USBC, Inc. annual report, FY2020

Business context and reporting period

The supplied filing is Know Labs, Inc.’s Form 10-K for the fiscal year ended September 30, 2020, filed December 29, 2020. This does not match the request metadata identifying USBC, Inc.; the filing itself identifies the registrant as Know Labs, Inc. (ticker KNWN). The filing covers a full fiscal year, not a standalone 2020 fourth quarter.

Know Labs is developing electromagnetic sensing technologies, chiefly Bio-RFID for non-invasive blood glucose measurement. It reported that it was focused on commercializing Bio-RFID; its newly formed Particle subsidiary was assigned non-medical applications. TransTech, historically the main source of revenue, closed June 30, 2020.

Financial performance and liquidity

Revenue fell about 93%, primarily because of TransTech’s closure. Gross margin percentage improved, but gross profit declined sharply with sales. Net loss widened by about $5.95 million; higher R&D and administrative costs, increased interest expense, and a loss on debt settlements contributed. The company reported $9.366 million of non-cash expenses, including $5.663 million of debt-discount amortization.

Cash and cash equivalents were $4.298 million at September 30, 2020, versus $1.901 million a year earlier. Operating cash use was $3.914 million; investing cash use was $70,134; financing provided $6.381 million. Current assets were $4.298 million and current liabilities $6.574 million on the balance sheet. Stockholders’ deficit was $1.915 million; accumulated deficit was $55.966 million.

The company raised $5.640 million gross through convertible notes and Particle received $785,000 through Simple Agreements for Future Equity (SAFE). The filing says cash on hand was expected to fund operations through September 30, 2021, while also warning that further financing may be needed. Contractual obligations were reported as $8.032 million, including $7.895 million of convertible notes and $137,521 of operating leases. The balance sheet shows $3.968 million in current convertible notes payable, reflecting accounting discounts; the filing’s debt and liquidity figures warrant reconciliation.

Changes, outlook, risks and unusual items

• Management said it expected operating losses to continue while the company commercializes its technologies. It planned to begin the FDA approval process for a non-invasive glucose monitor during calendar 2021, but could not estimate approval timing or likelihood of success. The proposed product requires FDA approval before U.S. marketing.
• The independent auditor’s report and management disclosures state that recurring losses, negative operating cash flows, negative working capital and financing needs raise substantial doubt about the company’s ability to continue as a going concern.
• COVID-19 slowed outside testing and validation, and could further affect operations, supply chains, funding access and commercialization.
• Management identified material weaknesses in financial reporting controls and concluded disclosure controls were ineffective. The filing cites no full-time CFO and no audit committee financial expert; management expected to strengthen finance staffing and appoint an expert in 2021.
• Potential dilution is substantial: at fiscal year-end, the company reported 20.016 million warrants, 4.805 million options, 8.108 million common shares issuable on preferred conversion, and 14.660 million shares issuable on conversion of convertible debentures. The company also disclosed anti-dilution provisions and further potential Particle dilution from SAFE conversion and future fundraising.
• Related-party exposures include convertible notes to entities associated with the chairman and approximately $597,177 of accrued compensation, travel and interest owed to the chairman and/or affiliated entities. Several debt maturities were extended after year-end to March 31, 2021.
• A July 2020 shareholder settlement involved $125,000 cash and 500,000 common shares; the company recognized an $825,000 loss on debt settlement, partly offset by a gain on settlement of TransTech liabilities.

Important facts for investors to verify

• Confirm issuer identity: the request names USBC, Inc., but the supplied 10-K is for Know Labs, Inc.
• Reconcile the MD&A table, which labels periods as years ended December 31, with the audited financial statements and other disclosures, which report years ended September 30.
• Reconcile debt, obligations and liquidity disclosures, including reported gross convertible debt, balance-sheet carrying value, current liabilities, and management’s stated working-capital and cash-runway figures.
• Assess the assumptions behind the September 2021 cash runway, financing availability, debt repayment or conversion terms, and the going-concern warning.
• Track progress and evidence supporting Bio-RFID performance, product development, manufacturing readiness, FDA submissions and regulatory milestones.
• Review the fully diluted share count, anti-dilution adjustments, Particle SAFE conversion terms, and related-party debt and compensation arrangements.