KULR Technology Group, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2018

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number:

000-55564

KT HIGH-TECH MARKETING, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 408-663-5247

(Former name, former address and former fiscal year, if changed since last report) N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 10, 2018, there were 77,718,788 shares of common stock, $0.0001 par value, issued and outstanding.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS 

The accompanying notes are an integral part of these condensed consolidated financial statements.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

The accompanying notes are an integral part of these condensed consolidated financial statements.

KT HIGH-TECH MARKETING, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 Business Organization, Nature of Operations and Basis of Presentation

Organization and Operations

KT High-Tech Marketing, Inc. ("KT High-Tech"), through its wholly-owned subsidiary, KULR Technology Corporation (“KULR”) (collectively, the “Company”), is primarily focused on developing and commercializing its thermal management technologies, which it acquired through assignment from and license with KULR’s co-founder Dr. Timothy Knowles, in the high value, high-performance consumer electronic and energy storage applications. KULR owns proprietary carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutions that it believes are more effective at conducting, dissipating and storing heat generated by an electronic system’s internal components (i.e. semiconductor, integrated circuits “chips”) in comparison to traditional materials, such as copper and aluminum. KULR’s technologies can be applied inside a wide array of electronic applications where heat is often a problem, such as mobile devices, cloud computing, virtual reality platforms, satellites, internet of things, drones, and connected cars.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of June 30, 2018 and for the three and six months then ended. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year ending December 31, 2018 or any other period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2017 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on April 17, 2018.

Note 2 Going Concern and Management’s Plans

Subsequent to June 30, 2018, the Company sold common stock for aggregate net proceeds of $159,000. See Note 9 – Subsequent Events – Private Placement for details. The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations. It is expected that its research and development and general and administrative expenses will continue to increase and, as a result, the Company will eventually need to generate significant product revenues to achieve profitability. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statement issuance date.

Based upon the Company’s forecast for continued operating losses, it expects that the cash it currently has available will fund its operations into the fourth quarter of 2018 while it continues to apply efforts to raise additional capital. Thereafter, the Company will require external funding to sustain operations and to follow through on the execution of its business plan. Although the Company’s management believes that it has access to capital resources, there are currently no commitments in place for new financing at this time and there is no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. If the Company is unable to obtain adequate funds on reasonable terms, it may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. 

Note 3 Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 2 – Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies, except as disclosed below.

Concentrations of Credit Risk

The Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were aggregate uninsured cash balances of $0 and $611,450 at June 30, 2018 and December 31, 2017, respectively.

Customer concentrations are as follows:

* Less than 10% 

Revenue Recognition

On January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

The Company adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment, if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company's condensed consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment was not required.

The Company recognizes revenue primarily from the following different types of contracts:

The following table summarizes our revenue recognized in our condensed consolidated statements of operations:

As of June 30, 2018, the Company had $0 and $161,909 contract assets and contract liabilities, respectively, from contracts with customers. The contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance obligation under the contract. As of December 31, 2017, the Company did not have any contract assets or contract liabilities from contracts with customers. During the three and six months ended June 30, 2018 and 2017, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.

Reclassifications

Certain prior year balance sheet amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. The following shares were excluded from basic weighted average common stock outstanding:

Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of non-vested restricted stock, if not anti-dilutive.

The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:

Recently Issued and Adopted Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09”). ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective basis in the annual and interim periods for fiscal years beginning after December 15, 2017 for share-based payment awards modified on or after the adoption date. The Company adopted ASU 2017-09 effective January 1, 2018 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 effective April 1, 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

Note 4 Prepaid Expenses

As of June 30, 2018 and December 31, 2017, prepaid expenses consisted of the following:

Note 5 Accrued Expenses and Other Current Liabilities

As of June 30, 2018 and December 31, 2017, accrued expenses and other current liabilities consisted of the following:

Note 6 Related Party Transactions

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities – related parties consist of: (i) a liability of $154,269 and $254,344 as of June 30, 2018 and December 31, 2017, respectively, to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”), in connection with consulting services provided to the Company associated with the development of the Company’s CFV thermal management solutions; and (ii) a liability of $36,290 and $28,253 as of June 30, 2018 and December 31, 2017, respectively, to the Company’s Chief Executive Officer (“CEO”) in connection with Company-related travel and entertain expenses incurred by the CEO.

Consulting Agreements

During the three and six months ended June 30, 2017, the Company recorded aggregate expense of $26,000 (of which, $13,000 and $13,000 was included within research and development expenses and selling, general and administrative expenses, respectively) and $65,000 (of which, $32,500 and $32,500 was included within research and development expenses and selling, general and administrative expenses, respectively), respectively, related to consulting agreements with its CEO and CTO, which were terminated in connection with the closing of the Share Exchange Agreement on June 19, 2017.

