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KULR Technology Group, Inc. - Quarter Report: 2020 March (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: March 31, 2020

  

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

  

KULR TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or Other Jurisdiction of Incorporation or Organization)

81-1004273

(I.R.S. Employer Identification No.)

 

1999 S. Bascom Ave. Suite 700. Campbell, California

(Address of principal executive offices)

 

 

95008

(Zip Code)

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered
None. N/A 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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

 

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.

 

Large accelerated filer ¨   Accelerated filer  ¨
Non-accelerated filer  x   Smaller reporting company  x
      Emerging growth company  ¨

 

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 June 25, 2020, there were 81,618,875 shares of Common Stock, $0.0001 par value, issued and outstanding. 

 

 

 

 

 

 

 

EXPLANATORY NOTE

 

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 is being filed pursuant to the order of the Securities and Exchange Commission contained in SEC Release No. 34-88465, dated March 25, 2020 (the “Order”). We filed a Form 8-K on May 15, 2020, the original due date of the Form 10-Q, indicating our reliance on the relief granted by the Order and the necessity to rely on such relief due to circumstances related to COVID-19 pandemic. In particular, the COVID-19 pandemic has caused severe disruptions in access to our facilities, resulting in limited support from our staff, as well as disruptions in the focus of our management that has dedicated time and resource to mitigating the effects of the pandemic. These effects, in turn, delayed our ability to file this Quarterly Report on its original due date.

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I – FINANCIAL INFORMATION
     
Item 1. Financial Statements. 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 1
     
  Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 2
     
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficiency for the Three Months Ended March 31, 2020 and 2019 3
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 4
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 5
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
     
Item 4. Controls and Procedures. 18
     
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings. 19
     
Item 1A. Risk Factors. 19
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 19
     
Item 3. Defaults Upon Senior Securities. 19
     
Item 4. Mine Safety Disclosures. 19
     
Item 5. Other Information. 19
     
Item 6. Exhibits. 19
     
SIGNATURES 20

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS 

   

    March 31,
2020
    December 31,
2019
 
    (unaudited)        
Assets                
                 
Current Assets:                
Cash   $ 634,148     $ 108,857  
Accounts receivable     56,812       30,101  
Inventory     31,605       27,091  
Prepaid expenses     68,579       23,825  
Other current assets     13,764       19,376  
Total Current Assets     804,908       209,250  
Property and equipment, net     26,973       27,516  
Deferred offering costs     78,259       -  
Total Assets   $ 910,140     $ 236,766  
                 
Liabilities and Stockholders' Deficiency                
                 
Current Liabilities:                
Accounts payable   $ 210,008     $ 344,660  
Accounts payable - related party     3,622       4,253  
Accrued expenses and other current liabilities     665,320       659,399  
Accrued expenses and other current liabilities - related party     -       10,419  
Current portion of notes payable, net of debt discount of $166,163 and $0 at March 31, 2020 and December 31, 2019, respectively     1,033,837       -  
Line of credit     8,401       -  
Deferred revenue     47,000       15,000  
Total Current Liabilities     1,968,188       1,033,731  
                 
Notes payable, non-current portion, net of debt discount of $34,617 and $0 at March 31, 2020 and December 31, 2019, respectively     215,383       -  
Total Liabilities     2,183,571       1,033,731  
                 
Commitments and contingencies (Note 10)                
                 
Stockholders' Deficiency:                
Preferred stock, $0.0001 par value, 20,000,000 shares authorized;                
Series A Preferred Stock, 1,000,000 shares designated; none issued and outstanding at March 31, 2020 and December 31, 2019     -       -  
Series B Convertible Preferred Stock, 31,000 shares designated; 14,487 shares issued and outstanding  and liquidation preference of $14,487 at March 31, 2020 and December 31, 2019     1       1  
Series C Preferred Stock, 400 shares designated; 24.01 shares issued and outstanding and liquidation preference of $240,100 at March 31, 2020 and December 31, 2019     -       -  
Common stock, $0.0001 par value, 500,000,000 shares authorized; 81,167,678 and 81,071,831 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively     8,117       8,107  
Additional paid-in capital     7,665,016       7,591,239  
Accumulated deficit     (8,946,565 )     (8,396,312 )
Total Stockholders’ Deficiency     (1,273,431 )     (796,965 )
Total Liabilities and Stockholders’ Deficiency   $ 910,140     $ 236,766  

