Know Labs, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2021; filed May 7, 2021. The filing identifies the registrant as Know Labs, Inc. (formerly Visualant, Incorporated), trading as KNWN. The request metadata names USBC, Inc.; that does not match the filing and should be verified.
Business context
Know Labs is developing electromagnetic-energy identification technology, principally Bio-RFID, with a stated focus on commercializing a non-invasive glucose monitor and related intellectual property. Its Particle subsidiary is developing germ-inactivating light bulbs. TransTech, historically the source of substantially all revenue, ceased operations on June 30, 2020. Neither the core technology business nor Particle reported revenue in the current quarter.
Financial performance and position
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1.259 million | $2.226 million |
| Selling, general and administrative expense | $1.343 million | $3.940 million |
| Operating loss | $2.601 million | $6.165 million |
| Interest expense | $2.772 million | $4.508 million |
| Net loss | $5.374 million | $10.673 million |
| Basic and diluted loss per share | $0.20 | $0.41 |
| Operating cash used | Not separately reported | $3.247 million |
Gross margin was not meaningful because current-period revenue was zero. The six-month loss included $7.028 million of non-cash expenses, including $4.199 million of debt-discount amortization. No income tax expense was reported.
At March 31, 2021, cash and cash equivalents were $15.697 million and total assets were $15.908 million. Current liabilities were $8.062 million, including $5.058 million of convertible notes payable (balance-sheet carrying value) and $1.125 million of Particle SAFE obligations. Total liabilities were $8.494 million. Accumulated deficit was $66.639 million; stockholders’ equity was $7.414 million. The filing reports $15.447 million of uninsured bank deposits.
Financing activities provided $14.681 million in the six-month period, primarily from $14.209 million of convertible-note proceeds, plus SAFE proceeds and warrant exercises, partly offset by issuance costs. Cash increased by $11.398 million from September 30, 2020. Capital expenditures were $35,000.
Changes versus prior comparable periods
- Revenue fell from $4,546 to zero for the quarter and from $121,939 to zero for the six months, principally because TransTech had closed.
- Six-month net loss widened to $10.673 million from $6.346 million. Operating loss increased to $6.165 million from $3.430 million.
- Six-month R&D expense increased to $2.226 million from $0.938 million, reflecting added personnel, consultants, and Bio-RFID and Particle development.
- Six-month SG&A increased to $3.940 million from $2.543 million, including higher stock-based compensation and Particle costs.
- Six-month interest expense rose to $4.508 million from $2.981 million, largely due to convertible financing and related non-cash debt-discount amortization.
- Cash rose from $4.298 million at September 30, 2020 to $15.697 million at March 31, 2021, following substantial financing.
Outlook, risks and unusual items
- Management expects operating losses to continue while it develops and commercializes its technologies. It states that cash on hand, including funding closed after quarter-end, should fund operations through March 31, 2023; elsewhere the filing cites March 15, 2023. The company’s prior-year audit report raised substantial doubt about its ability to continue as a going concern.
- On March 15, 2021, the company raised $14.209 million gross through subordinated convertible notes bearing 8% annual interest, payable in shares, and issued 3,552,250 warrants. The notes are stated to convert automatically at $2.00 per share on the first anniversary. Financing discounts, warrants and placement fees materially increased reported interest expense.
- Potential dilution is substantial: 14.787 million parent-company options, 23.440 million warrants, 8.108 million shares issuable upon preferred-stock conversion, and shares reserved for convertible debentures are disclosed. The filing reports 28.257 million common shares outstanding at March 31 and 30.397 million at May 7, 2021.
- The proposed glucose-monitoring product requires FDA approval. Management says it cannot estimate the approval timeline or likelihood of success. Particle had no sales; its bulb work, including reported preliminary germ and SARS-CoV-2 testing, remained subject to product certification, manufacturing and go-to-market steps.
- Other material risks include continued financing needs, technology commercialization and market-acceptance uncertainty, COVID-19-related disruption, intellectual-property risks, and dependence on key personnel. The filing reports no material pending litigation beyond ordinary routine matters.
- Disclosure controls and internal control over financial reporting were not effective as of March 31, 2021. The identified material weakness concerned finance staffing: the company lacked a full-time CFO and its chairman served as interim CFO with consultant support.
- Related-party items include a $1.812 million warrant issued to Chairman Ronald Erickson and a $250,000 CEO bonus accrued at quarter-end and paid in April 2021. The filing also reports amendments after quarter-end extending certain related-party note maturities to September 30, 2021.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Know Labs, Inc., not USBC, Inc.
- Reconcile the stated cash runway date, which differs between March 15 and March 31, 2023 in the filing.
- Review the full terms, maturity and conversion mechanics of the new notes, existing debt, warrants and Particle SAFEs, including their dilution and cash obligations.
- Track cash burn, financing availability, and progress toward revenue-generating products; current revenue was zero.
- Verify FDA pathway, testing evidence, certification, manufacturing and commercialization milestones for the glucose-monitoring device and Particle bulb.
- Monitor remediation of the disclosed internal-control weakness and changes in share count and potentially dilutive securities.