Know Labs, Inc. (NYSE:KNW) Q4 2023 Earnings Call Transcript

Know Labs, Inc. (NYSE:KNW) Q4 2023 Earnings Call Transcript December 19, 2023

Know Labs, Inc. misses on earnings expectations. Reported EPS is $-0.04 EPS, expectations were $-0.01. KNW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Know Labs Fourth Quarter Fiscal Year 2023 Earnings Conference Call. Please note, this conference call is being recorded. I will now turn the conference over to Jordyn Hujar, Know Labs’ Chief of Staff. You may begin.

Jordyn Hujar: Thank you. Thank you, everyone, for joining us for today’s conference call to review Know Labs fourth quarter and year end 2023 financial results and operating highlights. If you have not seen today’s financial results, press release and 10-K filings, please visit the Investors page on the company’s website at www.knowlabs.co. 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.

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 supported by a slide presentation, which will be shared through the webcast portal and can be downloaded from the Investors page on the company’s website. A Q&A session will follow this call. 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: Thanks Jordyn. Welcome everyone to our conference call to review the financial results and operating highlights of our fourth quarter and year-end for 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 will walk you through our progress today against the work streams we’ve articulated in our previous earnings calls and preview our goals for fiscal year 2024. Being transparent is critical for us. We have established and worked to maintain communication channels with our investors and followers. You can follow our press releases, which are distributed every time a material event occurs. I ask that you click on any of the links in those releases.

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Q&A Session

I’ve spoken with any number of you with questions and asked, did you click on the link? And if you have questions, I encourage you to reach out to us via our email at ask@knowlabs.co and subscribe to our newsletter on our website. You should also visit our website, www.knowlabs. co as we continually update our research and validation webpage. This section of our website provides access to information on our progress and data from our clinical trials. I’d like to start today’s discussion by reviewing some of the major events and achievements in our fiscal year 2023. A lot has happened this year, starting with significant leadership changes and an acceleration of our development progress and operational execution. On January 26, I was named Chief Executive Officer by the company’s Board of Directors while continuing as Chairman of the Board.

We added new members to the executive team and redistributed core responsibilities. We disclosed new and existing strategic partners in data science, engineering, product design, and regulatory affairs to support the Know Labs team. We also announced the expansion of our Board of Directors and Medical Advisory Board. We appointed three new directors to the Board of Directors with deep sector and intellectual property expertise and added four new members to the Know Labs who bring medical, R&D, and marketplace expertise to our already stellar advisory board. We are fortunate to be able to attract these respected individuals whose areas of expertise are directly related to the work we have underway. Their insights will help us build upon the existing knowledge and skills of our team as we refine our technology, expand our IP asset base, work on strategic collaboration opportunities, and prepare for submission and hope for FDA clearance of our non-invasive blood glucose monitoring device.

So we welcome John Cronin, Larry Ellingson, and Tim Londergan to our Board of Directors. And we welcome Jeff Hitchcock, Kareem Kulkarni, Dr. Meng Tan, and Dr. Satish Garg to our Medical Advisory Board. Earlier in the year, we announced a separate Scientific Advisory Board. It has been fully engaged during this past year and continues to provide insightful counsel to the team on protocol designs, manuscript review, and hardware, to name a few. Throughout fiscal year 2023, we aligned our resources toward our core objective. Early in the year, we reduced our full-time headcount from 19 to 11. At the same time, we expanded our team with external partners into areas where we needed additional resources or where we perceived we had gaps, such as machine learning, software and data management, and clinical research operations.

We now have 12 full-time employees. These changes have proved to be very effective as we’ve achieved a long list of meaningful milestones throughout the balance of the fiscal year. In terms of product development, we revealed this past June our Generation 1 device. The Gen 1 device is an important stage in the development of our proprietary sensing technology. It is a portable research lab designed to be a powerful data collection device. This device has allowed our team to scale data collection to include testing outside of our laboratory and perform sensor characterization. We are often asked if this is the device we will take to the FDA when we submit our technology for approval. This is Generation 1 and was built for remote data collection and research purposes.

We are well underway with the development of our Generation 2 device prototype, which will be a wearable, continuous glucose monitoring device. This device will operate similar to current CGMs being sold in the market, but it will monitor blood glucose noninvasively. We expect our Generation 2 device to be the form factor we will present to the FDA for clinical trials and clearance. We will reveal the Generation 2 device in the next few months. In terms of clinical testing and data collection, our research and development team collected nearly 500 three-hour glucose data sets this fiscal year, resulting in almost 3 billion data points. We have also kicked off an internal trial with up to 100 participants focused on a population with diabetes and pre-diabetes.

