated deficit		(125,351,041	)		(121,840,788	)
Total stockholders' equity		1,225,889			3,743,912

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,013,109		$	8,265,897

(1)	Derived from the audited consolidated balance sheet.

The accompanying notes are an integral part of these consolidated financial statements.

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KNOW LABS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

	Three Months Ended,
	December 31, 2023			December 31, 2022

OPERATING EXPENSES-
RESEARCH AND DEVELOPMENT EXPENSES	$	1,486,388		$	1,743,051
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		2,011,246			1,905,071
Total operating expenses		3,497,634			3,648,122
OPERATING LOSS		(3,497,634	)		(3,648,122	)

OTHER INCOME (EXPENSE), NET
Interest income		51,010			-
Interest expense		-			(227,170	)
Other (expense) income, net		-			52,433
Total other income (expense), net		51,010			(174,737	)

LOSS BEFORE INCOME TAXES		(3,446,624	)		(3,822,859	)

Income tax expense		-			-

NET LOSS		(3,446,624	)		(3,822,859	)

Deemed dividends on Series C and D Preferred Stock		(63,629	)		-

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(3,510,253	)	$	(3,822,859	)

Basic and diluted loss per share	$	(0.04	)	$	(0.08	)

Weighted average shares of common stock outstanding- basic and diluted		81,094,007			48,187,339

The accompanying notes are an integral part of these consolidated financial statements.

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KNOW LABS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Unaudited

	Series C Convertible				Series D Convertible								Additional					Total
	Preferred Stock				Preferred Stock				Common Stock				Paid in		Accumulated			Stockholders'
	Shares		$		Shares		$		Shares		$		Capital		Deficit			Equity
Balance as of October 1, 2022		17,858	$	1,790		10,161	$	1,015		48,156,062	$	48,158	$	111,209,388	$	(101,397,738	)	$	9,862,613
Stock compensation expense - employee options		-		-		-		-		-		-		744,640		-			744,640
Issuance of common stock for stock option exercises		-		-		-		-		1,875		1		2,342		-			2,343
Issuance of common stock for exercise of warrants		-		-		-		-		50,000		50		12,450		-			12,500
Expenses for extension of notes and warrants		-		-		-		-		-		-		206,994		-			206,994
Net loss		-		-		-		-		-		-		-		(3,822,859	)		(3,822,859	)
Balance as of December 31, 2022		17,858		1,790		10,161		1,015		48,207,937		48,209		112,175,814		(105,220,597	)		7,006,231

Balance as of October 1, 2023		17,858		1,790		10,161		1,015		80,358,463		80,358		125,501,537		(121,840,788	)		3,743,912
Stock compensation expense - employee options		-		-		-		-		-		-		699,246		-			699,246
Issuance of common stock for services		-		-		-		-		105,000		105		26,145		-			26,250
Deemed dividends on Series C and D Preferred Stock		-		-		-		-		-		-		63,629		(63,629	)		-
Isssuance of common stock for common stock offering		-		-		-		-		883,061		884		202,221		-			203,105
Net loss		-		-		-		-		-		-		-		(3,446,624	)		(3,446,624	)
Balance as of December 31, 2023		17,858	$	1,790		10,161	$	1,015		81,346,524	$	81,347	$	126,492,778	$	(125,351,041	)	$	1,225,889

The accompanying notes are an integral part of these consolidated financial statements.

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KNOW LABS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Three Months Ended,
	December 31, 2023			December 31, 2022

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,446,624	)	$	(3,822,859	)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation and amortization		18,724			103,160
Stock based compensation - stock option grants		699,246			744,640
Issuance of common stock for services		26,250			-
Amortization of operating lease right-of-use asset		47,523			44,404
Interest expense for extension of notes and warrants		-			206,994
Changes in operating assets and liabilities:
Other long-term assets		(3,001	)		(1,998	)
Operating lease right-of-use liability		(48,759	)		(45,732	)
Accounts payable - trade and accrued expenses		(686,006	)		(146,026	)
NET CASH (USED IN) OPERATING ACTIVITIES		(3,392,647	)		(2,917,417	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of research and development equipment		(12,697	)		(10,846	)
NET CASH (USED IN) INVESTING ACTIVITIES:		(12,697	)		(10,846	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock offering, net		203,105			-
Proceeds from issuance of common stock for stock options exercise		-			2,343
Proceeds from issuance of common stock for warrant exercise		-			12,500
NET CASH PROVIDED BY FINANCING ACTIVITIES		203,105			14,843

