Know Labs, Inc. — Form 10-Q Summary
Period: Three months ended December 31, 2018 (the company’s fiscal first quarter; not calendar-year Q1 2019). The filing identifies the registrant as Know Labs, Inc., formerly Visualant, Inc.; this differs from the request metadata naming USBC, Inc.
Business context
Know Labs is developing ChromaID and Bio-RFID technologies for identifying or diagnosing substances using electromagnetic energy. Its TransTech subsidiary, a distributor of identification products, generated substantially all current revenue, while the company reported minimal revenue from its proprietary technologies. The company said it was moving Bio-RFID toward commercialization and expected to begin seeking FDA approval for a non-invasive glucose-monitoring device during calendar 2019.
Key financial metrics
| Metric | Three months ended Dec. 31, 2018 | Prior-year period |
|---|---|---|
| Revenue | $602,209 | $1,232,857 |
| Gross profit / margin | $129,923 / 21.6% | $247,834 / 20.1% |
| Research and development | $206,990 | $87,720 |
| Selling, general and administrative | $689,446 | $414,365 |
| Operating loss | $(766,513) | $(254,251) |
| Net loss | $(769,203) | $(528,265) |
| Basic and diluted loss per share | $(0.04) | $(0.11) |
| Net cash used in operating activities | $(522,170) | $(371,397) |
At December 31, 2018, cash was $310,779, down from $934,407 at September 30, 2018. Current assets were $690,777 and current liabilities were $4,461,377, a balance-sheet working-capital deficit of approximately $3.77 million. The MD&A separately describes a net working-capital deficit of approximately $1.469 million, net of convertible notes and notes payable.
Convertible notes payable totaled $2,255,066; current notes payable were $46,576. Total liabilities were $4,461,377, all classified as current. The company reported $23,000 available under TransTech’s reduced $200,000 credit facility. No cash taxes were paid; cash interest paid was $9,126.
Changes versus the prior comparable period
- Revenue fell 51.2%, primarily because of lower TransTech sales. Management said it was focusing the subsidiary on maximizing profit at the lower sales level.
- Gross profit declined 47.6%, but gross margin increased to 21.6% from 20.1%.
- R&D expense rose to $207,000, mainly for product development, including Bio-RFID. SG&A increased to $689,000, including higher stock compensation, corporate development and other expenses.
- Operating loss widened to $767,000 from $254,000. Net loss increased to $769,000 from $528,000, despite substantially lower interest expense: the prior-year quarter included significant non-cash debt-discount and conversion-related interest expense.
- Operating cash outflow increased to $522,000 from $371,000. Cash fell by $624,000 during the quarter, including $99,000 of line-of-credit repayments.
Outlook, risks and unusual items
- Going concern and funding: The filing says recurring losses, operating cash outflows, limited capital and debt obligations raise substantial doubt about the company’s ability to continue as a going concern. Management estimated cash on hand would fund operations only through February 28, 2019. Additional financing was needed; failure to obtain it could require restructuring, asset divestitures, scaling back development or bankruptcy. The company expected losses to continue.
- Debt and credit facility: Convertible-note due dates were extended to February 27, 2019. Capital Source notified TransTech that its facility would be cancelled as of March 12, 2019; the facility was reduced to $200,000 effective December 12, 2018. The company said it expected to replace it by March 12.
- Commercialization and regulation: Bio-RFID glucose monitoring remained under development. Management anticipated beginning the FDA approval process in 2019 but could not estimate approval timing or likelihood. Commercial acceptance, sufficient revenue, and regulatory approval are uncertain.
- Dilution: At quarter-end, the company reported 2.28 million options, 15.17 million warrants, 4.91 million common shares issuable upon preferred-stock conversion, and approximately 9.02 million shares at the then-current conversion price issuable on convertible debentures. Price-adjustment provisions could increase potential dilution.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective, citing the lack of a full-time CFO and the absence of an audit committee financial expert. The company said it expected to appoint an independent director with that expertise during 2019.
- Other: The company reported no material pending legal proceedings outside routine business matters and no off-balance-sheet arrangements expected to have a material effect. It held 12 issued patents and reported 20 pending applications.
Important facts for investors to verify
- Whether the company obtained financing after the stated February 28, 2019 cash-runway estimate, and whether it remained able to meet obligations as they came due.
- The status of the Capital Source facility after its planned March 12, 2019 cancellation and whether replacement financing was secured.
- Whether the convertible notes due February 27, 2019 were repaid, further extended, converted or otherwise amended.
- Subsequent revenue, margins and cash burn at TransTech, and progress toward commercial revenue from ChromaID and Bio-RFID.
- FDA development and approval milestones, and the evidence supporting the company’s glucose-monitoring claims.
- Progress remediating the disclosed control weaknesses and the fully diluted share count, including any price adjustments or new financing.