USBC - Q2 2023

Transcript

Operator (participant)

Greetings. Welcome to the Know Labs Fiscal Year 2023 second quarter earnings conference call. Please note this conference call is being recorded. I would now like to turn the conference 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 second 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 investor's 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 future events. Any statements that are not historical facts or 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 the commercialized 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. We will not be taking questions over the phone during today's call. With that, I'll turn the call over to Ron Erickson, Know Labs CEO. Ron?

Ron Erickson (Chairman and CEO)

Thanks, Jordyn. Welcome everyone to our conference call to discuss the financial results and operating highlights of our second quarter of fiscal year 2023. Joining me today is Pete Conley, our Chief Financial Officer and Senior Vice President of Intellectual Property, who will discuss our financial results. I'm gonna walk through our progress against our strategic milestones today, provide an overview of our achievements for the fiscal quarter ending on March 31, 2023, and preview our goals for the balance of the fiscal year 2023.

We are committed to making a difference in the lives of millions of people worldwide by developing convenient, affordable, and non-invasive medical diagnostic solutions. We envision a world in which people can continuously and accurately measure different aspects of their health on a molecular level using a small, non-invasive sensor instead of the current invasive options available in the market.

Blood glucose is our top priority, and our team continues to work to bring the first FDA-cleared, truly non-invasive glucose monitoring device to market. As communicated during our last earnings call, we have welcomed new members to the executive team and redistributed core responsibilities, which, as hoped for, accelerated product development and clinical testing. Our strategic partners in data science, sensor technology, product design, and regulatory affairs have been integrated with our operations over the last few months. This integration and frequent collaboration and update sessions have allowed our team to accelerate our progress. Look forward to announcements that are evidence of that progress throughout this coming year. We have an aggressive and results-oriented plan in place, and I'm happy to report meaningful progress across all four work streams we enumerated in our earnings call last quarter.

Our most important goal for 2023 is the external validation of our Bio-RFID technology platform. We will achieve this by continuing focus on clinical development and trials, feature engineering through data science and algorithm refinement. Through partnerships with leading research institutions, we will obtain additional data collection and accuracy validation. As I said, our 2023 operating plan has been structured around four coordinated work streams. They are, 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 internally 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.

As a result of the work done across these work streams, we've published a technical report of our proof of concept study and presented the results of two studies at two different conferences. The first study, a proof of concept titled, quote, "Non-Invasive Blood Glucose Monitoring: A Validation of a Novel Sensor Compared to Dexcom G6", close quote, presented proof of concept for a new method to quantify blood glucose levels in vivo non-invasively using radio frequency. This report outlined data science techniques used to train our neural network model to make glucose level predictions and included metrics of model success. It served as a foundation for our other studies, assisting our product team in defining the future direction of our clinical work. This study was peer-reviewed by members of Know Labs' Scientific Advisory Board.

The second study, a proof of principle study titled "Detecting Unique Analyte-Specific Radiofrequency Spectral Responses in Liquid Solutions: Implications for Non-Invasive Physiologic Monitoring," was conducted in collaboration with Mayo Clinic in 2021. Its results were presented in the 2023 American Physiology Summit, held from April 20 to April 23 in Long Beach, California. The study demonstrated the accuracy of Know Labs' proprietary Bio-RFID technology platform in quantifying different analytes in vitro, proving a 100% accuracy rate in these tests. These results prove that Bio-RFID accurately detects, measures, and quantifies specific molecules in liquid. While these findings have in vitro commercial applications, these proof of principle studies provide strong support for the application of Bio-RFID for non-invasive biomonitoring of physiologically and medically relevant analytes, such as glucose in the human body.

The complete study is currently undergoing peer review publishing process, and we will provide an update as soon as we receive additional feedback. The third study, which focused on proving the technical feasibility of Bio-RFID, was presented at the American Association of Clinical Endocrinology annual meeting, held in here in Seattle from May fourth to May sixth, just a week ago.

This study, titled, quote, "Technical Feasibility of a Novel Sensor for Non-Invasive Blood Glucose Monitoring Compared to Dexcom G6," close quote, trained a neural network model to predict blood glucose concentrations in humans using only radio frequency readings and the Dexcom G6 as a reference device. Its results validated Bio-RFID as stable to deliver repeatable results and provided infrastructure for future data collection efforts. We have several protocols being followed by our team, both for in vitro and in vivo testing.