NET (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,202,239	)		(2,913,420	)

CASH AND CASH EQUIVALENTS, beginning of period		8,023,716			12,593,692

CASH AND CASH EQUIVALENTS, end of period	$	4,821,477		$	9,680,272

Supplemental disclosures of cash flow information:
Interest paid	$	-		$	-
Taxes paid	$	-		$	-

Supplemental disclosure of non-cash financing activity:
Deemed dividends on Series C and D Preferred Stock	$	63,629		$	-

The accompanying notes are an integral part of these consolidated financial statements.

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KNOW LABS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated condensed financial statements have been prepared by Know Labs, Inc, (“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 (“SEC”). 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, 2023, filed with the Securities and Exchange Commission on December 19, 2023. The results of operations for the three months ended December 31, 2023 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 currently has authorized 205,000,000 shares of capital stock, of which 200,000,000 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. At the annual shareholder meeting held on October 15, 2021, the Company’s authorized shares of common stock were increased to 200,000,000 shares of voting common stock, par value $0.001 per share.

The Company is focused on the development and commercialization of our proprietary sensor technology utilizing radio and microwave spectroscopy. When paired with our machine learning platform, our technology is capable of uniquely identifying and measuring almost any material or analyte using electromagnetic energy to detect, record, identify, and measure the unique “signature” of said materials or analytes.

The first application of our sensor technology is in a product to non-invasively monitor blood glucose levels. Our device will provide the user with real-time information on their blood glucose levels. We recently announced our Generation 1 working prototype device. This device embodies the sensor which has been used in internal clinical testing. We have also announced the work our R&D team is performing on the development of Generation 2 of our device, which is a wearable format and may be a final form factor, ready for commercialization. That device will be utilized in expanded internal and external testing. The device may be refined over time and will require FDA clearance prior to entering the market.

2. LIQUIDITY AND GOING CONCERN

The Company has cash and cash equivalents of $4,821,477 and net working capital of $1,034,257 ($3,796,188 exclusive of convertible notes payable) as of December 31, 2023. The Company anticipates that it will record losses from operations for the foreseeable future. During the end of the quarter ended March 31, 2023, the Company made some adjustments to its staffing level and the impact of those adjustments, plus the departure of our chief technology and executive office, has significantly reduced our monthly burn rate. The Company will further adjust its cost structure if new debt or equity capital is not received. The Company’s ability to transition profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. The Company believes that it has enough available cash and flexibility with its operating expenses to operate until at least June 30, 2024. Based on current operating levels, the Company will need to raise additional funds by selling additional equity or incurring debt. To date, the Company has funded its operations primarily through issuance of equity securities, and proceeds from the exercise of warrants to purchase common stock and the sale of debt instruments. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s products, the expansion of sales and marketing activities, the timing and extent of spending on research and development efforts and the continuing market acceptance of the Company’s products. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this Report.

Management of the Company intends to raise additional funds through the issuance of equity securities or debt. The Company is currently working on some capital fund raising transactions. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. As a result, the substantial doubt about the Company’s ability to continue as a going concern has not been alleviated. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The proceeds of warrants currently outstanding, which could be exercised on a cash basis, may generate potential proceeds of up to $16,008,327. The Company expects that portions of these warrants will be exercised but there is no guarantee any portion will be exercised.

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3. SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS

Basis of Presentation –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 subsidiary, Particle. Intercompany 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.

Property and Equipment – Equipment consists of machinery, leasehold improvements and furniture and fixtures, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 2-5 years, except for leasehold improvements which are depreciated over 5 years.

Long-Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.

Revenue Recognition – The Company determines revenue recognition from contracts with customers through the following steps:

	·	identification of the contract, or contracts, with the customer;

	·	identification of the performance obligations in the contract;

	·	determination of the transaction price;

	·	allocation of the transaction price to the performance obligations in the contract; and

	·	recognition of the revenue when, or as, the Company satisfies a performance obligation.

Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

Research and Development Expenses – Research and development expenses consist of the cost of officers, 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 its radio frequency spectroscopy technology and its first focus on non-invasive monitoring of blood glucose levels; extending its capacity and developing new and unique applications for this technology. The Company believes that continued development of new and enhanced technologies is essential to its future success. The Company incurred expenses of $1,486,388 and $1,743,051 for the three months ended December 31, 2023 and 2022, respectively, on development activities.

Advertising – Advertising costs are charged to selling, general and administrative expenses as incurred. Advertising and marketing costs for the three months ended December 31, 2023 and 2022 were $45,500 and $51,084, respectively.

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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, accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities as of December 31, 2023 and September 30, 2023 are based upon the short-term nature of the assets and liabilities. The fair value of the Company’s convertible notes payable are not readily available given the terms and conditions, including the conversion features, are complex.

The Company has a money market account which is considered a Level 1 asset. The balance as of December 31, 2023 and September 30, 2023 was $4,787,378, and $7,836,393, respectively. No other assets or liabilities are required to be recorded at fair value on a recurring nature.

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 an embedded derivative must be bifurcated and separately accounted for. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

The Company determined that the conversion features for purposes of bifurcation within its currently outstanding convertible notes payable were immaterial and there was no derivative liability to be recorded as of December 31, 2023 and September 30, 2023.

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 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. The Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.

Convertible Securities – Based upon ASC 815-15, the Company has adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities. The Company will evaluate its contracts based upon the earliest issuance date. In the event partial reclassification of contracts subject to ASC 815-40-25 is necessary, due to the Company’s inability to demonstrate it has 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. Deemed dividends to preferred shareholders increase the net loss available to common shareholders and impact the net loss per share calculation.

As of December 31, 2023, the Company had 81,346,524 shares of common stock issued and outstanding. As of December 31, 2023, there were options outstanding for the purchase of 28,220,473 shares of our common stock (including unearned stock option grants totaling 4,179,825 shares related to performance targets), warrants for the purchase of 20,984,961 shares of our common stock, 8,108,356 shares of the Company’s common stock issuable, collectively, upon the conversion of our Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, and approximately 3,201,534 shares of our common stock, collectively, reserved to pay accrued dividends on our Series C Convertible Preferred Stock and Series D Convertible Preferred Stock. In addition, the Company currently has 9,020,264 shares of its common stock at the current price of $0.25 per share reserved and are issuable upon conversion of convertible debentures of $2,761,931. Further, under the current terms of our Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, and assuming no changes in the ownership thereof, going forward on a quarterly basis the Company will accrete as a preferred dividend the value of approximately 160,000 shares of common stock, which are issuable if such dividends become payable as additional shares of preferred stock, and such preferred stock is then converted into common stock. All of the foregoing shares could potentially dilute future earnings per share but are excluded from the December 31, 2023, calculation of net loss per share because their impact is antidilutive.

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As of December 31, 2022, the Company had 48,207,937 shares of common stock issued and outstanding. As of December 31, 2022, there were options outstanding for the purchase of 24,480,495 common shares (including unearned stock option grants totaling 9,704,620 shares related to performance targets), warrants for the purchase of 21,736,313 common shares, and 8,108,356 shares of our common stock issuable upon the conversion of Series C and Series D Convertible Preferred Stock. In addition, the Company currently has 9,020,264 common shares at the current price of $0.25 per share reserved and are issuable upon conversion of convertible debentures of $2,255,066. All of the foregoing shares could potentially dilute future earnings per share but are excluded from the December 31, 2022, calculation of net loss per share because their impact is antidilutive.

Comprehensive loss – Comprehensive loss is defined as the change in equity of a business during a period from non-owner sources. There were no differences between net loss for the three months ended December 31, 2023 and 2022 and comprehensive loss for those periods.

Dividend Policy – The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of its business. The Company’s future dividend policy will be determined by the board of directors on the basis of various factors, including results of operations, financial condition, capital requirements and investment opportunities.

Use of Estimates – The preparation of financial statements in conformity with GAAP 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 recently issued, those standards not yet required to be adopted and proposed standards for the future, the Company does not believe such items are expected to have a significant impact on the Company’s consolidated financial statements.

4. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2023 and September 30, 2023 was comprised of the following:

	Estimated
	Useful Lives	December 31, 2023			September 30, 2023
Machinery and equipment	2-3 years	$	226,027		$	213,330
Furniture and fixtures	3 years		21,366			21,366
Less: accumulated depreciation			(172,095	)		(153,371	)
		$	75,298		$	81,325

Total depreciation expense was $18,724 and $103,160 for the three months ended December 31, 2023 and 2022, respectively. Equipment is used primarily for research and development purposes and accordingly $17,788 and $98,002 in depreciation is classified in research and development expenses during the three months ended December 31, 2023 and 2022, respectively.

5. LEASES

The Company has entered into operating leases for office and development facilities which range from two to three years and include options to renew. The Company determines whether an arrangement is or contains a lease based upon the unique facts and circumstances at the inception of the lease. Operating lease liabilities and their corresponding right-of-use asses are recorded based upon the present value of the lease payments over the expected lease term. As of December 31, 2023 and September 30, 2023, total operating lease liabilities for remaining long term leases was approximately $106,000 and $155,000, respectively. Right of use assets totaled approximately $98,000 and $145,000 at December 31, 2023 and September 30, 2023, respectively. In the three months ended December 31, 2023 and 2022, the Company recognized $62,000 and $82,000, respectively in total lease costs for the leases. Because the rate implicit in each lease is not readily determinable, the Company uses its estimated incremental borrowing rate to determine the present value of the lease payments.

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The weighted average remaining lease term for the operating leases was 6 months at December 31, 2023 and the weighted average discount rate was 7%.

The minimum future lease payments as of December 31, 2023 are as follows:

Year Ended December 31, 2024
Total remaining payments	$	102,267
Less imputed interest		3,771
Total lease liability	$	106,038

6. CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE

Convertible Promissory Notes with Clayton A. Struve

The Company owes Clayton A. Struve, a significant stockholder, $1,301,005 under convertible promissory or OID notes. The Company recorded accrued interest of $95,952 and $94,062 as of December 31, 2023 and September 30, 2023, respectively. On December 7, 2022, the Company signed Amendments to the convertible promissory or OID notes, extending the due dates to September 30, 2023. On September 15, 2023, the due dates on the notes was further extended to September 30, 2024. The Company expensed $230,005 as loss on debt extinguishment during the year ended September 30, 2023 related to the extension of the notes. The Company recorded in convertible note payable the incremental value related to the conversion feature and as such, we recorded the extension value as an expense with an offset to convertible note payable. The extension value will be reclassified to equity upon conversion.

Convertible Redeemable Promissory Notes with J3E2A2Z

The Company owes Ronald P. Erickson and J3E2A2Z, an entity affiliated controlled by Ronald P. Erickson $1,460,926 under convertible promissory notes. 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 our 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 Company recorded accrued interest of $196,241 and $218,334 as of December 31, 2023 and September 30, 2023, respectively. On December 7, 2022, the Company approved Amendments to the convertible redeemable promissory notes with Ronald P. Erickson and J3E2A2Z, extending the due dates to January 30, 2023. On January 25, 2023, the Company approved Amendments to the convertible redeemable promissory notes with Ronald P. Erickson and J3E2A2Z, extending the due dates to September 30, 2023. On September 15, 2023, the due dates on the notes was further extended to September 30, 2024. The Company expensed $276,860 as interest during the year ended September 30, 2023 related to the extension of the notes. The Company recorded in convertible note payable the incremental value related to the conversion feature and as such, we recorded the extension value as an expense with an offset to convertible note payable. The extension value will be amortized to equity upon conversion.

Convertible notes payable as of December 31, 2023 and September 30, 2023 are summarized below:

	December 31, 2023		September 30, 2023
Convertible note- Clayton A. Struve	$	1,301,005	$	1,301,005
Convertible note- Ronald P. Erickson and affiliates		1,460,926		1,460,926
	$	2,761,931	$	2,761,931

7. EQUITY

The following description summarizes important terms of the classes of our capital stock as of December 31, 2023.