During the three and six months ended June 30, 2017, the Company recorded research and development expense of $256,942 and $368,557, respectively, related to consulting services provided to the Company by ESLI associated with the development of the Company’s CFV thermal management solutions. There were no such costs recorded in the three and six months ended June 30, 2018. ESLI is controlled by the Company’s CTO.

Note 7 Stockholders' Equity

Stock-Based Compensation

During the three and six months ended June 30, 2018, the Company recognized stock-based compensation expense of $124,835 and $307,792, respectively, and during the three and six months ended June 30, 2017, the Company recognized stock-based compensation expense of $212,147 and $224,158, respectively, related to restricted common stock awards issued during 2014 which is included within general and administrative expenses on the condensed consolidated statements of operations. As of June 30, 2018, there was no unrecognized stock-based compensation expense.

Note 8 Commitments and Contingencies

Patent License Agreement

On March 21, 2018, the Company entered into an agreement with the National Renewable Energy Laboratory (“NREL”) granting the Company an exclusive license to commercialize its patented Internal Short Circuit technology. The agreement shall be effective for as long as the licensed patents are enforceable, subject to certain early termination provisions specified in the agreement. In consideration, the Company agreed to pay to NREL the following: (i) a cash payment of $12,000 payable over one year, (ii) royalties ranging from 1.5% to 3.75% on the net sales price of the licensed products, as defined in the agreement, with minimum annual royalty payments ranging from $0 to $7,500. In addition, the Company shall use commercially reasonable efforts to bring the licensed products to market through a commercialization program that requires that certain milestones be met, as specified in the agreement. As of the date of filing, there had been no sales of the licensed products, such that no royalties had been earned. 

Note 9 Subsequent Events

Private Placement

Subsequent to June 30, 2018, the Company sold an aggregate of 278,788 shares of common stock to investors for aggregate gross and net cash proceeds of $184,000 and $159,000, respectively. Of the $25,000 of cash offering costs withheld from the proceeds, $20,000 was included within deferred offering costs on the condensed consolidated balance sheet as of June 30, 2018.

Note 10 Revision of Financial Statements for the Quarter Ended March 31, 2018

During the course of preparing the quarterly report on Form 10-Q for the quarter ended June 30, 2018, the Company identified certain errors related to cost of revenue not being recorded in connection with a product sale to a customer, which resulted in the understatement of its net loss for the three months ended March 31, 2018. The reason for the error was related to certain information not being provided to the Company’s accounting staff as a result of the Company’s transition of certain accounting duties from its then-Interim Chief Financial Officer, who left the Company in the first quarter of 2018.

The following tables reconcile the prior period as reported balances to the as revised balances:

In accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated this error, based on an analysis of quantitative and qualitative factors, as to whether it was material to the condensed consolidated statement of operations for the three months ended March 31, 2018 and if amendments of previously filed financial statements with the SEC are required. The Company has determined that quantitatively and qualitatively, the error has no material impact to the condensed consolidated statement of operations for the three months ended March 31, 2018 or other prior periods.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition of KT High-Tech Marketing, Inc. ("KT High-Tech" and, including its subsidiary, KULR Technology Corporation (“KULR”), the “Company”) as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2017 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 17, 2018. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Report, in our other reports filed with the SEC, and other factors that we may not know.

Overview

The Company owns proprietary carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutions that it believes are more effective at conducting, dissipating and storing heat generated by an electronic system’s internal components (i.e. semiconductor, integrated circuits “chips”) than traditional materials, such as copper and aluminum. KULR’s technologies can be applied inside a wide array of electronic applications where heat is often a problem, such as mobile devices, cloud computing, virtual reality platforms, satellites, internet of things, drones, and connected cars.

Three key vectors have driven advancements in semiconductors and electronics systems – performance, power, and size. These vectors, however, often counteract one another. As chip performance increases, power consumption increases, and more heat is generated as a byproduct. When chip size reduces, there is an increased potential for a hot spot on the chip, which can degrade system performance. Electronic system components must operate within a specific temperature range on both the high and low end to operate properly. KULR resolves many of the tradeoffs associated with other thermal management materials. KULR’s products improve heat storage and dissipation, rigidity problems and durability. Its products are lightweight and reduce manufacturing complexity associated with traditional thermal management materials.

