Know Labs, Inc. — FY2019 Form 10-K
Entity and period: The supplied filing identifies the registrant as Know Labs, Inc. (OTCQB: KNWN), not USBC, Inc. It covers the fiscal year ended September 30, 2019; it is not a standalone fourth-quarter report.
Business context and results
Know Labs is developing electromagnetic-sensing technologies, principally Bio-RFID and ChromaID. Its planned initial Bio-RFID product is UBAND, a non-invasive continuous glucose monitor that requires FDA approval. Nearly all reported revenue came from TransTech, a distributor whose business the company expected to wind down.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1.805 million | $4.303 million |
| Gross profit / margin | $427,000 / 23.6% | $822,000 / 19.1% |
| Research and development | $1.258 million | $571,000 |
| SG&A | $4.182 million | $2.509 million |
| Operating loss | $5.013 million | $2.258 million |
| Interest expense | $2.945 million | $1.195 million |
| Net loss | $7.612 million; $0.42 per share | $3.258 million; $0.38 per share |
| Cash used in operations | $3.104 million | $1.117 million |
Liquidity, debt and capital
- Cash at year-end was $1.901 million. Cash increased by $966,000, principally because $4.242 million of convertible-note proceeds more than offset operating and investing outflows.
- The balance sheet shows current assets of $1.977 million and current liabilities of $5.815 million, implying negative working capital of approximately $3.838 million. Management separately cites approximately $241,000 of net working capital “net of convertible notes payable and notes payable”; the filing does not reconcile this figure to the balance sheet.
- Convertible notes had $6.498 million of gross principal at September 30, 2019, including $4.242 million raised in a May 2019 private placement. Their balance-sheet carrying amount was $3.954 million after debt discounts. The new notes bear 8% interest, generally convert into common stock, and were due or convertible in early 2020 under their terms.
- The company reported an accumulated deficit of $42.404 million and stockholders’ deficit of $3.297 million. It disclosed substantial potential dilution from outstanding options, warrants, preferred shares and convertible debt.
- Management said available cash was expected to fund operations through June 30, 2020, but the auditor’s report included a substantial-doubt going-concern paragraph. The company said it needed additional financing and might otherwise restructure or divest operations.
Material changes and notable items
- Revenue fell 58.1%, primarily because of lower TransTech sales as customers shifted to other sources. TransTech recorded a $78,000 operating loss versus $49,000 operating income in FY2018; the company anticipated winding it down.
- Gross profit declined, but gross margin improved to 23.6% from 19.1%, reflecting management’s focus on profitability at TransTech’s lower sales level.
- R&D more than doubled as Bio-RFID development expanded. SG&A rose 66.7%, including a $969,000 increase in stock-based compensation. Interest expense increased substantially and included amortization of debt discounts and conversion-related costs.
- FY2019 net loss included substantial non-cash charges, including $2.771 million of debt-discount amortization and $1.260 million of stock-based compensation. The company also recorded a $356,000 gain on debt settlements.
- After year-end, the company raised an additional $385,000 through 8% convertible notes. It also extended certain related-party and other convertible-note due dates to March 31, 2020.
Outlook, risks and controls
- Management planned to pursue FDA approval for UBAND, with the approval process expected to begin during calendar 2020. The filing provides no reliable estimate of approval timing or likelihood; commercialization and revenue remain uncertain.
- Key risks include continued operating losses, financing availability, debt repayment or conversion terms, dilution, limited product-market acceptance, dependence on external engineering and manufacturing resources, regulatory approval, and the expected decline or wind-down of TransTech.
- Management concluded that internal control over financial reporting and disclosure controls were ineffective, citing the absence of a full-time CFO and an audit committee financial expert. It described plans to strengthen finance staffing and governance.
- The company reported no pending material legal proceedings. The filing also notes that $1.651 million of cash deposits were uninsured at year-end.
Investor verification priorities
- Confirm the intended issuer: the supplied filing is for Know Labs, Inc. (KNWN), not USBC, Inc.; confirm the fiscal-year period rather than a quarterly period.
- Reconcile the stated $241,000 working-capital figure with the balance sheet’s approximately $3.838 million working-capital deficit.
- Verify current cash, financing raised since year-end, and the status, maturity, conversion and repayment of the company’s notes.
- Track UBAND development, independent validation, FDA pathway, approval milestones and the funding needed to reach commercialization.
- Assess TransTech’s wind-down and its effect on revenue, cash flows and remaining liabilities.
- Monitor dilution from convertible securities, warrants and options, and whether disclosed material control weaknesses have been remediated.