USBC, Inc. quarterly report, Q1 FY2022

Business context and reporting period

This is Know Labs, Inc.’s Form 10-Q for the three months ended December 31, 2021, its fiscal first quarter of 2022. The request identifies USBC, Inc.; that does not match the registrant named in the filing. Know Labs develops Bio-RFID and ChromaID sensing technologies, with an initial medical focus on non-invasive glucose monitoring. Its AI Mind subsidiary began generating NFT revenue during the quarter. Financial statements are unaudited.

Financial performance and position

The filing reports no cost of goods sold or gross profit line. NFT sales less stated transaction costs were approximately $1.233 million; the segment table reports the same amount as digital asset segment operating profit. The consolidated operating margin was approximately negative 20%, and net margin approximately negative 123%, based on reported revenue.

At December 31, 2021, cash was $10.734 million, down from $12.258 million at September 30, 2021. Current assets were $13.858 million and current liabilities $17.423 million; the resulting conventional working-capital deficit was approximately $3.565 million. The company separately reports working capital of approximately $9.980 million when excluding convertible notes and lease assets and liabilities.

Convertible notes had a reported net carrying value of $13.376 million, while the filing describes $16.464 million in convertible debentures on a principal/contractual basis. The $14.209 million 2021 note offering bears 8% interest and is scheduled to convert automatically at $2 per share beginning March 15, 2022. PPP loans totaled $431,803 and remained outstanding pending forgiveness applications. Total stockholders’ equity was a deficit of $3.141 million.

Material changes versus the prior comparable period

• Revenue began with $4.351 million in NFT sales, versus none in the 2020 quarter. Digital asset sales and their associated costs are separate from the company’s core sensor commercialization efforts.
• Operating loss narrowed by approximately $2.696 million, principally as 2020 included substantial warrant-based compensation and SG&A decreased. Net loss was nevertheless slightly higher, as interest expense increased by approximately $2.753 million, largely from amortization of convertible debt discounts and warrant-related discounts.
• Cash used in operations increased by approximately $0.487 million. The quarter included a $3.125 million related-party receivable for NFT proceeds held in the CEO’s personal digital accounts.
• Common shares outstanding rose from 35.167 million at September 30 to 35.970 million at December 31, primarily following warrant exercises. Potential dilution is substantial: the filing lists 18.423 million options, 21.654 million warrants, 8.108 million shares issuable on preferred conversion, and 16.125 million shares reserved for convertible debt conversion.

Outlook, commentary, risks and unusual items

• Management expects operating losses to continue while it develops and commercializes its technologies. It states that available cash should fund operations through December 2023, but also says it intends to seek additional equity and debt financing. This runway estimate is subject to execution, cash use and financing risks.
• The planned glucose-monitoring product requires FDA clearance. Management says it cannot estimate the approval timeline or likelihood of success; clinical testing, product development and commercialization remain ongoing.
• The NFT proceeds were routed through the CEO’s personal digital wallet and Coinbase account because the company had not established its own accounts. At quarter end, $3.125 million was recorded as due from the related party. Related-party accrued expenses included approximately $1.56 million of expected special bonus compensation, and other accrued expenses included approximately $326,000, primarily estimated sales and use taxes.
• The company recorded $4.487 million of interest expense, including $4.185 million of non-cash debt-discount amortization. Cash interest paid was reported as zero. Management identifies continued financing needs, operating losses, commercialization and regulatory uncertainty, potential dilution, and COVID-19-related disruption as risks.
• Disclosure controls and internal control over financial reporting were assessed as ineffective due to a material weakness: the company has no full-time CFO and relies on its chairman as interim CFO, with support from a consultant. Management reported no material control changes during the quarter.
• The filing reports no material pending legal proceedings beyond routine matters. Subsequent to quarter end, the company disclosed additional director equity awards and three Bio-RFID-related U.S. patents issued in January and February 2022.

Important facts for investors to verify

1. Confirm the registrant and period: the supplied request says USBC, Inc., while the filing is for Know Labs, Inc. and covers the quarter ended December 31, 2021.
2. Verify collection, ownership and reconciliation of the $3.125 million NFT-related receivable held in the CEO’s personal accounts, and the related bonus, consultant, transaction and tax accruals.
3. Reconcile the company’s stated $9.980 million working capital measure with the balance-sheet current-asset and current-liability deficit, and reconcile convertible debt’s $13.376 million net carrying value with the $16.464 million principal/contractual amount.
4. Assess the March 2022 automatic conversion terms, related share issuance, other debt maturities and the company’s funding runway assumptions.
5. Monitor potential dilution from options, warrants, preferred shares and convertible notes, as well as progress toward FDA clearance, clinical validation and commercial launch of the glucose-monitoring product.
6. Review remediation of the disclosed material weakness and the effectiveness of controls over related-party digital-asset transactions and financial reporting.