USBC, Inc. quarterly report, Q2 FY2020

Business context and reporting period

Entity/period note: The supplied filing is for Know Labs, Inc. and subsidiaries, not USBC, Inc. It is a Form 10-Q for the quarter ended March 31, 2020, the second quarter of the company’s fiscal year; financial statements also present the six months ended March 31, 2020. The filing was signed May 15, 2020.

Know Labs is developing Bio-RFID and ChromaID electromagnetic-sensing technologies. Its stated primary focus is commercializing Bio-RFID, initially through a non-invasive wearable continuous glucose monitor (UBAND) that requires FDA approval. TransTech, historically the main revenue source, was being wound down, with full closure expected by June 30, 2020.

Financial performance and position

For the six-month period, research and development expense rose to $938,303 from $391,014; selling, general and administrative expense rose to $2,543,492 from $1,692,950. Interest expense increased to $2,981,164 from $409,327, including substantial non-cash amortization of debt discounts. The filing reports non-cash expenses of approximately $4.51 million for the six months.

Six-month operating cash use was $1,688,330 in the cash flow statement; investing cash use was $27,739 and financing provided $591,985. Cash declined from $1,900,836 at September 30, 2019 to $776,752 at March 31, 2020. The cash flow statement reports ending cash of $776,752. Total assets were $1,228,172, current liabilities $4,356,486, and stockholders’ deficit $3,141,220. Convertible notes payable were reported at a net carrying amount of $2,739,330; contractual obligations list $3,402,606 of convertible notes.

Management describes a net working capital deficit of approximately $722,000 after excluding convertible notes and lease right-of-use amounts. On a simple balance-sheet basis, current assets of $776,752 were substantially below current liabilities of $4,356,486. The filing states that cash on hand and financing received after quarter-end were expected to fund operations through early 2021, but additional financing is needed.

Material changes versus the prior comparable period

• Six-month revenue fell about 90%, primarily as TransTech sales declined during the wind-down; the quarter’s revenue was only $4,546.
• Six-month net loss widened to $6.35 million from $2.21 million. Higher development and administrative expenses and sharply higher interest expense contributed.
• Cash declined by $1.12 million during the six months. The company raised $715,000 in gross proceeds from convertible notes during the period.
• The company issued 4,114,800 common shares upon automatic conversion of 2019 debt and accrued interest, and issued 540,000 restricted shares for services valued at $1.026 million. Common shares outstanding increased to 23,324,128 at March 31, 2020 from 18,366,178 at September 30, 2019.

Outlook, risks, contingencies and unusual items

• Going concern and funding: The filing states that recurring losses, limited capital, and financing needs raise substantial doubt about the company’s ability to continue as a going concern. Management expects continued losses and says further financing is necessary; unavailable or unacceptable financing could require scaling back operations or divestitures.
• Subsequent financing: After March 31, the company reported $1,979,500 of gross proceeds from additional subordinated convertible notes and warrants. It also received $226,170 under the federal Paycheck Protection Program on April 30, 2020. These amounts are not included in March 31 cash.
• Product and regulatory risk: The UBAND glucose monitor is still under development and requires FDA approval. Management planned to begin the FDA approval process during calendar 2020 but could not estimate the approval timeline or likelihood of success.
• TransTech wind-down: Management expected to close the subsidiary by June 30, 2020; loss of its revenue and wind-down costs could affect results.
• COVID-19: The company said the pandemic had not yet caused imminent adverse effects, but cited uncertainty around operations, suppliers, customers, financing access, and market conditions.
• Dilution and related parties: Options, warrants, preferred stock, and convertible debt could substantially dilute common shareholders. Chairman Ronald P. Erickson and affiliated entities were creditors and had approximately $613,525 of accrued compensation, travel, and interest at March 31.
• Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing the lack of a full-time CFO and an audit committee financial expert.
• Legal matters: The filing reports no pending legal proceedings other than routine litigation incidental to the business.

The filing contains figures that warrant reconciliation: the cash flow statement reports operating cash use of $1,688,330, while the MD&A describes approximately $1,688,000 and one going-concern passage gives $1,668,330. The stated six-month gross margin of 20.2% in MD&A also does not match gross profit divided by revenue (approximately 42.8%); the filing’s quarter and prior-period margin references likewise vary between sections.

Most important facts for investors to verify

• Confirm the issuer: this filing is Know Labs, Inc. (ticker KNWN), not USBC, Inc.
• Reconcile the operating cash-use and gross-margin inconsistencies against the filed financial statements and any amendments.
• Verify post-quarter-end financing proceeds, terms, conversion prices, fees, and resulting dilution, and assess cash runway against near-term debt and operating needs.
• Track the TransTech closure, remaining liabilities, and any wind-down costs.
• Monitor UBAND development milestones and FDA submissions, clearances, and commercialization timeline.
• Assess remediation of the disclosed control weaknesses and the company’s ability to appoint qualified finance and audit oversight personnel.