This trial has allowed the R&D team to increase data collection in the hyper and hypoglycemic ranges, achieving a MARD under 10% as a goal we must achieve before undertaking FDA clinical trials of our device. Our current and future studies are working toward that goal. Scientific validation is critical for the development of our technology. In this past fiscal year, we published five manuscripts and presented two posters at Medical Conferences. Throughout these publications and presentations, we’ve been able to demonstrate improvement of our technologies, accuracy, stability, and repeatability, going from a MARD of 20.6% to a MARD of 11. 3%, which positions us in an accuracy range similar to other FDA-cleared devices and much closer to our goal.

I’m pleased to announce that we will be presenting the results of our current clinical study at the Advanced Technologies and Treatments for Diabetes or ATTD Conference in Florence, Italy in 2024. If you’re not familiar with ATTD, it is the premier global conference for companies building new technologies for diabetes management. It provides a world-class setting for clinicians and scientists to present, discuss and exchange insights on those rapidly evolving areas of diabetes technology management and treatments. In addition to the presentation of our new study, we will have a presence at the Technology Fair displaying our work and prototype devices. On the Intellectual Property front, we grew our portfolio by nearly 140% in the past 12 months.

As of today, we have more than 250 patents issued pending and in process, which is a significant increase over the last year. Our portfolio growth rate is at least four times higher than the average patent market growth rate for noninvasive blood glucose monitoring. We continue to expand our patent portfolio and focus on maintaining our number one global position for patent leadership in noninvasive glucose monitoring. Our top rank has been documented by PatSnap research and IP Capital Group, two leading patent analytic firms. We completed a new public offering in September of 28 million shares of Know Labs’s common stock that was priced at $0.25 a share, achieving gross proceeds of $7 million. These were not the terms we were expecting to achieve, but the capital markets have been challenging, and the additional funding was critical to continue our R&D work.

Our efforts to better align our resources to critical functions such as clinical and product development and to streamline the organization’s expenses have also paid off. In addition to accelerating progress, we’ve reduced our burn rate from $1.2 million per month to roughly $700,000 per month. Lastly, we have undertaken conversations with several global brand-name companies, which may lead to strategic collaborations. Joint development agreements or JDA discussions are underway with potential biopharma, medical device manufacturers, and consumer electronics partners. These could play an important role in the acceleration of product development, the provision of additional funding, and achieving commercialization. For obvious confidentiality reasons, we cannot disclose the names of these companies nor the scope of these discussions.

We revealed our Generation 1 device in June of 2023. The Gen 1 device is a portable research laboratory designed to be a powerful data collection device. As you can see on the slide, the Gen 1 is roughly the size of a computer mouse. Users rest their palm, wrist, or arm on the portable device to obtain blood glucose-level data. This device has allowed our team to scale data collection outside of our laboratory. This was the first true working prototype we could take with us outside our facilities. Generation 1 was built for remote data collection and research purposes. We do not plan on taking this device to the FDA for market clearance. It is robust in design and even includes a computer with the power of a laptop. Our priority is to build a wearable, continuous, non-invasive blood glucose monitoring device that is convenient for users to rely on anywhere they are.

That will be our Generation 2 device prototype, a wearable, continuous glucose monitoring device. We expect Generation 2 to be the form factor we’ll present to the FDA for clearance. This device will be wearable and more than 50% smaller than Generation 1, adding convenience to the user experience. We expect to reveal Generation 2 in the next few months, potentially at the ATTD conference in Florence, Italy in March of 2024. I get a lot of questions on how and why our technology is different. This slide is a simple representation of why we believe our sensor is different and has the potential to transform non-invasive medical diagnostics. Our technology is based on radio frequency spectroscopy. The RF dielectric spectroscopy sweeps the entire tissue stack, capillary and venous blood, interstitial fluid, and cellular material to collect high resolution voltage data at a high speed that fixed wavelength optical sensors are incapable of achieving.