Additional research is underway to continue refining and developing our technology and respective algorithms. We expect to publish additional studies in the remainder of fiscal year 2023. I encourage you to visit a new page on our website called Research and Validation. You will find documentation related to these studies and updates on our development progress. Pictures of KnowU Generation 1 prototype have been disclosed in these studies. If you haven't seen these, I encourage you to review the posters presented at these last two conferences, which can be viewed on our website and provide detailed and exploded views of the prototype.

Assuming the clinical testing with these devices continues to deliver successful results, we plan on building a significant number of these devices to accelerate data collection and expand its testing into real-world scenarios. All current testing is being performed with our proprietary Bio-RFID sensor.

The sensor, which is complete and has been used in our tests for many months, is the key component of the Generation 1 prototype. Keep in mind that I'm talking about the Generation 1 prototype. Lessons learned from this prototype will inform modifications for future generations. As we have discussed, when we undertake FDA clinical trials to achieve clearance for our non-invasive glucose monitor, those trials will utilize the final market-ready product. That may be a generation or two from now. I want to emphasize that point as we have completed the foundational hardware development phase of our work, and while there is more work to be done, we are now heavily focused on broad clinical data collection to inform algorithm development. To date, our current clinical testing has generated billions of observations, and that continues daily in our laboratory.

That massive amount of data is critical to refine our algorithms and to train our machine learning platform to accurately measure glucose levels in humans in real time. The Bio-RFID sensor has the potential to capture 1.5 million observations per hour per test. Based on the current operating parameters, this means the sensor makes a prediction every 22-23 seconds during each test. As we prepare to undertake clinical testing with the new generation one devices, we estimate we will have tens of billions of observations to process. We are confident that as we get more reference labels combined with more raw data collected with our sensor, our algorithm performance will improve. This is the standard procedure in machine learning and will hopefully lead to a higher accuracy level and lower M-A-R-D or MARD triggers.

As we increase sample size, it's expected there are changes in accuracy resulting from variability in testing conditions, biological diversity, and other factors. This is the core goal of expanded data collection. This massive amount of data requires a robust approach to data engineering, artificial intelligence, and machine learning. Edge Impulse, the creator of the industry-leading development toolkit for machine learning, has been collaborating with our team to accelerate Bio-RFID's algorithm refinement. We've also started to build our own internal team focused on supporting this effort.

Moving on, we announced last month the establishment of a scientific and technical advisory board comprised of distinguished researchers, innovators, and experts in medical technology and human health. These individuals will advise the company and its strategic partners on advancing the company's progress against all work streams, including algorithm refinement, device development, clinical trial design, and research publication strategy.

They are working alongside our current medical and regulatory advisory board, which was established in 2020. Bringing industry experts on board will help us to validate and accelerate our work. No one has achieved true non-invasive monitoring of blood glucose. We're focused on changing that, and we cannot do it alone. We rely on our team, partners, and advisors to work with us to achieve our goals, and we rely upon support from you, our shareholders and others who provide encouragement that makes a real difference. To touch on IP, we continue to expand our patent portfolio. As previously disclosed, Patsnap Research and ipCapital Group, two leading patent analytic firms, ranked Know Labs number one for patent leadership in non-invasive glucose monitoring.

I'm happy to share we currently have more than 159 patents issued and pending, which is a remarkable 62% single quarter increase over the last quarter's total of 98 patents issued and pending. Further evidence of the pace of our product development and our accelerating IP leadership. Our goal is to reinforce our position as the top worldwide IP holder in non-invasive blood glucose monitoring. We are a platform technology with other aspects of our patent portfolio reaching beyond blood glucose into other realms of medical diagnostics. As it relates to FDA clearance, shareholders often ask us, when will we go to the FDA to commence clinical trials and ultimately obtain FDA clearance for our non-invasive glucose monitoring device? It is difficult to set forth exact dates. We are inventing and developing new technology that has never been done before.

As we expand data collection and testing conditions, we learn more about what needs to be addressed. We must achieve a repeatable, accurate standard of excellence with the market-ready product before undertaking clinical trials for the FDA clearance application. This takes time, rest assured that as soon as we have high confidence in FDA clearance-related timelines, we will share them with you. 2023 has been a year of change for Know Labs. Pete will cover our financials, rigid budget planning and control has also been a priority. We rebuilt our budget from the ground up to ensure every resource was contributing to our strategic and operating goals, the four work streams I've mentioned, and to ensure capital was being used effectively. This included the elimination of certain positions and the creation of new ones.