Authorized Capital Stock. The Company’s authorized capital stock currently consists of:

	·	200,000,000 shares of common stock, par value $0.001 per share; and

	·	5,000,000 shares of “blank check” preferred stock, par value $0.001 per share, of which:

	·	30,000 shares have been designated as our Series C Convertible Preferred Stock, $0.001 par value per share; and

	·	20,000 shares have been designated as our Series D Convertible Preferred Stock, $0.001 par value per share.

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Outstanding Shares of Capital Stock. The Company’s common stock is the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. All outstanding shares of the Company’s capital stock are fully paid and nonassessable. As of September 30, 2023, there were:

	·	81,346,524 shares of common stock issued and outstanding, held by holders of record;

	·	17,858 shares of Series C Convertible Preferred Stock issued and outstanding, held by one holder of record; and

	·	10,161 shares of Series D Convertible Preferred Stock issued and outstanding, held by one holder of record.

Securities Subject to Price Adjustments

If in the future, the Company sells its common stock at a price below $0.25 per share, the conversion price of our outstanding shares of series C convertible preferred stock and series D convertible preferred stock would adjust below $0.25 per share pursuant to the documents governing such instruments. In addition, the conversion price of the convertible promissory notes referred to above and the exercise price of certain outstanding warrants to purchase 7,684,381 shares of common stock would adjust below $0.25 per share pursuant to the documents governing such instruments.

Series C and D Preferred Stock, Warrants and Dividends

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 cumulative dividend of 8% and an ownership blocker of 4.99%. Dividends are due and payable in cash when declared by the Company or when the stock is converted. Series C Preferred stock is senior to Series D Preferred stock and is entitled to receive equal dividends paid to Series D. 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 and warrant and its conversion price, were adjusted to $0.25 per share pursuant to the documents governing such instruments. As of December 31, 2023, Mr. Struve owns all of the 17,858 issued and outstanding shares of Series C Preferred Stock. Each holder of Preferred Series C is allowed to vote as a common shareholder as if the shares were converted to common stock up to the ownership blocker of 4.99%.

In 2017 the Company closed a $750,000 Series D Preferred Stock and Warrant offering with Mr. Struve. As of December 31, 2023, Mr. Struve owns all of the 10,161 issued and outstanding shares of Series D Preferred Stock. Each outstanding share of series D preferred stock will accrue cumulative cash dividends at a rate equal to 8.0% per annum, subject to adjustment as provided in the series D preferred stock certificate of designations. Dividends are due and payable in cash when declared by the Company or when the stock is converted. In addition, On August 14, 2017, the price of the Series D Preferred Stock were adjusted to $0.25 per share pursuant to the documents governing such instruments. Each holder of Preferred Series D is allowed to vote as a common shareholder as if the shares were converted to common stock up to the ownership blocker of 4.99%.

In August, 2023, as part of a modification of the Series C and Series D Preferred certificates of designation, such preferred stock does not accrue or pay cash dividends. All future dividends will be accrued and paid in Series C or Series D stock, as applicable. As was the case prior to the modifications of the Series C and Series D preferred stock, although accrual of dividends is required as described below, no dividends are actually paid, and no shares actually issued, until a conversion of such stock or declaration of the dividend by the Board of Directors. Additionally, the Series D Preferred stock will no longer be required to automatically convert to common stock based on listing of the Company’s common stock on the NYSE American, except if the volume weighted average price of the common stock is at least $2.50 per share for 20 trading days and certain other requirements are satisfied. The cumulative dividends accrued and paid in preferred stock will be determined based upon a $.70 stated value. The conversion from preferred stock into common stock is determined based dividing the $0.70 stated value by the $0.25 conversion price. In June, 2023, as part of the anticipated modification of the certificates of designation of the Series C and Series D preferred stock, at Mr. Struve’s request, the Company settled all cash dividends with respect to the Series D preferred stock accrued and accumulated through December 31, 2022 in exchange for the issuance to Mr. Struve of 1,402,784 shares of the Company’s common stock in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. In connection with this transaction, the Company recorded $1,627,230 in dividends, representing the fair market value of the 1,402,784 shares issued.