In other words, our technology safely collects data from the body, enabling a comprehensive picture of glucose that optical sensors and others claiming to be noninvasive are unable to achieve. We believe our sensor is the only technology currently targeting both the microwave and radio wave bandwidths in the electromagnetic spectrum. This allows it to achieve a higher signal transmission depth than the other technologies being explored by other companies. US patent number 11-529-077, titled “high performance glucose sensor” sets forth evidence of our novel approach. As stated in the patent, Know Labs technology approaches blood glucose reading very differently than FDA-cleared devices currently available on the market. Radio frequency spectroscopy, enhanced by time frequency synchronization and decoupled antenna designs, allows our technology to collect a massive amount of data signals across real-time glucose concentrations in the interstitial fluid, capillary, venous blood and cellular tissue.

Know Labs’ energy field penetrates more than 1 inch into the body. In contrast, current microfilaments used by minimally invasive devices such as the Dexcom G6 and G7 and Abbott Lab’s FreeStyle Libre systems are limited to readings of only interstitial fluid, typically within 2/10 of an inch of the skin surface. Everything I’m describing is clearly demonstrated in this slide. It may look a little bit complex, but I will explain what this slide means. I also encourage you to download this presentation from our website and revisit this slide in detail. It explains the power of our technology and why it is different. There are two graphs on this slide. The graph on the left refers to in-vitro testing, meaning performed or taking place in a test tube or elsewhere outside of a living organism.

And the graph on the right refers to in-vivo or clinical testing, meaning testing performed or taking place in a living organism. So let’s start with the curve on the left. Plotted data are frequency sweeps using our sensing technology. As you can see on the graph, during this experiment, our sensor was set to emit and receive signals from 1,500 megahertz to 2,550 megahertz. Each line represents a different glucose concentration level in distilled water. And the values on the y-axis are the amount of energy captured by the receiving antennas. The curves for each concentration level are very different from each other. Many technologies can identify glucose, but they can’t distinguish the different concentration levels like our technology does.

This graph shows we can repeatedly distinguish different levels of concentration. The graph on the right is very similar to the graph on the left, but it’s based on clinical data. Many technologies work in an in-vitro environment, but lose their efficiency when moved into a clinical setting. However, for our technology, there’s still a very clear distinction between the different glucose concentrations in the body. This is the foundation of our technology. Our work now is focused on mapping all of these frequency signatures for different blood glucose levels. That is why scaling data collection is so important to complete R&D and algorithm development and ultimately achieve commercialization. We still have a lot of data collection and testing to be done, but we’ve achieved a lot in the last 12 months.

A timeline shows we have methodically approached the task and achieved significant improvement. As our data sets increase, we have experienced a clear improvement in the algorithm’s accuracy. This allowed us to go from an above 20% MARD to an MARD of 11. 27%. Documents covering each of these studies can be found on the research and validation page of our website. As we prepare to use Generation 2 with study participants in 2024, we estimate we will have tens of billions of observations to process. We are confident that our algorithm performance will improve as we get more raw data collected with our sensor. This is standard procedure in machine learning and will hopefully lead to a higher accuracy level or lower MARD figures. We will present the results of our current study at ATTD in Florence, Italy.

This study protocol allows us to test up to 100 participants with diabetes and pre-diabetes and uses venous blood as the reference point. This is the type of study we need to test real-world applications and to continue developing an algorithm for commercialization. This slide details the protocol for our current clinical study. For every participant, a test or what we call a data set takes at least three hours to complete. The data is subsequently processed and our glucose readings and accuracy compared to our reference device is determined. In general, the test starts with a participant resting his or her arm on our device for around 30 minutes, which allows the device to capture a baseline reading. After this baseline stage, the participant ingests 75 grams of glucose solution, which should spike his or her blood glucose levels.

As a reaction to the glucose increases, insulin should be released in the bloodstream, bringing blood glucose levels back to baseline values. Going through this glucose tolerance test allows our device to measure the participant’s changes in glucose values. Reference data through IV and a CGM is collected every five minutes. This step is critical to train our algorithms. But keep in mind that based on current setting parameters, our sensor completes a sweep every 22 seconds. This means the new glucose prediction is completed every 22 seconds. This also means while we get one reading from an IV sample or CGM, our technology delivers 13 different readings. This could be a very powerful help for diabetes management and in mitigating latency issues.

