USBC Inc (USBC) 2023 Q2 法說會逐字稿

Greetings, and 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.

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 filings, 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-Q, which identifies 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 and 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. 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?

Thanks, Jordyn. Welcome, everyone, to our conference call to discuss the financial results and operating highlights of our second quarter 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 going to 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 major 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 workstreams. 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 the future IRB-approved protocols to increase our clinical data collection and analysis; and four, the 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 workstreams, 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, quote, Detecting Unique Analyte-Specific Radio Frequency Spectral Responses in Liquid Solutions - Implications for Non-Invasive Physiologic Monitoring, close quote, was conducted in collaboration with Mayo Clinic in 2021. Its results were presented in the 2023 American Physiological Society 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 here in Seattle from May 4 to May 6, just a week ago. This study, titled, quote, Technical Feasibility of a Novel Sensor for Non-Invasive Blood Glucose Monitoring Compared to the Dexcom G6, close quote, trained a neural network model to predict blood glucose concentrations in humans using only radiofrequency 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 no-use Generation 1 prototype has 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 view 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 test 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. We have completed the foundational hardware development phase of our work. And while there's 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 to 23 seconds during each test.

As we prepare to undertake clinical testing with the new Generation 1 devices, we estimate we will have tens of billions of observations to process. We are confident that as we get more reference label, 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 figures.

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 tool kit for machine learning, has been collaborating with our team to accelerate Bio-RFIDs to 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're working alongside our current medical and regulatory advisory board, which was established in 2020.

Bringing industry experts onboard will help us to validate and accelerate our work. No one has a cheap 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 advisers 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 IP Capital Group, two leading patent analytic firms, ranked Know Labs number one for patent leadership and 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 was to reinforce our position as the top worldwide IP holder in non-invasive blood glucose monitoring. That said, we are a platform technology, with other aspects of our patent portfolio reaching beyond blood glucose into other rounds of medical diagnostics.

As it relates to FDA clearance, and 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, but 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, but 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 workstreams I've mentioned, and to ensure capital is 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 full 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?

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, but 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 1 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 prior 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 six 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 adjustments to its staffing levels, 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.

Thanks, Pete. We'll now dedicate the next 10 to 15 minutes for questions submitted through the webcast portal. And I should note that some of those started to come in here as we're actually moving through our presentation.

So the first question, and this is a question actually that was asked in various ways by five or six different individuals. I touched upon this in our formal remarks. And so, 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 going to get the FDA? When are you going to submit to FDA? What's your timeline?

So as I indicated 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. And 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, not Gen 1 as 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 going to share that with you and let you know. So 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?

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.

And I would say that prior to the listing on the New York Stock Exchange, we had zero. So I think that as we've gone to a national market, major exchange, it 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 another capital raise by the end of the year, or are you exploring other alternatives to raise cash for operations?

And somebody asked, will you license to third parties or engage in other, perhaps, strategic partnerships? Pete, do you want to handle that one?

Sure. As we've noted both in our prepared comments and in the 10-Q, we have enough cash to comfortably last us through February of 2024. That said, as we've disclosed in the 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.

There's a question, and there are actually a couple of individuals that have asked questions about our recent reporting of results as it relates to MARD levels. And so, 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? So Pete, if you could speak to that, please.

Sure. So in October 2021, we disclose the MARD average across three different benchmarks. The Dexcom G6, the Abbott FreeStyle Libre, and the Accu-Chek by Roche. And in that study, we achieved an average of 5.8%. In the AACE 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, there's a direct result proportional to the size of the dataset. So if you look at the results that were announced in October 2021, we had a sample size of three and roughly 1.5 million data points.

In the AACE poster, we had a sample size of 92, in other words, 30x greater, with over 400 million data points. So 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.

And I would point you to the actual poster. And if you look at, for instance, we list a number of simple 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. But 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 going to see MARD trim 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 want to 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 improved, its MARD were in the 16%, 17% range. So it's a variable target. We won't know until we get into the FDA and talk to them that what the benchmark's going to be. But right now, our internal target is to get below 10.

There's a question here. We referenced the Gen 1 in these two posters. And as Peter has indicated, you can go to our website, there are visuals. The question is do we plan to send a press release on the Gen 1 scanner.

I would say, of course, what's been represented on those posters is an early not final design. As I said, you can find it on our website. So 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 1 device. So look forward to that.

Somebody want to know if it's possible to have a current lab tour on our YouTube channel.

That's a good idea. I think a picture tells a thousand words. You tell a big story. And so, I think it's a great idea. I would say, over time, look forward to that. We'll walk you through and tell you what goes on there.

