Know Labs, Inc. — Form 10-Q summary
Entity note: The request identifies USBC, Inc., but the filing is for Know Labs, Inc. (ticker KNWN), formerly Visualant, Inc. The filing reports the quarter and nine months ended June 30, 2020; the 2019 comparative results are identified as restated.
Business context and reporting period
Know Labs is developing electromagnetic sensing technologies, principally Bio-RFID, with a planned initial medical product: a wearable, non-invasive continuous glucose monitor that requires FDA approval. It formed majority-owned subsidiary Particle in April 2020 to pursue non-medical applications. TransTech, historically the principal source of revenue, was shut down June 30, 2020. Particle had no sales through the quarter-end.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $0 | $121,939 | $381,270 quarter; $1,577,191 nine months |
| Gross profit | $0 | $52,213 | $105,451 quarter; $374,247 nine months |
| Operating loss | $1,009,412 | $4,438,994 | $1,025,117 quarter; $2,840,285 nine months |
| Net loss | $2,905,086 | $9,250,612 | $2,154,266 quarter; $4,365,707 nine months |
| Basic and diluted loss per share | $0.12 | $0.44 | $0.12 quarter; $0.24 nine months |
- For the nine months, research and development expense was $1.314 million, versus $833,000 in 2019; selling, general and administrative expense was $3.178 million, versus $2.382 million.
- Interest expense for the nine months was $4.170 million, including $3.874 million of non-cash debt-discount amortization. Net cash used in operating activities was $2.666 million, versus $1.899 million in 2019; financing provided $5.441 million.
- Cash at June 30 was $4.662 million, compared with $1.901 million at September 30, 2019. Total assets were $5.040 million; current liabilities were $3.798 million. Management separately disclosed a $3.145 million working-capital deficit, described as net of convertible notes and lease right-of-use amounts.
- Convertible notes had a reported balance-sheet carrying amount of $2.179 million after discounts; the filing also reports $7.895 million of convertible-debt obligations. A $226,170 PPP note was outstanding. A separate $825,000 settlement payable was recorded as a non-current liability.
- Common shares outstanding were 23.926 million at June 30 and 24.484 million at August 6. Potential dilution includes 20.664 million warrants, 4.895 million options, preferred-stock conversion shares and shares issuable on convertible debt.
Material changes versus prior period
- Nine-month revenue fell 92% as TransTech sales declined during the wind-down; the quarter produced no revenue. TransTech closed on June 30, removing the company’s historical revenue source.
- Nine-month net loss more than doubled, primarily reflecting higher operating expenses and interest expense, including non-cash debt discounts; the quarter’s net loss also increased.
- The company raised $5.640 million in gross proceeds from 2020 convertible-note offerings during the nine-month period. These notes and related warrants create potential dilution.
- Cash rose from September 2019, largely with financing proceeds, while operating activities continued to consume cash. Stockholders’ deficit of $3.297 million at September 2019 became equity of $417,000 at June 2020, mainly alongside financing and share issuance.
Outlook, risks and unusual items
- Management expects continuing losses while commercializing its technology. It said cash on hand and funding received after June 30 should fund operations through June 2021, but also said further financing is needed to execute its plan and meet obligations. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The planned UBAND glucose monitor requires FDA approval; the company expected to begin the approval process during 2020 but could not estimate timing or likelihood of success. Commercial acceptance, product development, third-party supply and financing remain significant uncertainties.
- After quarter-end, a shareholder settlement resulted in $125,000 cash received and 500,000 common shares issued; the company had accrued an $825,000 settlement loss at June 30. Particle also raised $785,000 in stated SAFE funding and received $733,585 gross proceeds, before a placement fee.
- The company reported ineffective disclosure controls and internal control over financial reporting, citing the lack of a full-time CFO and an audit committee financial expert. COVID-19, market access to capital, dilution, related-party obligations and intellectual-property protection are among its disclosed risks.
- There are numerical presentation differences in the filing: MD&A states a 20.2% nine-month 2020 gross margin, while the reported revenue and gross-profit figures imply a different percentage. The filing also gives differing patent counts in separate sections.
Important facts for investors to verify
- Confirm the issuer identity and reporting period: the supplied filing is Know Labs, Inc., not USBC, Inc.
- Reconcile the disclosed $3.145 million working-capital deficit with the balance-sheet current-asset and current-liability totals and the stated exclusions.
- Review the carrying value, principal, maturity, conversion terms and potential share dilution of the convertible debt, warrants and preferred stock.
- Verify the settlement accounting and post-quarter share issuance, and the amount of Particle financing actually available to the parent company.
- Track FDA progress, funding runway, TransTech shutdown effects, and remediation of the reported control weaknesses.