USBC - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the Know Labs Fiscal Year 2023 First Quarter Earnings Conference Call and Webcast. Please note this conference call is being recorded. I will now turn the conference call over to Jordyn Hujar, Know Labs' Chief of Staff. You may begin.

Jordyn Hujar (Chief of Staff)

Thank you, Operator. Thank you everyone for joining us for today's conference call to discuss Know Labs' first quarter of fiscal year 2023 financial results and recent operating highlights. If you have not seen today's financial results, press release, and 10-Q filing, please visit the investors page on the company's website. Before turning the call over to Ron Erickson,Know Labs' Chairman and Chief Executive Officer, I would like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. Any statements that are not historical facts are forward-looking statements. We encourage you to review the company's SEC filings, including, without limitation, the company's Forms 10-K and 10-Qs, which identify specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, risks inherent in the development and/or commercialization of potential diagnostic products, uncertainty in the results of clinical trials or regulatory approvals, the need to obtain third-party reimbursement for patients' use of any diagnostic products the company commercializes, our need and ability to obtain future capital and maintenance of IP rights, risks inherent in strategic transactions such as failure to realize anticipated benefits, legal, regulatory, or political changes in the applicable jurisdictions, accounting and quality controls, greater than estimated allocations of resources to develop and commercialize technologies or failure to maintain any laboratory accreditation or FDA certification, and uncertainties associated with the COVID-19 pandemic and its possible effects on our operations. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements.

Know Labs expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law. Today's call will be followed by a Q&A session. Your questions can be submitted through the webcast portal, which can be accessed through our website. Due to the large number of participants on today's call, we will not be taking questions over the phone. With that, I'll turn the call over to Ron Erickson, Know Labs CEO. Ron?

Ron Erickson (Chairman and CEO)

Thanks, Jordyn Hujar, welcome everyone to our conference call to discuss our first quarter 2023 financial results and operating highlights. Joining me today is Pete Conley, our Chief Financial Officer, who will discuss our financial results. Today, I'm going to walk through our progress against our strategic milestones, provide an overview of our achievements for the fiscal quarter ending on December 31, 2022, and preview our goals for the balance of fiscal year 2023. Our team continues to work to bring the first FDA-cleared, non-invasive glucose monitoring device to the market. We've made significant changes to our leadership team to accelerate our execution. As disclosed on January 26, Phil Bosua will step down as an executive officer of the company and board member, I was named Chief Executive Officer by the company's board of directors while continuing as Chairman of the board.

Phil remains engaged with Know Labs in a consulting capacity, which will allow him to pursue his passion for new discoveries in science, software, and artificial intelligence while providing as-needed technical guidance to our product development team. We've welcomed new members to the executive team and redistributed core responsibilities. These leadership changes were detailed in a press release issued on January 27th. This new structure should accelerate product development and testing while work toward the FDA clearance process for medical devices is being executed in parallel. I believe we put an aggressive and results-oriented plan in place, which I'll review with you this afternoon. We also recently disclosed on February 2nd, strategic partners in data science, sensor technology, product design, and regulatory affairs, who we've been engaging with over the past few years and are continuing in their support of the Know Labs team.

We're fortunate to have world-class respected experts working alongside our own talented team. These press announcements can all be found on our website. Our most important goal for 2023 is external validation of our Bio-RFID technology platform. We will achieve this through a heavy focus on feature engineering through data science and algorithm refinement, clinical development and trials, and partnerships with leading research institutions for additional data collection and accuracy validation. Taking this objective into consideration, our plan is comprised of four coordinated work streams. One continued development of our hardware solution, our patented sensor. Two the continued development of our software solution, working in conjunction with key third parties on our proprietary trade secret algorithm and machine learning platform. Three continued testing both internally and under current and future IRB-approved protocols to increase our clinical data collection and analysis.

Four continued strategic development of our intellectual property portfolio, our patents issued, pending, and in development, as well as codifying our trade secrets. We're pleased today to report progress on all of these work streams. First, our Bio-RFID prototype sensor has achieved its intended initial performance goals. While it will be continually improved, it has enabled us to collect data and conduct testing on a prototype sensor to accurately measure and monitor in humans glucose readings in real time. Our team has been working on the development of a functional KnowU prototype, which we expect to share with you when completed. Igor Institute, a product development firm specializing in mechanical, electrical, and firmware engineering, and Dr. Reza Ghassem-Kassary, and MD, is a Lead Designer and System Architect for numerous commercially successful large-scale projects. These are two critical partners for this endeavor.

