Know Labs, Inc. — FY2018 Form 10-K
Registrant note: The supplied filing identifies the registrant as Know Labs, Inc., formerly Visualant, Inc.; it does not identify USBC, Inc. The reporting period is the fiscal year ended September 30, 2018, not a standalone fourth-quarter report. The company traded on OTCQB as KNWN.
Business context
Know Labs is developing ChromaID and Bio-RFID technologies intended to identify, authenticate, or diagnose substances using electromagnetic energy. The company said Bio-RFID was moving from laboratory development toward commercialization, including potential non-invasive glucose monitoring and a planned wearable calorie-counter product. Its TransTech Systems distribution subsidiary continued to provide substantially all current revenue, though sales were declining.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.303 million | $4.874 million |
| Gross profit | $0.822 million | $0.908 million |
| Gross margin | 19.1% | 18.6% |
| Research and development | $0.571 million | $0.079 million |
| Operating loss | $2.258 million | $3.243 million |
| Interest expense | $1.195 million | $0.377 million |
| Net loss | $3.258 million | $3.901 million |
| Basic and diluted loss per share | $0.38 | $1.01 |
Revenue fell 11.7%, primarily due to lower TransTech sales. Gross profit declined, but gross margin increased modestly. The smaller operating and net losses reflected lower general and administrative expense and no repeat of FY2017’s $0.984 million goodwill impairment; higher R&D and interest expense partly offset those improvements. TransTech reported operating income of $49,000, compared with an operating loss of $256,000 in FY2017.
Cash used in operations was $1.117 million, versus $1.264 million in FY2017. Investing activities used $97,000, chiefly for laboratory equipment; financing provided $2.046 million. Cash at September 30, 2018 was $934,000, and the company reported a working-capital deficit of approximately $832,000. Total current liabilities were $4.711 million against current assets of $1.479 million. The balance sheet lists $2.255 million of convertible notes and $145,000 of current notes payable; the filing separately describes approximately $2.966 million of obligations as due at year-end.
Material changes and notable transactions
- In June 2018, the company raised $1.75 million gross in a private placement, issuing 7.0 million common shares and warrants to buy 3.5 million shares at an initial $0.25 exercise price.
- Common shares outstanding increased from 4.655 million at September 30, 2017 to 17.532 million at September 30, 2018.
- In April, the company acquired RAAI Lighting, Inc. for 2.0 million shares issued to CEO Phillip Bosua; it recorded $520,000 of acquired technology/intellectual property.
- In March, $1.184 million of related-party notes and payables was converted into convertible notes. Other debts and liabilities were also converted or repaid with cash and shares.
- Capital Source notified TransTech that its credit facility would be cancelled effective March 12, 2019; a December 2018 modification reduced the facility to $200,000.
- Management disclosed substantial potential dilution from outstanding options, warrants, convertible preferred stock, and convertible notes. The filing estimates 9.020 million common shares issuable on conversion of $2.255 million of notes at the stated $0.25 conversion price, in addition to other potential shares.
Outlook, risks, and unusual items
Management expected continued losses while commercializing its technologies and estimated cash on hand would fund operations through March 31, 2019. It stated that additional financing was needed to execute its plan, service operations, and meet debt obligations; no assurance was given that financing would be available on acceptable terms. The independent auditor included a going-concern explanatory paragraph citing substantial doubt about the company’s ability to continue operating.
The company said it expected to begin the U.S. FDA approval process for a non-invasive glucose-monitoring device during calendar 2019, but could not estimate the approval timeline or likelihood of success. It reported laboratory comparison testing with existing continuous glucose monitors, not regulatory approval or established commercial performance. Key risks include financing availability, commercialization and market acceptance, declining TransTech sales, regulatory approval, intellectual-property protection, dependence on key personnel and external development resources, and potential dilution.
Management concluded that internal control over financial reporting was ineffective and disclosure controls were not effective. Disclosed weaknesses included no full-time CFO and no audit-committee financial expert; management expected to address the latter by appointing an independent director. The filing reports no material pending litigation outside ordinary routine matters.
Investor facts to verify
- Confirm the issuer and ticker: the supplied 10-K is for Know Labs, Inc. (KNWN), not USBC, Inc.
- Review the going-concern disclosure, actual cash runway, subsequent financing, and repayment or extension status of debt due in 2019.
- Reconcile the filing’s debt totals and related-party balances; amounts differ across sections and notes.
- Assess dilution from outstanding shares, warrants, options, convertible notes, and preferred stock, including any anti-dilution adjustments.
- Verify product-development milestones, independent validation, FDA pathway and timing, and whether any technology has generated material revenue.
- Track remediation of the disclosed control weaknesses and the cancellation or replacement of TransTech’s credit facility.