In addition to thermal management of electronic systems, KULR has developed, in partnership with National Aeronautics and Space Administration (“NASA”) Johnson Space Center (“NASA JSC”), a highly effective, lightweight and passive thermal protection technology, Thermal Runaway Shield (“TRS”) for lithium-ion batteries. KULR’s lithium-ion battery (“Li-B”) TRS product prevents a potentially dangerous combustible condition known as thermal runaway propagation from occurring in neighboring Li-B cells by acting as a shield or barrier in between individual Li-B cells in a battery pack. Although rare, incidents of thermal runaway propagation occurring spontaneously in Li-B cargo shipments and inside electronics, including hoverboards, smartphones, and electric vehicles, are a cause of public concern.

During the second quarter of 2018, we generated business from our existing aerospace and automotive customer-base by providing contract services and thermal solution products. We continue to make progress with establishing the production of Internal Short Circuit (“ISC”) devices which were licensed from NASA and National Renewable Energy Laboratory (“NREL”) in the first quarter of 2018. Although no assurances can be made, we expect to generate revenue from the sale of ISC devices in the second half of 2018. In addition, we expect some of our current design engagements with potential customers in aerospace, defense and battery storage products to reach early production in the second half of 2018 and into 2019. However, no assurances can be made that such design engagements will result in production agreements or purchase orders.

We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant product revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds to support our business operations, although there can be no assurance we will be successful in raising additional funds in the future.

Recent Developments

In May 2018, the Company was assigned a trading symbol, “KUTG”, for quotation on the OTC Markets.

In July 2018, we sold an aggregate of 278,788 shares of common stock to investors for aggregate gross and net proceeds of $184,000 and $159,000, respectively.

Results of Operations

Three and Six Months Ended June 30, 2018 Compared With Three and Six Months Ended June 30, 2017

The closing of the Share Exchange Agreement with KULR on June 19, 2017 was accounted for as a reverse recapitalization under the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 805-40. The condensed consolidated statements of operations herein reflect the historical results of KULR prior to the completion of the reverse recapitalization since it was determined to be the accounting acquirer, and do not include the historical results of operations for KT High-Tech prior to the completion of the reverse recapitalization.

Revenues

Our revenues consisted of the following types:

For the three months ended June 30, 2018 and 2017, we generated $171,091 and $10,900 of revenues, an increase of $160,191, or 1,470%. Our revenues during the three months ended June 30, 2018 primarily consisted of sales of our component product, CFV thermal management solution, which carries a higher margin, as well as certain research and development contract services. Our revenues during the three months ended June 30, 2017 consisted of sales of our Phase Change Material (“PCM”) heat sink. The increase was primarily due to an increase in the volume of product sales, as well as the addition of our contract services revenue.

For the six months ended June 30, 2018 and 2017, we generated $399,131 and $10,900 of revenues, an increase of $388,231, or 3,562%. Our revenues during the six months ended June 30, 2018 consisted of sales of our component product, CFV thermal management solution, which carries a higher margin, sales of an Original Equipment Manufacturer (“OEM”) product, which carries a lower margin, as well as certain research and development contract services. Our revenues during the six months ended June 30, 2017 consisted of sales of our Phase Change Material (“PCM”) heat sink. The increase was primarily due to an increase in the volume of product sales, as well as the addition of our contract services revenue.

Cost of Revenues

Cost of revenues consists of the cost of our products as well as labor expenses directly related to product sales or research contract services.

For the three months ended June 30, 2018 and 2017, cost of revenues was $33,470 and $56,195, respectively, a decrease of $22,725, or 40%. The decrease was primarily due to increased costs in 2017 to produce the PCM heat sinks, as well as due to the fact that our 2018 sales were of higher margin products.

For the six months ended June 30, 2018 and 2017, cost of revenues was $183,417 and $56,195, respectively, an increase of $127,222, or 226%. The increase was primarily due to costs of sales of our lower margin, higher cost OEM product as well as increased labor costs.

Research and Development

Research and development (“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution. R&D expenses are expensed as they are incurred.

For the three months ended June 30, 2018, R&D expenses increased by $82,558, or 227%, to $119,006 from $36,448 for the three months ended June 30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to a headcount increase of 9 employees.

For the six months ended June 30, 2018, R&D expenses increased by $189,062, or 381%, to $238,690 from $49,628 for the six months ended June 30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to a headcount increase of 9 employees.

We expect that our R&D expenses will continue to increase.

Research and Development – Related Parties

R&D – related parties include expenses associated with the development of our CFV thermal management solutions provided by Energy Science Laboratories, Inc. (“ESLI”), a R&D company owned by our Chief Technology Officer (“CTO”), as well as services provided by our CTO. R&D – related parties expenses are expensed as they are incurred.

For the three months ended June 30, 2018, R&D – related parties decreased by $269,942, or 100%, to $0 from $269,942 for the three months ended June 30, 2017. The decrease is due to the elimination of R&D services provided by ESLI during the current period, which resulted from the Company hiring its own research and development staff in June 2017.