Based upon the modified terms and conditions of Series C and D certificates of designations, it was determined that Series C and D preferred dividends need to be accreted going forward. As of December 31, 2023, cumulative unpaid Series C and D dividends totaled approximately $800,000, which on a converted-to-common-stock basis represents approximately 3,202,000 shares of common stock. Company has recorded $3,590,283 in cumulative deemed dividends related to Series C and D Preferred Stock which have not been paid, net of the approximately $351,000 of accumulated dividends with respect to the Series D preferred that were settled for 1,402,784 shares of common stock as noted above. Mr. Struve is subject to an ownership blocker limiting his ownership to 4.99% and thus the number of common shares he can receive for dividends. Unpaid accreted stock dividends will be issued to Mr. Struve if he converts preferred stock or if the Board declares a dividend thereon, limited to his 4.99% ownership blocker. Assuming no changes in the amount of outstanding Preferred Series C or D ownership, going forward on a quarterly basis the Company will accrete as a preferred dividend the value of approximately 160,000 shares of common stock, which are issuable if such dividends become payable as additional shares of preferred stock, and such preferred stock is then converted into common stock.

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Common Stock

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.

Three Months Ended December 31, 2023

On October 10, 2023, the Company issued 105,000 fully vested stock awards total to three directors at an exercise price of $0.25 per share for director services.

On October 26, 2023, the Company closed an offering of our common stock pursuant to which we sold 883,061 shares of common stock, at a purchase price of $0.25 per share. After deducting underwriting commissions and other offering expenses, the Company received net proceeds of $203,105.

Warrants to Purchase Common Stock

Three Months Ended December 31, 2023

On September 29, 2023, pursuant to the Underwriting Agreement, the Company issued common stock purchase warrants to Boustead Securities, LLC and The Benchmark Company, LLC to purchase an aggregate of 123,648 shares of Common Stock at an exercise price of $0.25 per share, subject to adjustments. The Representatives’ Warrants are immediately exercisable, and may be exercised at any time and from time to time, in whole or in part, until September 26, 2028 and may be exercised on a cashless basis. The Representatives’ Warrants also include customary anti-dilution provisions and immediate piggyback registration rights with respect to the registration of the shares underlying the Representatives’ Warrants. The warrants were valued at $20,896 and recorded in additional paid in capital as costs from common stock offering.

Warrants to purchase 5,000 shares of common stock at $0.25 per share were forfeited.

A summary of the warrants outstanding as of December 31, 2023 were as follows:

				Weighted
				Average
				Exercise
	Shares			Price
Outstanding October 1, 2023		20,866,313		$	1.063
Issued		123,648			0.250
Exercised		-			-
Forfeited		(5,000	)		(0.250	)
Expired		-			-
Outstanding at end of period		20,984,961		$	1.059
Exercisable at end of period		20,984,961

The following table summarizes information about warrants outstanding and exercisable as of December 31, 2023:

		Weighted		Weighted				Weighted
		Average		Average				Average
Number of		Remaining		Exercise		Shares		Exercise
Warrants		Life ( In Years)		Price		Exercisable		Price
	9,768,029		1.95	$	0.250		9,768,029	$	0.250
	6,512,207		1.12	1.20-1.85			6,512,207	1.20-1.85
	4,694,725		2.34	2.00-3.00			4,694,725	2.00-3.00
	10,000		0.18		4.080		10,000		4.080
	20,984,961		1.83	$	1.059		20,984,961	$	1.059

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The significant weighted average assumptions relating to the valuation of the Company’s warrants for the three months ended December 31, 2023 were as follows:

Dividend yield		0	%
Expected life	3 years
Expected volatility		108	%
Risk free interest rate		4.79	%

There were vested warrants of 20,984,961 with an aggregate intrinsic value of $2,539,688.

8. STOCK INCENTIVE PLANS

On August 12, 2021, the Company established its 2021 Equity Incentive Plan (the “2021 Plan”), which was adopted by stockholders on October 15, 2021. The Company initially had 20,000,000 shares of its common stock authorized as the maximum number of shares of common stock that may be delivered to participants under the 2021 Plan, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. This number was increased to 22,000,000 shares of common stock as of January 1, 2022 as a result of the automatic share reserve increase described below.