Both assist our team with the miniaturization and refinement of Know Labs' Bio-RFID sensor. In parallel with KnowU hardware optimization, Bould Design, a respected industrial design firm behind successful products from large consumer goods brands, is providing Know Labs with design support for this updated prototype. Second, as a result of our internal testing, we've generated tens of millions of clinical observations to comprise our data set, from which to refine our algorithms and train our machine learning platform to accurately measure glucose levels in humans in real time. Edge Impulse, creator of the industry-leading development toolkit for machine learning, is collaborating with our team to accelerate Bio-RFID's algorithm refinement. This is an essential step before launching large-scale clinical trials. Third, our internal studies have yielded results with greater than 90% correlation to the gold standard Dexcom G6, with less than 10% mean absolute error.

While we believe these internal results speak strongly to the specificity and sensitivity necessary to achieve our goal of FDA clearance and our standing in the competitive landscape, we believe further testing is required. We've recently expanded our team in clinical development functions, which allows us to increase the amount of data utilized to train Bio-RFID's algorithm. We've also been working with Novus Management, a medical device consulting firm, on the implementation and execution of regulatory systems and strategy in anticipation of upcoming third-party validations of our clinical protocols and preparation for the FDA clearance process. Fourth, we continue to expand our robust patent portfolio. As previously disclosed, PatNav Research and ipCapital Group, two leading patent analytic firms, ranked Know Labs number one for patent leadership in non-invasive glucose monitoring.

On January fourth, the United States Patent and Trademark Office granted Know Labs a new foundational patent that equates the company's Bio-RFID diagnostic technology to a current reference standard for glucose monitoring, widely used by diabetes researchers, hospital labs, and glucose meter manufacturers, and establishes a specific superior benchmark range of clinical accuracy known as the MARD, or mean absolute relative difference. The patent issued was entitled, "High Performance Glucose Sensor," extending our IP portfolio to over 100 patents issued and pending, reinforcing our position as the top worldwide IP holder in non-invasive blood glucose monitoring. As we continue to accelerate our activities, we plan to bring on new technical and scientific board members with relevant sector expertise. We believe our advisory board members will be critical in guiding us as we get closer to our end goal.

Looking ahead in 2023, we're very focused on accelerating our progress on hardware product development. We plan to finalize our first generation or Gen 1 product, which will be a functioning freestanding prototype that we'll use to continue our data collection efforts. On software development, we plan to further our algorithm development accuracy across an increasing number of individuals to enable us to continue on our path to the FDA. In clinical studies, our goal is to collect large amounts of data to continue training the Bio-RFID algorithm and to secure third-party validation from leading research centers. Lastly, we'll continue our efforts to build a world-class patent portfolio that will serve as a foundation for our company to derive strategic value in the marketplace.

In summary, we believe we're executing on the path to delivering on our goal to be the first FDA-cleared, non-invasive glucose monitoring device in the market and our broader vision to transform medical diagnostics through non-invasive means. Now I'd like to turn the call over to Pete Conley to review our financials. Pete?

Pete Conley (CFO and SVP of Intellectual Property)

Thank you, Ron. We detailed the financial results in today's first quarter earnings release, which as noted by Jordyn, you can find on our website. I'll share a few key line items with you now. Know Labs reported a net loss of $3.82 million in the first quarter of 2023, compared to a net loss of $5.36 million in the year ago period, which translates to earnings per share of a loss of $0.08, an improvement over the year ago period of $0.15. I would note the net loss for the first quarter of $3.82 million included non-cash expense of $1.05 million, comprised primarily of stock-based compensation, warrant expense, and depreciation and amortization.

Research and development expense for the first quarter was $1.74 million as compared to $886,000 in 2022. The increase in R&D expense was related to staff increases in engineering, third-party technical services, and expenditures related to the development of our Bio-RFID technology as we continue to execute our path to FDA clinical trials and commercialization. Selling general and administrative expense for the quarter was $1.91 million versus $1.22 million in 2022, which increased versus the prior year, primarily due to key additions to the executive team and increases in third-party services. Turning now to the balance sheet. As of December 31, 2022, we had cash and cash equivalents of $9.68 million as compared to $12.5 million at the end of September 30, 2022.

Net cash used in operations for the quarter was $2.92 million compared to $1.91 million in the prior year. We believe our cash on hand will be sufficient to fund our operations through February 15, 2024. That concludes my review of our financial highlights. I'll return the call back to Ron.

Ron Erickson (Chairman and CEO)

Thanks. Thanks, Pete. We'd now like to dedicate the next few minutes to questions submitted through the webcast portal. I believe we have some. The first question: When will Know Labs apply for FDA approval? Our intent, and this, you know, there are several parts to this. I've talked to many of you independently regarding how this process works. When you go to the FDA, obviously you have to go with a product that's complete, that's ready to go in the marketplace. It has to have your final form factor, it has to have the final operating algorithms, it has to have all of those elements come together.

As we do this and as we work to get toward the FDA, please understand that there are a number of pieces to this that have to come together simultaneously in order for us to go to the FDA with credibility. It is our expectation that those pieces will come together and we'll be able, during the course of the year, to announce many of those elements, that we will be able to go to the FDA for submission during the course of 2023. That should be your expectation by the end of 2023, that all of those elements will coalesce to allow us to do that. One of the things as sort of an admonition, as we do this, a lot of what we do involves third parties.

As we found over the last couple of years, sometimes third parties are not as responsive as you'd like to have them be. I like to throw that out and indicate that we are dealing with third parties and, you know, we encourage them to work as rapidly and in such a focused manner that we can meet our milestones and our goals. It is part of our reality that we deal with third parties that sometimes are not as responsive as we'd like to have them be. Let's see. Another question coming in. Could you provide investors with an IRB status update? The IRB, which we announced last February, was for the purpose of having an approved co-protocol that allowed us to bring investors...

not investors, individuals off the street for what amounted to a five-minute test. We have brought a number of people in for that. What we determined in this process is that we're getting more robust data from our own internal three-hour tests, which are, you know, as you might imagine, significant in their duration and also something that has to be very well organized and managed for the purpose of data collection and the development of our algorithms. What we've discovered is that the scale of the data we were getting from the three-hour test was superior than the kind of data we were getting from the five-hour and the five-minute test from individuals who were coming in off the street who were volunteering for some of the IRB.

The real focus has been on data collection and on the three-hour test, as opposed to the five-minute test that was central to the IRB. The next question: What are the terms of Phil Bosua's separation agreement?

Pete Conley (CFO and SVP of Intellectual Property)

Ron, I can take that. In both the 10-Q on our website, I would direct investors to page 34 in the index of exhibits, and item 10.8 is the link to Phil's separation agreement. Invite all of you that wanna delve into that to read the agreement. I can just summarize at a high level some of the key points. Under the terms of the separation and release agreement, Phil was paid 1 year's severance. Then we hired Phil as a consultant for a period of one year at a rate of $10,000 a month. The company transferred to Phil certain assets related to AI Minds, which was a subsidiary we had established to pursue certain AI activities.

AI is really Phil's passion. We felt it was appropriate to let Phil continue to do his work in AI. Additionally, the company will have an exclusive, perpetual, and royalty-free right to any patents or other IP that Phil develops or anyone working with or under Phil relating to Bio-RFID for a period of five years following his separation on January 26th.

Ron Erickson (Chairman and CEO)

Lastly, Phil executed a lock up leak out agreement as pertains to his 3 million shares of common stock that he owns. Outside of that, Phil forfeited stock options totaling approximately 7.4 million shares. All of that, again, is reflected in the separation agreement, which you can find linked in the 10-Q. There's a follow-on question. With Phil in a different position with Know Labs, will your progress slow down? I would say the short answer is no. Phil will continue to be a consultant with the company. We've got a great team in place. Phil was the inventor of the foundational IP that underscores and supports Bio-RFID.

We've got very precise roadmap and path that we're following to accelerate the progress of the company based upon Phil's invention. No, I think progress will not slow down. We're also supported by Phil in his consulting capacity. I think it's full speed ahead. That's how the team feels, that's how I feel. We've got a big head of steam and excited to see the year unfold. Another question that just came in, I think this relates to as we get ready to go to the FDA, ultimately go to the market, one of the questioners wanted to know if we still have a relationship with Racer Technology, if they will still be our manufacturing partner. Yes, they will. We're still working with them.

In fact, we have a call with them later today. They've been to Seattle, we've been to Singapore. They are very renowned in their capacity to build world-class medical devices. We continue to work with them and expect we will do so for the long haul. Another question that just came in because we're a platform technology, people often ask us about, you know, other things we can do with this technology in addition to glucose. The question is whether or not we're going to seek some of those other opportunities as we go through the process to obtain FDA clearance for our technology for blood glucose monitoring. The short answer is the focus is on blood glucose.

We have in the past announced our capacity to identify blood alcohol levels, blood oxygen levels, and identify the presence of Tylenol and Aspirin after they've been ingested, which is really a proxy for the therapeutics. At this time, our focus is on glucose. We do believe over time, as we've indicated, that there will be a number of other analytes that we're going to be able to identify. Those all relate to human health, and we think there are really going to be significant opportunities to do things with our technology over the years to come. But for now, the focus is on glucose, as it must be. That concludes our Q&A. I wanna thank everyone for joining us this afternoon. There's a lot to look forward in 2023, and we're excited to report on our progress.

I know I speak with many of you, so does Pete Conley. We're happy to entertain those calls, so don't be a stranger. We appreciate your support, and we want to acknowledge the incredible effort of our team, of our wonderful, talented employees. With that, I wanna thank you. Have a great day. I have to end by saying, because it is the 14th of February, Happy Valentine's Day to everyone out there. Thank you for dialing in, for participating. We appreciate it very, very much.

Jordyn Hujar (Chief of Staff)

Thanks, Ron. The conference call replay will be available on our website in the coming days. Thank you everyone for your participation.

Operator (participant)

Thank you. That does conclude today's teleconference webcast. You may now disconnect.