For the six months ended June 30, 2018, R&D – related parties decreased by $401,057, or 100%, to $0 from $401,057 for the six months ended June 30, 2017. The decrease is due to the elimination of R&D services provided by ESLI during the current period, which resulted from the Company hiring its own research and development staff in June 2017.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based compensation, marketing, travel, rent and office expenses.

For the three months ended June 30, 2018, selling, general and administrative expenses increased by $330,600, or 99%, to $663,018 from $332,418 for the three months ended June 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately $164,000 from the hiring of new employees in the third quarter of 2017, professional fees of approximately $184,000 resulting from the compliance and reporting costs of being a public company as well as due to entering into new consulting agreements, partially offset by decreased non-cash stock-based compensation expense of approximately $99,000.

For the six months ended June 30, 2018, selling, general and administrative expenses increased by $1,032,896, or 249%, to $1,447,258 from $414,362 for the six months ended June 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately $311,000 from the hiring of new employees in the third quarter of 2017, increased professional fees of approximately $446,000 resulting from the compliance and reporting costs of being a public company as well as due to entering into new consulting agreements, increased travel expenses of approximately $74,000, increased rent expenses of approximately $46,000 due to entering into a new lease agreement as well as increased non-cash stock-based compensation expense of approximately $84,000.

Liquidity and Capital Resources

For the six months ended June 30, 2018 and 2017, cash (used in) provided by operating activities was $(779,380) and $281,756, respectively. Our cash used in operations for the six months ended June 30, 2018 was primarily attributable to our net loss of $1,470,467, adjusted for non-cash expenses in the aggregate amount of $316,316, partially offset by $374,771 of net cash provided by changes in the levels of operating assets and liabilities. Our cash provided by operations for the six months ended June 30, 2017 was primarily attributable to our net loss of $918,598, adjusted for net non-cash expense in the aggregate amount of $225,040, partially offset by $975,314 of net cash provided by changes in the levels of operating assets and liabilities.

For the six months ended June 30, 2018 and 2017, cash (used in) provided by investing activities was $(8,350) and $1,922,216, respectively. Cash used in investing activities during the six months ended June 30, 2018 was due to purchases of equipment. Cash provided by investing activities during the six months ended June 30, 2017 resulted from $1,859,261 of cash acquired in connection with the Share Exchange as well as $85,000 of proceeds received from the collection of our note receivable to our CEO, partially offset by $22,045 of purchases of property and equipment.

There were no cash flows from financing activities for the six months ended June 30, 2018 and 2017.

In July 2018, we sold an aggregate of 278,788 shares of common stock to investors for aggregate gross and net proceeds of $184,000 and $159,000, respectively. We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant product revenues and/or raise additional capital to fund our operations. These conditions indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date.

Based upon our forecast for continued operating losses, we expect that the cash we currently have available will fund our operations into the fourth quarter of 2018 while we continue to apply efforts to raise additional capital. Thereafter, we will require external funding to sustain operations and to follow through on the execution of our business plan. Although management believes that we have access to capital resources, there are currently no commitments in place for new financing at this time and there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures.

Our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Off Balance Sheet Arrangements

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Critical Accounting Policies

For a description of our critical accounting policies, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

For a description of recently adopted accounting pronouncements, including adoption dates and estimated effects, if any, on our condensed consolidated financial statements, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is a smaller reporting company, as defined by Rule 229.10(f)(1), and is not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our management, with the participation of our principal executive officer and principal financial officer, concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our principal executive officer, as appropriate, to allow timely decisions regarding required disclosure.

The following material weakness in our internal control over financial reporting were identified as of June 30, 2018 in the normal course:

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard AS 2201, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We intend to address the weakness identified above by increasing the internal controls over the (a) vendor management process and (b) purchase to pay process.

Notwithstanding the assessment that our disclosure controls and procedures and our internal controls over financial reporting were not effective and that there is a material weakness as identified herein, we believe that our condensed consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects.

Changes in Internal Control over Financial Reporting

Except as disclosed above, our internal control over financial reporting did not change during the three months ended June 30, 2018.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on April 17, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In July 2018, we sold an aggregate of 278,788 shares of common stock to certain accredited investors for aggregate gross proceeds of $184,000, which proceeds will be used for general corporate expenses and other research and development expenses. The issuances of securities were made pursuant to the exemption from registration under Section 4(a)(2) and Rule 506 of Regulation D under the Securities Act for transactions not involving a public offering and transactions with “accredited investors” as defined under the Securities Act. 

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

 None.

Item 6. Exhibits. 

*Filed herewith

**Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned hereunto duly authorized.