Three Months Ended December 31, 2023

During the three months ended December 31, 2023, the Company issued stock option grants to twenty six employees and consultants for 13,909,315 shares at an average exercise price of $0.256 per share. The stock option grants expire in five years. The stock option grants primarily vest quarterly over two to four years.

During the three months ended December 31, 2023, stock option grants for 195,000 shares at an average exercise price of $2.019 per share were forfeited.

Stock option activity for the three months ended December 31, 2023 and the years ended September 30, 2023 and 2022 was as follows:

	Weighted Average
	Options			Exercise Price			Proceed $
Outstanding as of October 1, 2021		15,315,120		$	1.565		$	23,964,509
Granted		6,636,000			1.815			12,045,330
Exercised		(26,293	)		(1.376	)		(36,170	)
Forfeitures		(1,132,457	)		(2.057	)		(2,329,267	)
Outstanding as of September 30, 2022		20,792,370			1.618			33,644,402
Granted		4,158,333			1.381			5,744,716
Exercised		(166,890	)		(0.273	)		(45,473	)
Forfeitures		(10,277,655	)		(1.647	)		(16,923,131	)
Outstanding as of September 30, 2023		14,506,158			1.546			22,420,514
Granted		13,909,315			0.256			3,555,929
Exercised		-			-			-
Forfeitures		(195,000	)		(2.019	)		(393,650	)
Outstanding as of December 31, 2023		28,220,473		$	0.907		$	25,582,793

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2023:

			Weighted		Weighted				Weighted
			Average		Average				Average
Range of	Number		Remaining Life		Exercise Price		Number		Exercise Price
Exercise Prices	Outstanding		In Years		Outstanding		Exercisable		Exercisable
$0.25-0.51		13,909,315		4.78	$	0.256		535,251	$	0.267
$0.88-1.25		2,161,875		2.91		0.172		1,935,625		3.989
$1.28 - 1.67		9,684,283		3.02		1.473		3,144,458		1.418
$1.79-3.67		2,465,000		3.06		2.181		1,210,000		2.137
		28,220,473		3.88	$	0.907		6,825,334	$	1.134

There are stock option grants of 28,220,473 shares as of December 31, 2023 with an aggregate intrinsic value of $4,269,089.

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There are 28,220,473 (including unearned stock option grants totaling 4,179,825 shares related to performance milestones) options to purchase common stock at an average exercise price of $0.907 per share outstanding as of December 31, 2023 under the 2021 Plan. The Company recorded $699,246 and $744,640 of compensation expense, net of related tax effects, relative to stock options for the three months ended December 31, 2023 and 2022, respectively, in accordance with ASC 718. As of December 31, 2023, there is $6,569,469 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 3.88 years.

9. INCOME TAXES

The Company recorded a provision for income taxes of $0 for the three months ended December 31, 2023 and 2022.

The Company’s effective tax rate was 0.0% for the three months ended December 31, 2023 and 2022. The difference between the effective tax rate and the federal statutory tax rate primarily relates to the valuation allowance on the Company’s deferred tax assets.

For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

As of December 31, 2023 and 2022, the Company retains a full valuation allowance on its deferred tax assets. The realization of the Company’s deferred tax assets depends primarily on its ability to generate taxable income in future periods. The amount of deferred tax assets considered realizable in future periods may change as management continues to reassess the underlying factors it uses in estimating future taxable income.

10. SIGNIFICANT AND OTHER TRANSACTIONS WITH RELATED PARTIES

Transactions with Clayton Struve

See Notes 6 and 7 for related party transactions with Clayton A. Struve, a significant stockholder.

On June 27, 2023, at Mr. Struve’s request, the Company settled all cash dividends with respect to the Series D preferred stock accrued and accumulated through December 31, 2022 in exchange for the issuance to Mr. Struve of 1,402,784 shares of the Company’s common stock in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. In connection with this transaction, the Company recorded $1,627,230 in dividends, representing the fair market value of the 1,402,784 shares issued.

Related Party Transactions with Ronald P. Erickson

See Notes 6, 7 and 11 for related party transactions with Ronald P. Erickson, the Company’s Chairman and Chief Executive Officer and affiliated entities.

On October 10, 2023, the Company issued a stock option grant to Ronald P. Erickson for