Our full-time employee count was reduced from 19 to 10, but we also increased the number of contractors, advisors, and vendors supporting our co-core team. Most important, as Pete will soon share with you, these actions will reduce our monthly burn. In summary, we are executing on the plan to deliver the first FDA-cleared, truly non-invasive blood 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 to Pete Conley, our Chief Financial Officer, to review our financials. Pete?

Pete Conley (CFO)

Thank you, Ron. We detailed the financial results in today's second quarter earnings release, which as noted by Jordyn, you can find on our website. I'll share a few key line items. Know Labs reported a net loss of $4.93 million in the second quarter of 2023, compared to a net loss of $6.14 million in the year-ago period, which translates to earnings per share of a loss of $0.10, an improvement over the year-ago period of a loss of $0.16. Research and Development expense for the second quarter was $2.56 million as compared to $1.25 million 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 and Generation one device as we continue to execute our path to FDA clinical trials and commercialization. Selling, general, and administrative expense for the quarter was $2.24 million versus $1.49 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 March 31, 2023, we had cash and cash equivalents of $6.27 million as compared to $12.59 million at the end of September 30, 2022.

Net cash used in operations for the months ended March 31, 2023, was $6.34 million compared with $1.02 million in the prior year. During the end of the quarter ended March 31, 2023, the company made six adjustments to its staffing level, as noted by Ron, and the impact of these adjustments will significantly reduce our monthly burn rate. Given the significant reduction in fixed expenses, the company believes that it has enough cash and flexibility with its operating expenses to operate until at least February 2024. That concludes my review of our financial highlights, and I'll return the call to Ron for closing remarks.

Ron Erickson (Chairman and CEO)

Thanks, Pete. We'll now dedicate the next 10-15 minutes to questions submitted through the webcast portal. I should note that some of those started to come in here just as we're actually moving through our presentation. The first question, and this is a question actually that it was asked in various ways by 5 or 6 different individuals. I touched upon this in our, in our formal remarks. Let me just reiterate what I've said. The question really has to do, what are both optimistic and conservative timelines the company has established for FDA approval? Or put another way, when are you gonna get to FDA? When are you gonna submit to FDA? What's your timeline? As I indicated in the, in our formal remarks, it's very difficult to set forth exact dates.

We're inventing and developing new technology that's never been done before. As I indicated, as we expand our data collection and testing conditions, we learn more about what needs to be addressed. We have to achieve a repeatable, accurate standard of excellence with a market-ready product. That is a product that we can ship in the market. It's not Gen One, it's a market-ready product before undertaking clinical trials for FDA clearance.

This takes time, but I want you to know that as soon as we have a sense of what that timing is, and we have a high confidence regarding our ability to go before the FDA and obtain approval, we're gonna share that with you and let you know. At this time, I'll just reiterate, it's very difficult to set forth exact dates. I appreciate the question. It's a common one.

We get it every day, and we will be forthright and forthcoming as soon as we can be more explicit. Next question, does Know Labs have any institutional shareholders interested in the stock? Pete, why don't you take that?

Pete Conley (CFO)

The institutions with more than $100 million of assets under management are required by the SEC at the end of each quarter to file a 13F. As of the last quarterly reporting period, we have 23 institutions that have positions in Know Labs.

Ron Erickson (Chairman and CEO)

I would say that prior to the listing on the New York Stock Exchange, we had zero. I think that as we've gone to a national market, a major exchange, it's certainly provided an opportunity for institutional holders to begin to acquire our stock. Once again, we've got four individuals that asked the question that's a variation on the theme of how much cash we have on hand and what's the runway. As of March 31, the company had $6.2 million cash on hand. The question is, are you anticipating other capital raise by the end of the year, or are you exploring other alternatives to raise cash for operations? Somebody asked, will you license to third parties or engage in other perhaps strategic partnerships? Pete, do you wanna handle that one?

Pete Conley (CFO)

Sure. As we've noted, both in our prepared comments and in the Form 10-Q, we have enough cash to comfortably last us through February of 2024. That said, as we've disclosed in the Form 10-Q, we do anticipate seeking additional financing between here and there. The benefit to having reduced our monthly burn rate so significantly and shifting from fixed to variable expense gives us a lot more flexibility in terms of when we choose to take additional financing and on what terms.

