Know Labs, Inc. — Form 10-Q Summary
Entity and period: The supplied filing is for Know Labs, Inc. and its subsidiaries, for the quarter ended December 31, 2019 (fiscal 2020 Q1), filed February 14, 2020. This does not match the request metadata identifying USBC, Inc. The company’s common stock traded on OTCQB under KNWN.
Business context
Know Labs is developing electromagnetic sensing technologies, with its current focus on commercializing Bio-RFID. Its planned first product is UBAND, a non-invasive continuous glucose monitor requiring FDA approval. TransTech, a distributor that historically generated substantially all company revenue, was being wound down; management expected the wind-down to be completed in early 2020.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2019 | Comparable 2018 period |
|---|---|---|
| Revenue | $117,393 | $602,209 |
| Gross profit / margin | $51,458 / 43.8% | $129,923 / 21.6% |
| Operating loss | $1,360,231 | $766,513 |
| Net loss | $3,015,013 | $769,203 |
| Interest expense | $1,679,490 | $9,126 |
| Basic and diluted loss per share | $0.16 | $0.04 |
| Net cash used in operations | $824,325 | $522,170 |
| Cash at quarter-end | $1,502,309 | $310,779 |
At December 31, 2019, total assets were $2.09 million, current liabilities were $7.26 million, and stockholders’ deficit was $5.25 million. Convertible notes had a carrying value of $5.30 million and stated principal of approximately $7.02 million. The company reported $213,426 in operating lease right-of-use assets and $216,494 in lease liabilities.
Changes versus the prior comparable quarter
- Revenue fell 80.6%, primarily because TransTech sales declined as customers bought similar products directly from other sources and the subsidiary was wound down.
- Gross margin improved to 43.8% from 21.6%, although gross profit declined with lower sales.
- Research and development expense rose to $491,138 from $206,990, reflecting additional personnel, consultants, Bio-RFID development and FDA-related work. Selling, general and administrative expense rose to $920,551 from $689,446.
- Net loss increased substantially, chiefly because of $1.57 million of non-cash amortization of debt discounts recorded as interest expense. Total non-cash expenses were approximately $2.07 million.
- Operating cash use increased to $824,325. The company received $520,000 from convertible-note financing, net of $78,845 in issuance costs, and cash decreased by $398,527 during the quarter.
Outlook, risks and unusual items
- Going concern and funding: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It estimated that cash on hand would fund operations through August 31, 2020, but said additional financing was needed for operations and debt obligations. Failure to obtain funding could require restructuring, divestitures, scaling back development or bankruptcy.
- Debt and dilution: Convertible notes included an 8% subordinated financing, with principal and interest generally payable in shares. Note terms include mandatory conversion provisions and, in specified circumstances, cash payment upon a change in control. Options, warrants, preferred-stock conversions and notes could substantially dilute common shareholders.
- Product and regulatory risk: The UBAND glucose monitor remained in development. The company expected to begin the FDA approval process during calendar 2020 but could not estimate the review timeline or likelihood of approval. Commercial acceptance and revenue from Bio-RFID and ChromaID were uncertain.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective, citing the absence of a full-time CFO and an audit committee financial expert. Management said it expected to strengthen finance staffing and appoint a qualified audit committee chair during 2020.
- Other: The filing reported no material pending legal proceedings beyond ordinary routine matters and no off-balance-sheet arrangements reasonably likely to have a material effect. The company reported $1,252,309 in uninsured bank deposits.
Important facts for investors to verify
- Confirm the issuer identity: the provided filing names Know Labs, Inc., not USBC, Inc.; confirm the intended company and reporting period.
- Verify cash runway and subsequent financing against actual cash use, debt maturities and payment obligations; the filing’s runway estimate is management’s expectation.
- Review the terms and conversion triggers of the convertible notes, including potential share issuance, anti-dilution provisions and change-of-control cash obligations.
- Track FDA progress, clinical or technical validation, manufacturing readiness and whether the planned commercialization schedule is achievable.
- Assess remediation of the disclosed control weaknesses and the financial condition and closure costs associated with the TransTech wind-down.
- Reconcile liquidity disclosures: the filing states approximately $321,000 of working capital “net of convertible notes payable,” while the balance sheet shows current assets of $1.51 million and current liabilities of $7.26 million; the precise basis for the stated working-capital figure is not clear from the filing text.