Know Labs, Inc. (formerly Visualant, Inc.) — Form 10-Q
Period: Third quarter of fiscal 2019, three and nine months ended June 30, 2019; filed August 7, 2019. The filing identifies Know Labs, Inc., not USBC, Inc.
Business context
Know Labs is developing electromagnetic-energy technologies, with its current primary focus on commercializing Bio-RFID. Its planned first application is a wearable, non-invasive continuous glucose monitor (UBAND), which requires FDA approval. TransTech, a product distributor and the source of substantially all current revenue, faced declining sales; management expected to wind it down before fiscal year-end.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2019 (2018) | $381,270 ($1,107,216) | $1,577,191 ($3,432,301) |
| Gross profit; gross margin | $105,451; 27.7% (2018: $197,259; 17.8%) | $374,247; 23.7% (2018: $671,750; 19.6%) |
| Operating loss | $1,134,029 ($732,387) | $3,624,028 ($1,491,378) |
| Net loss | $805,433 ($506,254) | $3,299,254 ($2,333,673) |
| Loss per share | $0.04 ($0.06) | $0.17 ($0.39) |
For the nine months, R&D expense rose to $832,555 from $366,809, primarily for Bio-RFID development. SG&A increased to $3,165,720 from $1,796,319, including higher corporate development and stock-based compensation. The quarter’s gross margin was 27.7%, calculated from reported revenue and gross profit; the MD&A text states 23.4%, so the quarter margin value is inconsistent within the filing.
- Cash flow: Operating cash use was $2,306,763 and investing cash use was $79,934 for the nine months. Financing provided $4,140,997; cash increased $1,754,300 to $2,688,707.
- Balance sheet at June 30: Current assets were $2,845,443 and current liabilities $3,872,869; total assets were $3,323,214. Stockholders’ deficit was $549,655.
- Debt and obligations: The balance sheet reports $2,255,065 of current convertible notes payable and no long-term debt. Management’s contractual-obligations table also lists $302,238 of operating leases and $250,000 of capital expenditures. A separate May private placement raised $4,242,515 through 8% subordinated convertible notes and warrants; the filing’s balance sheet and cash-flow presentation do not clearly reconcile this financing to reported debt and cash proceeds.
Material changes and notable items
- Nine-month revenue fell 54.1%, primarily because of lower TransTech sales. Gross margin improved from 19.6% to 23.7%, but the operating loss widened substantially as development and corporate expenses increased.
- Cash increased following the May 2019 private placement. Its notes are payable in shares, with conversion terms tied to a qualified financing or the one-year maturity; warrants and potential price adjustments could increase dilution.
- A $325,000 gain on settlement of old accounts payable boosted reported other income for the nine months. Cash-flow reconciliation separately identifies a $320,000 non-cash gain on accounts payable.
- Management cited substantial doubt about the Company’s ability to continue as a going concern, recurring losses, and a need for additional financing. It estimated cash on hand would fund operations only through December 31, 2019; funding availability and terms were uncertain.
- The company reported ineffective disclosure controls and internal control over financial reporting, citing the lack of a full-time CFO and an audit committee financial expert. No non-routine pending legal proceedings were reported.
Outlook and risks
Management expected losses to continue while it commercialized its technologies. It planned to begin the FDA approval process for the glucose-monitoring product during calendar 2019 but could not estimate approval timing or likelihood of success. Key risks include the need for further financing, possible dilution or restructuring, FDA and market-acceptance uncertainty, declining TransTech revenue, and control weaknesses. The filing reports 22,567,686 common shares outstanding at June 30, plus substantial outstanding options, warrants, preferred-stock conversion rights, and convertible-note conversion potential.
Important facts for investors to verify
- Confirm the registrant and filing identity: the submitted text is a Know Labs, Inc. 10-Q, despite the request metadata naming USBC, Inc.
- Reconcile the $4.242 million May convertible-note financing with the balance-sheet debt balance, reported cash, and cash-flow statement classification.
- Clarify the inconsistent third-quarter gross-margin figure in the MD&A versus the financial statements.
- Track financing needs, cash runway, note maturity/conversion terms, and the resulting potential dilution.
- Monitor TransTech’s planned wind-down, Bio-RFID development and FDA progress, and remediation of material control weaknesses.