Ron Erickson (Chairman and CEO)

Here's a question, there are actually a couple of individuals that have asked questions about our recent reporting of results as it relates to MARD levels. One wants to know what's our target MARD. The recent technical feasibility study showed a MARD of 20.6. Another question said, "I was confused by the recent validation. Are we disappointed by the MARD of 20.6? How does this compare to MARDs announced by various competitors?" Pete, if you'd speak to that, please.

Pete Conley (CFO)

Sure. In October of 2021, we disclosed a MARD average across 3 different benchmarks, the Dexcom G6, the Abbott FreeStyle Libre, and the Accu-Chek by Roche. In that study, we achieved an average of 5.8%. In the ACE results, on the poster, which can be downloaded on our website, we announced an average MARD of 20.6%. The important thing to understand about MARD is the accuracy as measured by the confidence interval in the metric is a direct result proportional to the size of the data set. If you look at the results that were announced in October of 2021, we had a sample size of 3.

Roughly 1.5 million data points. In the ACE poster, we had a sample size of 92, in other words, 30x greater, with over 400 million data points. You had a 30x increase in sample size and a 300x increase in data. Therefore, we had a higher MARD, but it's important to keep in mind that that was across a very large sample size. I would point you to the actual poster, and if you look at, for instance, we list a number of single tests that in test seven, for instance, we achieved a MARD of 9.7. In a couple of the other tests on the poster, we achieved MARD in the tens. Across the entire totality of the 92 samples, we're at 20.6.

As we continue to work on our algorithms and expand the cohort of our tests, we believe that we're gonna see MARD trend lower. There's a follow-on question here related to MARD targets. We've talked about our intent and our belief that to have a medical grade device cleared by the FDA, we wanna achieve a MARD under 10. That's where the current CGMs that are cleared by the FDA are from Dexcom, Abbott, and so forth. The thing to keep in mind is the 10% target is not carved in stone, so to speak. If you go back to the original Medtronic MiniMed CGM, when that was approved, the FDA approved it with a MARD of 20. When Dexcom had its first generation products approved, its MARD were in the 16%-17% range.

It's a variable target. We won't know until we get into the FDA and talk to them that, you know, what the benchmark's gonna be. Right now, our internal target is to get below 10.

Ron Erickson (Chairman and CEO)

There's a question here, we referenced the Gen 1 in these two posters, and as Pete's indicated, you can go to our website and there are visuals. The question is, do we plan to send a press release on the Gen 1 scanner? And I would say, you know, of course. What's been represented on those posters is an early, not final design, as I think you'll find that on our website.

We would intend to as that gets refined and completed, you can absolutely expect that we'll share all the details we can, comprehensive details on that Gen one device. Look forward to that. Somebody wanted to know if it's possible to have a current lab tour on our YouTube channel. You know, that's a good idea. I think it, you know, 'cause a picture shows, you know, tells a thousand words, and you tell a big story. I think it's a great idea. We'll, I would say over time, look forward to that. We'll walk you through and show you what goes on there. There's a question here.

An individual asked about a potential competitive product and wants to know if we could comment on a holographic camera from Smart that might be used for spectroscopy. First of all, I wanna thank everybody. You can, you know, you can send emails to us. You can get in touch with us. If you run across something that you think is competitive, we wanna know about it. I mean, we have our tentacles out there. We try to pay attention with the various data feeds, but, you know, we're not gonna see everything. Please bring things up to our attention. This question has to do with a holographic camera that could be used for spectroscopy. It's apparently the world's smallest LED phone camera microscope. The question is whether or not this is competition or would need to use your patents.

We believe that this is technology that is photonic based, LED photonic based. We are using radio frequency spectroscopy with our Bio-RFID technology, we wouldn't see this as directly competitive. I think we also have a sense that photonics doesn't work especially well. Photonics can be inhibited by such things as the amount of melanin in the skin tone, skin thickness, and other things that are not inhibitors for radio frequency spectroscopy. Once again, please, you can send emails to [email protected] if you run across something that you think is a competitor. Let us know. Here's another question here. Somebody wanted to know about the possibility of adding a smartwatch face to the UBand. As you know, we've talked about two products.

This product called the KnowU that would take the place of periodic finger sticks. You carry it with you could sit on the table. Then there's the U-band, which is the wearable device that is more for continuous glucose monitoring. The question is, have we looked at the possibility of adding a smartwatch face to the U-band? Has this idea been considered? I would say right now, today, we're focused on Gen 1, the first product, moving that to the FDA, getting FDA clearance there. We do, you know, have internal plans about follow-on products. One of the things we say about our technology is, and this is a term that gets oft used, it's form factor agnostic. In other words, if you have a sensor, that sensor could be in all kinds of things.