This is a very simple slide. I simply wanted to show you how we collect data outside the laboratory. This is a real life use case with that Gen 1 allowed us to implement. Users collect data either by resting their forearm or palm on the device. We have a committed and passionate team at Know Labs. We achieved a lot, and we learned a lot. Part of inventing is discovering new things. Our RF spectroscopy sensing technology was first disclosed in 2018. It sits atop sensor inventions that we first began working on in 2007. We’ve spent the last five years primarily focused on miniaturizing the technology and testing its capability, taking it from an exploratory concept to proof-of-concept, and lastly, to the feasibility stage. The miniaturization work has allowed us to reveal the Gen 1 prototype device and is the foundation for the Generation 2 prototype device.

The sensor being used in the Generation 2 device is the same one that was originally used in the exploratory studies and used in the Gen 1 device. So far, the validation has involved in-vitro testing and clinical testing with small cohorts, but it has allowed us to build the foundational knowledge to scale testing. We learned in more detail what needs to be accomplished before presenting our technology and devices to the FDA and before launching a medical device in the global marketplace. We learned there’s more work to do to conform with all the regulatory requirements, especially in topics like data accuracy across all glycemic ranges. More than 80% of our current data is still concentrated in the normal glucose range, which is 80 to 150 milligrams per deciliter.

We need to expand data collection to a wider range, including hypo and hyperglycemic scenarios to be successful in front of the FDA. These will also help us determine the intended use of our glucose monitoring devices in people with Type 1 and Type 2 diabetes or other subsegments. Patient physiological characteristics. We need to expand our data collection efforts to include a more diverse set of patients with different skin pigmentation, skin thickness, and the presence of other elements that could cause interference such as air, sweat, intense movement, and other substances, and environment and human factors. Our tests are currently conducted in a controlled laboratory environment. Ultimate regulatory approval requires us to have a deep understanding of real world environmental conditions, such as air pressure, temperature and humidity, other substances, noise, and human interaction with the technology, which may interfere with our signal and ultimately impact its accuracy.

We are currently undertaking a trial with up to 100 participants, and we plan to kick off trials with external research institutions soon. We will also scale testing for larger population sets, as we believe that trials with 500 to 1,000 participants will provide the amount of diverse data required to increase the generalizability of our technology platform and algorithm. We have an aggressive and results-oriented plan in place. We’ve made significant progress in the last fiscal year and we’ll continue to focus on our core work streams. We have set six primary goals for fiscal year 2024 that support that mission. First, we will soon reveal the Gen 2 prototype device, which will be a wearable CGM that is at least 50% smaller than the Gen 1 prototype device.

This is what we refer to as the earbud’s case size. And it has the potential to be the final format for FDA submission. Our R&D team remains focused on accelerating data collection and continuing algorithm refinement. This is the key message of today’s presentation. More data delivers better results, so we need more data. We will achieve that by continuing testing in-house and partnering with external research institutions. Our goal is to deliver a device with a MARD under 10% when compared to a blood reference device and I believe we’re on track to do that. We will continue the strategic development of our intellectual property portfolio, our patents issued pending and in development, as well as codifying our trade secrets. You should also see more activity from our team with more clinical results being published.

As a result to FDA clearance, shareholders often ask us when we’ll 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. As we expand data collection and testing conditions, we continue to learn more about what needs to be addressed. We must achieve a repeatable, accurate standard of excellence with 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’ll share them with you. Every new development helps us refine our regulatory strategy. We will continue conversations with potential partners to pursue strategic collaborations.

Lastly, all of the above can only be achieved if we prepare the organization for accelerated growth and a go-to-market plan. We’re executing the plan to develop the first FDA-cleared, truly noninvasive glucose monitoring device in the market, and our broader vision is to transform medical diagnostics through non-invasive means. Now, I’d like to turn the call to Pete Conley so he can review our financials. Pete?

Pete Conley: Thank you, Ron. We detail the financial results in today’s fourth quarter and fiscal year 2023 earnings release, which, as noted by Jordyn, you can find on our website. But I’ll share a few key line items. For FY 2023, Know Labs reported a net loss of $15.29 million compared to a net loss of $20.07 million in FY 2022, a reduction in net loss of 23.8%. This translates to earnings per share of a loss of $0.41, better than FY 2022 earnings per share loss of $0.50, an improvement of 18% before preferred stock dividends. In FY 2023, we also recorded a non-cash charge to earnings of $4.77 million, principally related to the fair market value of dividends on our Series C and D preferred stock in the amount of $2.96 million that were either paid or accrued in shares of common stock.

