Know Labs, Inc. — Form 10-Q Summary
Filing identity and period: The supplied filing identifies the registrant as Know Labs, Inc. (OTCQB: KNWN), not USBC, Inc. It reports the fiscal quarter ended December 31, 2020, the company’s first quarter of fiscal 2021. The statements are unaudited except where noted.
Business context
Know Labs is developing Bio-RFID and ChromaID technologies for identifying or authenticating substances using electromagnetic energy. Management says the company’s current focus is commercializing Bio-RFID, initially for non-invasive glucose monitoring, which will require FDA approval. Particle, Inc., a majority-owned subsidiary, is developing germ-inactivating light bulbs; it had no sales. TransTech, historically the principal revenue source, closed on June 30, 2020.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Prior-year comparable period |
|---|---|---|
| Revenue | $0 | $117,393 |
| Gross profit | $0 | $51,458 |
| Research and development | $966,861 | $491,138 |
| Selling, general and administrative | $2,598,732 | $920,551 |
| Operating loss | $3,565,593 | $1,360,231 |
| Interest expense | $1,733,738 | $1,679,490 |
| Net loss | $5,299,331 | $3,015,013 |
| Basic and diluted loss per share | $0.21 | $0.16 |
| Net cash used in operating activities | $1,421,000 | $824,325 |
Gross margin was not meaningful in the quarter because revenue and cost of sales were both zero. The company reported $3.648 million of non-cash expenses, including a $1.812 million warrant award to Chairman Ronald P. Erickson and $1.597 million of debt-discount amortization recorded as interest expense.
At December 31, 2020, cash and cash equivalents were $2.927 million, down from $4.298 million at September 30, 2020. Total assets were $3.224 million; current liabilities were $7.870 million; and stockholders’ deficit was $4.661 million. The balance sheet reports convertible notes payable of $5.045 million, while contractual obligations disclose $7.425 million of convertible notes. These are different reported measures; investors should check the notes for the reconciliation and terms. Management cited approximately $187,000 of working capital after excluding convertible notes and lease items, rather than the unadjusted current-asset/current-liability comparison.
Material changes and financing
- Revenue fell to zero from $117,393 as TransTech had closed. The filing attributes the loss of sales to that closure.
- R&D expense nearly doubled, which management attributed to increased personnel, consultants, and Bio-RFID and Particle development.
- SG&A increased substantially. Management cited $1.587 million of additional stock-based compensation and $375,000 of Particle expenses, partly offset by lower professional fees and TransTech expenses.
- Operating cash use increased to $1.421 million from $824,325. Financing provided $59,688, primarily from $55,000 of Particle SAFE proceeds and warrant exercises.
- Common shares outstanding were 25,370,224 at quarter-end; the cover reports 26,301,354 as of February 16, 2021. Potential dilution is significant: the filing lists substantial outstanding options, warrants, convertible preferred shares, and convertible debt.
Outlook, risks, contingencies, and unusual items
- Going concern and liquidity: Management expects operating losses to continue and says cash on hand, including funding closed after quarter-end, was expected to fund operations through July 31, 2021. The company states that substantial doubt exists about its ability to continue as a going concern and that further financing may be needed. Financing may be unavailable or dilutive; failure to obtain it could require restructuring, divestitures, or reduced development.
- Debt and maturities: Contractual cash obligations totaled approximately $7.524 million, principally convertible notes shown as due within one year. Certain notes were extended to March 31, 2021. The company also reported a $226,170 Paycheck Protection Program loan and expected to seek forgiveness; it remained outstanding pending legal forgiveness.
- Development and regulatory risk: The company expects to begin the FDA approval process for its glucose-monitoring device during calendar 2021 but cannot estimate timing or likelihood of success. Particle’s bulb had preliminary internal testing for certain common germs; a laboratory was testing its efficacy against SARS-CoV-2. No commercial results or Particle revenue were reported.
- COVID-19: The filing says the pandemic slowed third-party testing and validation and could disrupt operations, supply chains, financing, and commercialization.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective due to material weaknesses, including the lack of a full-time CFO and, at the assessment date, an audit committee financial expert. A financial expert was appointed on February 12, 2021.
- Related-party and equity compensation: The company issued Erickson a fully vested five-year warrant for 2 million shares, valued at $1.812 million, and granted large performance-based option awards to Erickson and CEO Phillip A. Bosua. Related-party accrued compensation, travel, and interest were approximately $619,218 at quarter-end.
- The company reported no pending non-routine legal proceedings and no off-balance-sheet arrangements. It has never paid cash dividends and does not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- Confirm the issuer and ticker: the supplied 10-Q is for Know Labs, Inc. (KNWN), notwithstanding the request metadata naming USBC, Inc.
- Review the company’s post-quarter financing and cash position against the stated July 31, 2021 runway, including the February 2021 Particle SAFE proceeds.
- Reconcile the $5.045 million balance-sheet carrying value of convertible notes with the $7.425 million contractual amount, and verify maturity, conversion, and repayment terms.
- Track FDA milestones, independent validation, manufacturing readiness, and commercialization prospects for Bio-RFID glucose monitoring; separately assess Particle testing and sales progress.
- Assess dilution from warrants, options, preferred stock, convertible debt, and Particle SAFEs, including related-party awards and subsequent share issuances.
- Monitor remediation of the disclosed control weaknesses and the company’s ability to improve financial reporting oversight.