Know Labs, Inc. — Form 10-Q Summary
Period and issuer: The filing covers the quarter and six months ended March 31, 2019, the company’s fiscal second quarter. Although the request identifies USBC, Inc., the filing identifies the registrant as Know Labs, Inc. (formerly Visualant, Inc.), trading on OTCQB as KNWN.
Business context
Know Labs is developing ChromaID and Bio-RFID technologies for identifying or diagnosing materials using electromagnetic energy. Bio-RFID, including a proposed non-invasive glucose-monitoring application and UBAND products, is the company’s principal commercialization focus. TransTech, a distributor of identification products, historically generated substantially all revenue; management said it expected to wind down the subsidiary before fiscal year-end as its sales declined.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2019 / 2018 | $594,000 / $1,092,000 | $1,196,000 / $2,325,000 |
| Gross profit, 2019 / 2018 | $139,000 / $227,000 | $269,000 / $474,000 |
| Operating loss, 2019 / 2018 | $(1,723,000) / $(505,000) | $(2,490,000) / $(759,000) |
| Net loss, 2019 / 2018 | $(1,725,000) / $(1,299,000) | $(2,494,000) / $(1,827,000) |
| Basic and diluted loss per share, 2019 / 2018 | $(0.09) / $(0.25) | $(0.14) / $(0.37) |
- Revenue fell 45.6% in the quarter and 48.6% for the six-month period, primarily because of lower TransTech sales. Gross profit also declined, though cost of sales fell with revenue.
- R&D expense increased to $184,000 for the quarter and $391,000 for six months, mainly for Bio-RFID development. SG&A rose to $1.678 million and $2.368 million, respectively; management cited corporate development, stock-based compensation, investor relations and business development costs.
- Gross margin was approximately 23.4% for the quarter and 22.5% for six months based on the financial-statement amounts. The MD&A reports different figures for those periods; see investor verification points below.
- Cash and equivalents were $3.062 million at March 31, 2019, versus $934,000 at September 30, 2018. Six-month operating cash use was $1.463 million, investing cash use was $75,000, and financing cash provided was $3.665 million.
- Current assets were $3.369 million and current liabilities $4.286 million, implying a working-capital deficit of approximately $917,000. The balance sheet included $2.255 million of current convertible notes. Stockholders’ deficit was $343,000.
- The company reported $2.255 million of convertible notes payable on the balance sheet and separately disclosed $3.810 million of subordinated convertible notes issued in March. It had no remaining Capital Source facility debt after repaying the balance in March.
Material changes, outlook and risks
- March private placements raised gross proceeds of $3.810 million through subordinated convertible notes and warrants. The notes carry 8% annual interest, payable in shares, and are subject to conversion provisions; management later extended the offering through May 31, 2019.
- Common shares outstanding rose from 17.532 million at September 30, 2018 to 22.003 million at March 31, 2019; the filing reports 22.285 million outstanding on May 15. Potential dilution includes outstanding options, warrants, preferred-stock conversions and convertible debt.
- Management expected continued operating losses and believed available cash would fund operations through December 31, 2019. It stated that additional financing would be needed to execute the business plan, service operations and pay debts. The filing repeats the substantial-doubt going-concern conclusion and warns that unavailable financing could force restructuring, asset divestitures or bankruptcy.
- Management expected to begin the FDA approval process for a non-invasive glucose-monitoring device during 2019 but said it could not estimate the approval timeline or likelihood of success. Commercialization, customer adoption, product development, regulatory approval, supplier availability, intellectual-property protection and the planned TransTech wind-down are key risks.
- Subsequent to quarter-end, amendments dated May 8, 2019 extended certain existing convertible-note maturities to September 30, 2019; one amendment also increased the interest rate to 6%.
- Disclosure controls and internal control over financial reporting were reported ineffective, with material weaknesses associated with the lack of a full-time CFO and the absence of an audit committee financial expert. The company reported no non-routine pending legal proceedings.
Important facts for investors to verify
- Reconcile the financial-statement gross margins with the MD&A, which states 22.5% for the quarter and 23.4% for six months, opposite the approximate margins calculated from the reported revenue and gross profit.
- Reconcile the March financing disclosures: the notes describe $3.810 million of subordinated convertible notes, while the cash-flow statement labels $3.810 million as proceeds from issuance of common stock.
- Clarify total debt and working capital. The balance sheet shows $2.255 million of current convertible notes, while other filing disclosures cite different debt or working-capital figures; confirm how the March-issued notes and accrued amounts are presented.
- Monitor cash use against management’s December 31, 2019 runway estimate, financing availability and the timing and terms of any further capital raises.
- Assess potential dilution and conversion-price adjustments, the execution and costs of winding down TransTech, and evidence supporting Bio-RFID product performance, commercialization plans and regulatory progress.