In fact, at one point I said in a jocular fashion, "You could have, you could have our sensor in your tennis shoe." In other words, it could be in a wearable. There are a lot of possibilities. Having a smartwatch face is certainly one of them. Right now, clear focus on this gen 1 prototype going to the FDA with a working, market-ready device. That's our focus. There's another question that's about something that is in our Form 10-Q, and you can read about it there. We make reference to it. The question is: Has the particle vault found a partner to take the product to market and plan? Pete, do you wanna respond to that?

Pete Conley (CFO)

Sure. As Ron indicated, we have disclosed in the Form 10-Q that we are actively seeking a partnership. In terms of update, you know, what we can say is recently we have begun discussions with third parties. We'll keep everybody apprised as things materialize.

Ron Erickson (Chairman and CEO)

Here's another question, and this really kind of in the, you know... We had the question about could we do a tour of the lab, and see what we're doing there. I think the same time, this question is, could you interview Steve Kent and others on this YouTube on our YouTube channel? We don't know these people. It'd be helpful. Yeah, no, I think that'd be, that's another great idea. You know, the... I think in the most recent press release, Steve Kent was quoted, but it's one thing to be quoted and another thing to see his picture on our website. I think it's always good to have more engagement with people to learn more about them. It's a great idea. Appreciate that. Perfect. Scroll down.

There's a question: What happened to Phil's relinquishment of 3 million shares? Phil did not relinquish 3 million shares. Phil holds 3 million shares. They are subject to a, as part of his separation from the company, part of that separation, they're subject to what we call a lockup leak out agreement so that they, in other words, they can't be dumped on the market. He wouldn't want to dump them on the market. But they are subject to a lockup leak out agreement. He continues to hold those. Those are shares in his name. As a part of his separation from the company, he did return and company returned to the option pool, his unvested options.

I believe that's indicated in our Form 10-Q filing. In the aggregate, we've had over this past year with a reduction in headcount, and the options that came back with that, we've had in the aggregate between $8 million and $9 million option shares go back into the pool, which of course obviously has an impact in terms of, I think, non-dilutive. There's I think we've pretty much gone through everything. There's one final question. The question is: Is it fair to say prototype is currently being made hardware-wise and just requires final algorithms to get to a lower MARD? As we indicated in our prepared remarks, this is Gen 1. This is Gen 1. Ultimately, you go to the FDA with final market-ready product.

When we sit here today, we don't know if that's going to be gen 2, gen 3, gen 4, because you go through a process of refinement, you go through iterations, you know, it's hard to say. What we have said and continue to say is the sensor, the sensor itself, that's part of the radio frequency spectroscopy, sort of the guts of Bio-RFID, the sensor is complete. The sensor will be embedded and embodied in that prototype. The prototype itself has a number of other components, that will no doubt go through refinement. I think the other thing that we're all alert to and we have been over the, you know, certainly the last year or so, are supply chain issues.

You know, you can build a device and have your build materials and everything you're gonna put in that, then suddenly be surprised by a serious issue with a supply chain, and you might not have the component. You might not have availability for the component you want. We have heard from our manufacturing partner in Singapore, Racer Technology, that there are some chips that are backordered 12 months. You know, you just have to be alert to those kinds of things. Gen 1 is Gen 1. We believe that there will be refinements in that over time before we end up having a market-ready product.

Pete Conley (CFO)

You know, Ron, if I could expand on your comment about supply chain, I would note for shareholders that we have in-house all of the componentry necessary to build 100 of the gen 1 prototype.

Ron Erickson (Chairman and CEO)

Right. Thanks, Pete. Yeah. We've got enough to build 100. We don't have enough to build 200. Thanks a lot, Pete, and thank you all so much for your support, for your encouragement. We're here on your behalf working every day. We appreciate everything you've done to get us this far, and you can count on us continuing to work hard to achieve our goals for you.

Pete Conley (CFO)

Thanks so much.

Ron Erickson (Chairman and CEO)

This now concludes our Q&A. I wanna thank everybody for joining us today. There's a lot to look forward to in 2023, and we're excited to report on our progress. Obviously, as I said earlier, we appreciate your support, and I also wanna acknowledge the efforts of our team. We've got a really first-class group of individuals who are doing great work.

Wanna thank them, I wanna thank you, and to all of you, have a great day.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.