And the remaining $1.81 million non-cash charge comprised of $310,000 in depreciation and amortization, $550,000 loss on the sale of assets, $507,000 loss on debt extinguishment, $350,000 from the modification of notes and warrants and $142,000 from the amortization of operating lease right of use during FY 2023. Research and development expense for FY 2023 was $7.73 million as compared to $5.39 million in FY 2022, an increase of 43.5% year-over-year. The increase in R&D expense was related to increases in engineering third-party technical services and expenditures related to the development of our Generation 1 device, which we completed and announced on June 7th, as we continue to execute our path to FDA clinical trials and commercialization.

Selling, general, and administrative expenses for FY 2023 were $6.57 million, which was lower by $1.55 million than the $8.12 million in FY 2022, an improvement of 19.1% as we continue our initiatives to reduce our cash firm. Turning now to the balance sheet, as of September 30, 2023, we had cash and cash equivalents of $8.02 million, as opposed to $12.59 million at the end of September 30, 2022. Net cash used in operations for FY 2023 was $10.35 million compared with $6.92 million in the prior year. During the year and at September 30, 2023, the company made adjustments to its fixed expenses and the impact of those adjustments has significantly reduced our monthly burn rate. Given the significant reduction in fixed expenses, the company believes it has enough available cash and flexibility with its operating expenses to operate until at least June 30, 2024.

As we have stated in our FY 2023 10-K file today, we expect to raise additional funds through the issuance of equity, preferred stock, and convertible debentures. Finally, shareholder equity for fiscal year 2023 was $3.74 million versus $9.86 million in fiscal 2022. That concludes my review of our financial highlights, and I’ll return the call back to Ron for closing remarks.

Ron Erickson: Thanks, Pete. We will now dedicate the next 10 to 15 minutes to questions submitted through the webcast portal. So, I’ve got a question here inbound from one of our shareholders. What sort of joint development agreements can we see in the future, and how long will it take for something like this to happen or be announced? As we indicated in our remarks, we are in discussions with potential global strategic partners. We have NDAs in place, as you might imagine. As a consequence, we can’t really talk about any detail about what these opportunities look like. I think the other thing that’s important to keep in mind, and I think many of you have had these experiences, these are larger corporations. And while we’re small and nimble, often dealing with a large corporation, nimble qualities are in short supply.

So I would say that we try to manage expectations. We know that these can take some time, especially as you make through the various layers of a large global enterprise. So I don’t think I can really, I can’t speculate on how long these will take and I will not speculate or discuss what form they will take. There’s a question here from another shareholder about what progress has been made with the Gen 1 prototype device announced in June. As I indicated in my earlier remarks, we are using that device both internally and externally. It’s allowed us to move testing outside of the lab. It’s allowed us to increase our data collection. And so it has done just exactly what we wanted it to do. Some of you have seen in that video, the launch video last June, that in the lab we’d been using the sensor.

But the sensor was connected to a large apparatus and was fitting on something that was about the size of a large breadboard. To get it into something the size of a computer mouse, in essence, allowed us a lot of flexibility. It’s the kind of product you can take with you in your briefcase to the other side of the world and test it. And so it’s allowed us to dramatically expand testing. And it’s really not exactly what we hoped for. Okay, I’ve got one more here and what is the path to FDA clinical trials look like, the key milestones and anticipated timing. There again, we spoke to this. We think Gen 2, as I indicated, could be the form factor that goes to the FDA. And when I say Gen 2, you know, it could be refined, but essentially that is our ambition, to have the Gen 2 be the device that we take to the FDA.

And I also indicated that another component of that, the Gen 2 is the hardware component, The software algorithm component is relying upon further data collection and refinement of our algorithms. So as those come together, then we’re going to be headed to the FDA. And as I indicated, We have a great sense of urgency around this, and we’re working as fast and hard as we can to achieve that goal for ourselves, for all of you, for all of our stakeholders. With that, I’ll conclude our Q&A. Thanks for those questions. I want to thank everyone for joining us today. There’s a lot to look forward to in 2024, and we’re really excited to report on our progress. The team is, as I say, committed, passionate, and everyone loves what they’re doing. We appreciate your support, our shareholders.

We really appreciate everything you’ve done, so that we can continue to do our work here on your behalf. I really want to acknowledge here at year-end the incredible effort of our employees, our board members, our advisors, our strategic partners. All of them are important parts of the team. All the very best to all of you for the Holiday Season and a bountiful and peaceful New Year. I want to thank you all very much, and have a great day.

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

End of Q&A: