Know Labs, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2021; the company’s fiscal year ends September 30. The filing identifies the registrant as Know Labs, Inc., not USBC, Inc., as stated in the request metadata. Financial statements are unaudited.
Business context
Know Labs is developing Bio-RFID and ChromaID spectroscopy technologies, with its principal focus on commercializing Bio-RFID for non-invasive analyte measurement, initially a glucose monitor. It had no revenue in the quarter or nine-month period. Its former revenue-producing TransTech business ceased operations in June 2020. Subsidiary Particle is developing germ-inactivating light bulbs and had generated no sales by June 30, 2021.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Nine months ended June 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 for the quarter; $121,939 for nine months |
| Research and development | $868,584 | $3,094,123 | $375,243 and $1,313,546 |
| Selling, general and administrative | $994,221 | $4,934,085 | $634,169 and $3,177,661 |
| Operating loss | $(1,862,805) | $(8,028,208) | $(1,009,412) and $(4,438,994) |
| Interest expense | $(5,228,058) | $(9,735,604) | $(1,188,874) and $(4,170,038) |
| Net loss | $(7,090,863) | $(17,763,812) | $(2,905,086) and $(9,250,612) |
| Basic and diluted loss per share | $(0.23) | $(0.64) | $(0.12) and $(0.44) |
With no current-period revenue, gross margin is not meaningful. Cash and cash equivalents were $13.87 million at June 30, 2021, up from $4.30 million at September 30, 2020. Operating cash use was $5.14 million for the nine months; investing cash use was $47,553; financing provided $14.76 million. The filing reports current liabilities of $7.82 million and total liabilities of about $8.03 million. Convertible notes had a $5.01 million net carrying value after discounts, while the filing separately reports $16.46 million of convertible debt obligations before applicable discounts and conversions. The company reported an accumulated deficit of $73.73 million.
The March 2021 private placement raised $14.209 million gross through subordinated convertible notes bearing 8% annual interest, payable in shares, and warrants. The notes are scheduled to convert automatically at $2 per share on the first anniversary beginning March 15, 2022. Debt-discount amortization was a major, largely non-cash component of interest expense: $9.07 million for the nine months. The company also had $1.125 million of Particle SAFE instruments outstanding.
Changes versus prior period
- Nine-month revenue fell from $121,939 to zero following TransTech’s closure. Operating costs rose: R&D increased about 136% and SG&A about 55%.
- Nine-month net loss widened by $8.51 million. Higher operating expenses and interest expense contributed; the latter increased by $5.57 million, primarily because of convertible-debt discounts and related financing instruments.
- Cash increased substantially, principally from financing. The company issued 6.09 million shares during the nine months on automatic conversion of earlier notes and accrued interest; common shares outstanding rose to 33.72 million from 24.80 million at September 30, 2020.
Outlook, risks and notable items
- Management expects continued losses while developing and commercializing its technologies. The filing contains inconsistent cash-runway statements: the going-concern note says cash is expected to fund operations through December 31, 2022, while MD&A and risk disclosures say through December 31, 2023. The filing also states that substantial doubt about going concern existed, based on recurring losses and financing needs.
- The initial glucose-monitor product requires FDA approval. Management said it could not estimate approval timing or likelihood of success. Commercialization, validation, manufacturing, market acceptance, and access to further financing remain material uncertainties.
- Potential dilution is significant: at June 30, 2021, the filing lists 23.17 million warrants, 14.65 million options, 8.11 million shares issuable on preferred-stock conversion, and 16.12 million shares reserved for convertible-debt conversion. Many options are subject to performance conditions.
- Cash deposits of $13.62 million were uninsured. Management reported ineffective disclosure controls and internal control over financial reporting, citing the absence of a full-time CFO; the chairman served as interim CFO with consultant support.
- The company reported no material pending legal proceedings. It received several Bio-RFID-related U.S. patents after quarter-end and disclosed a $500,000 warrant exercise in August 2021.
Investor verification priorities
- Confirm the registrant and ticker: the supplied metadata says USBC, while the filing is for Know Labs, Inc. (KNWN).
- Reconcile the conflicting cash-runway dates of December 2022 and December 2023, and assess the basis for the going-concern conclusion.
- Review the convertible notes’ principal, carrying value, interest and conversion terms, including the effect of warrants and debt discounts on future dilution.
- Track FDA plans, independent validation, product development milestones, and evidence of commercial demand; the company had no current-period revenue.
- Assess remediation of the disclosed financial-reporting control weakness and the status of the uninsured cash balance.