USBC, Inc. quarterly report, Q2 FY2022

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Business context and reporting period

The supplied filing is Know Labs, Inc.’s unaudited Form 10-Q for the three and six months ended March 31, 2022, its fiscal second quarter. This differs from the request metadata, which names USBC, Inc. The company is developing Bio-RFID and ChromaID biosensor technologies, with a primary focus on commercializing a non-invasive glucose monitor. Its AI Mind subsidiary generated NFT sales during the period.

Financial performance and position

  • Revenue: Six-month revenue was $4.36 million, all from digital asset/NFT sales, versus none a year earlier. Second-quarter revenue was only $8,687.
  • Expenses and losses: Six-month operating expenses were $8.07 million, including $3.27 million of NFT selling and transaction costs. Operating loss was $3.71 million; net loss was $11.50 million, or $0.31 per share. Second-quarter net loss was $6.14 million, or $0.16 per share.
  • Cash flow: Cash used in operations was $1.02 million for six months; investing activities used $827,000, primarily for R&D equipment. Financing provided $778,000. Cash declined $1.07 million to $11.19 million.
  • Liquidity: Total assets were $12.66 million and stockholders’ equity was $6.73 million at March 31. Management reported net working capital of $8.36 million, excluding convertible notes and right-of-use liabilities; the filing does not clearly reconcile that adjusted figure to the balance sheet.
  • Debt: Convertible notes, net, were $2.26 million, down from $9.19 million at September 30, 2021, largely following conversion of the 2021 notes into shares. Six-month interest expense was $7.78 million, including $7.27 million of non-cash debt-discount amortization. PPP loans of $431,803 remained reported as non-current liabilities; after quarter-end, the SBA forgave $128,064 of one loan and required repayment of $98,106 plus interest.
  • Margins: Consolidated margins are not informative given the small second-quarter revenue and the unusual NFT revenue mix. NFT transaction costs were about 75% of six-month NFT sales.

Material changes versus prior comparable period

  • Six-month revenue rose from zero to $4.36 million, but was concentrated in NFT sales and did not represent established biosensor product revenue.
  • Operating loss narrowed from $6.17 million to $3.71 million, while net loss increased from $10.67 million to $11.50 million, mainly as interest expense rose by $3.28 million.
  • Cash used in operations improved from $3.25 million to $1.02 million, while cash fell from $15.70 million at March 31, 2021 to $11.19 million at March 31, 2022.
  • Common shares outstanding increased from 35.17 million at September 30, 2021 to 43.74 million at March 31, 2022, including 7.67 million shares issued upon automatic debt conversion.

Outlook, risks and unusual items

  • Management expects operating losses to continue and believes cash on hand will fund operations through June 30, 2023; it also intends to seek additional equity or debt financing.
  • The glucose-monitor product requires FDA clearance. The company reported an approved 200-person internal study, but gave no clear timeline or likelihood of regulatory success. Commercialization, clinical validation, market acceptance and reliance on external development/manufacturing resources remain risks.
  • NFT proceeds were initially received through the CEO’s personal digital accounts while the company lacked its own wallet and Coinbase account. The company reported related-party receivables of $119,210 at March 31 and related-party accrued NFT expenses and compensation of approximately $1.89 million. Ethereum value declined by $96,820 during the quarter.
  • Management concluded disclosure controls and internal control over financial reporting were ineffective due to a material weakness: the company had no full-time CFO, and its chairman served as interim CFO.
  • Potential dilution is substantial: 17.88 million options, 21.71 million warrants, 8.11 million shares issuable on preferred-stock conversion and 9.02 million shares reserved for convertible debentures were disclosed, in addition to outstanding common shares.
  • After quarter-end, related-party convertible note maturities were extended to September 30, 2022; certain warrants held by Clayton Struve were extended by one year.

Important facts for investors to verify

  1. Confirm the issuer identity: the provided filing is for Know Labs, Inc. (ticker KNWN), not USBC, Inc.
  2. Assess whether NFT revenue and its associated costs are repeatable, and distinguish them from future biosensor revenue prospects.
  3. Verify cash runway assumptions, upcoming debt maturities, financing needs and the effect of potential equity issuance and anti-dilution provisions.
  4. Review the status and results of clinical testing, FDA plans and any evidence supporting the proposed glucose-monitor performance.
  5. Monitor remediation of the disclosed control weakness and the company’s handling of related-party digital-asset transactions and accrued amounts.