There's a question here, an individual that asked about potential competitive product, that wants to know if we could comment on a holographic camera from smart that might be used for spectroscopy.

First of all, thank you, everybody. You can send e-mails to us. You can get in touch with us. If you run across something, you think it is competitive, we want to know about it. We have our tentacles out there. We're trying to pay attention with these various datasets, but we're not going to see everything. So please bring things to our attention.

So 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 radiofrequency spectroscopy with our Bio-RFID technology. So 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, skin tone, skin thickness, and other things that are not inhibitors for radiofrequency spectroscopy. But once again, please, you can send e-mails to ask at knowlabs.co if you run across something, or you think is a competitor, let us know.

So here's another question here. Somebody wanted to know about the possibility of adding a smart watch face to the UBand. As you know, we've talked about two product, this product called the KnowU, that would take the place of periodic finger sticks. You could carry with, you could put on the table. And then there's the UBand, which is the wearable device, that is more for continuous glucose monitoring. And the question is have we looked at the possibility of adding a smart watch face to the UBand. Has this idea's been considered?

I would say right now to date, we're focused on Gen 1, the first product, moving that to the FDA, getting FDA clearance there. We do have internal plans about follow-on products. One of the things we say about our technology is -- and this is a term that gets often used, its form factor agnostic. In other words, if you have a sensor, that sensor could be in all kinds of things.

And in fact, at one point, I said in a jocular fashion, you could have our sensor in your tennis shoe. In other words, it could be in a wearable. So there are a lot of possibilities, having a smart watch face is certainly one of them. But 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 about something that is in our 10-Q and you can read about it there. We make reference to it. The question is has the Particle Bulb found a partner to take the products to market and [PNAV]? Pete, do you want to respond to that?

Sure. As Ron indicated, we'd have disclosed in the 10-Q that we are actively seeking a partnership. And in terms of update, what we can say is recently, we have begun discussions with third parties. We'll keep everybody apprised materialized.

Here's another question, and this really kind of in a -- there's a question about could we do a tour of the lab and tour what we're doing there.

I think the same time this question is could you reduce the -- [count and other funded] YouTube -- on a YouTube channel. We don't know these people would be helpful. So yeah, no, I think that would be great. That's another great idea.

I think in the most recent press release, [can't be quoted], but one thing that they've quoted and also you see a picture of our website. I think it's always good to have more engagement with people to learn more about them. So great idea. Appreciate that.

There's a question what happened to Phil relinquishment of 3 million shares.

Phil did not relinquish 3 million shares; Phil holds 3 million shares. They are subject to -- as part of the separation from the company, part of that separation, they're subject to what we call a lock-up leak-out agreement, so that they -- in other words, they can't be dumped on the market, and he wouldn't want to bet on the market. So -- but they are subject to a lock-up leak-out agreement. So he continues to hold those shares in his name.

As a part of it is a separation from the company, he did return -- the company returned to the option pool, his unvested options. And I believe that's indicated in our 10-Q filing. But in the aggregate, we've had over this past year with a reduction in headcount and the option 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.

I'm going to -- I think we're pretty much gone through everything. As one final question, and the question is, is it fair to say prototype is currently being made hardware wise and just require the final algorithms to get to a lower MARD?

As we indicated in our prepared remarks, this is Gen 1, this is Gen 1. And ultimately, you go to the FDA with final market-ready product. Where 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. And so, it's hard to say.

What we have said and continue to say is the sensor, the sensor itself, that's part of the radiofrequency spectroscopy, sort of the guts of Bio-RFID, the sensor is complete. The sensor will be embedded and embodied in the prototype. But the prototype itself has a number of other components. So that will no doubt go through refinement.

I think the other thing that we're all aware to and we have been over certainly the last year or so, our supply chain issues. You can build a device and have your building materials, [monitoring and put in that], and then suddenly be surprised by a serious issue with the supply chain and you might have the component, you might have -- 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 back ordered 12 months. So you just have to be alert to those kinds of things. Gen 1 is Gen 1, and we believe that there will be refinements in that our overtime before we end up having a market-ready product.

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

Right. So we -- thanks, Pete. Yeah. We've got enough to build 100. We don't have enough to build 200. But -- so 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 it this far. And you can count on us continuing to work hard to achieve our goals for you.

Thanks so much.

This now concludes the Q&A. I want to 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 want to acknowledge the efforts of our team. We've got a really first-class group of individuals that are doing great work. I want to thank them; I want to thank you. And to all of you, have a great day.

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