 

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

 

 1 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   For the Three Months Ended 
   March 31, 
   2020   2019 
         
Revenue  $77,500   $194,952 
           
Cost of revenue
   25,926    61,517 
           
Gross Profit
   51,574    133,435 
           
Operating Expenses:          
Research and development   111,713    129,492 
Selling, general and administrative   469,527    569,191 
           
Total Operating Expenses   581,240    698,683 
           
Loss From Operations   (529,666)   (565,248)
           

Other Expenses: 

          
 Interest expense, net   (1,367)   (445)
Amortization of debt discount   (19,220)   - 
           
Total Other Expenses   (20,587)   (445)
           
Net Loss  $(550,253)  $(565,693)
           
Net Loss Per Share          
- Basic and Diluted  $(0.01)  $(0.01)
           
Weighted Average Number of          
Common Shares Outstanding          
- Basic and Diluted   81,098,163    78,730,818 

  

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

 

 2 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

(unaudited)

 

   FOR THE THREE MONTHS ENDED MARCH 31, 2020 
                                     
   Series B Convertible   Series C Convertible           Additional       Total 
   Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficiency 
                                     
Balance - January 1, 2020   14,487   $1    24.01   $    -    81,071,831   $8,107   $7,591,239   $(8,396,312)  $(796,965)
                                              
Stock-based compensation   -    -    -    -    -    -    10,528    -    10,528 
                                              
Common stock issued as a commitment fee for the Standby Equity Distribution Agreement    -    -    -    -    95,847    10    63,249    -    63,259 
                                              
Net loss   -    -    -    -    -    -    -    (550,253)   (550,253)
                                              
Balance - March 31, 2020   14,487   $1    24.01   $-    81,167,678   $8,117   $7,665,016   $(8,946,565)  $(1,273,431)

 

   FOR THE THREE MONTHS ENDED MARCH 31, 2019 
                             
   Series B Convertible           Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficiency 
                             
Balance - January 1, 2019   30,858   $3    78,706,256   $7,871   $6,283,548   $(6,416,559)  $(125,137)
                                    
Stock-based compensation   -    -    25,000    3    36,057    -    36,060 
                                    
Common stock issued for cash   -    -    234,849    23    154,977    -    155,000 
                                    
Net loss   -    -    -    -    -    (565,693)   (565,693)
                                    
Balance - March 31, 2019   30,858   $3    78,966,105   $7,897   $6,474,582   $(6,982,252)  $(499,770)

 

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

 

 3 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

   

    For the Three Months Ended  
    March 31,  
    2020     2019  
Cash Flows From Operating Activities:                
Net loss   $ (550,253 )   $ (565,693 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Amortization of debt discount     19,220       -  
Depreciation expense     543       3,000  
Bad debt expense     335       -  
Write-down of inventory     -       90  
Stock-based compensation     12,728       47,940  
Changes in operating assets and liabilities:                
Accounts receivable     (27,046 )     79,381  
Inventory     (4,514 )     1,200  
Prepaid expenses     (44,754 )     (7,626 )
Other current assets     5,612       (10,246 )
Accounts payable     (135,283 )     134,063  
Accrued expenses and other current liabilities     (6,698 )     31,471  
Deferred revenue     32,000       -  
                 
Total Adjustments     (147,857 )     279,273  
                 
Net Cash Used In Operating Activities     (698,110 )     (286,420 )
                 
                 
Cash Flows from Financing Activities:                
Proceeds from note payable     1,410,000       -  
Payment of debt issuance costs     (130,000 )     -  
Repayments of note payable     (50,000 )     -  
Proceeds from line of credit     10,000       -  
Repayments of line of credit     (1,599)       -  
Proceeds from sale of common stock     -       155,000  
Payment of financing costs on equity line of credit     (15,000 )     -  
                 
Net Cash Provided By Financing Activities     1,223,401       155,000  
                 
Net Increase (Decrease) In Cash     525,291       (131,420 )
                 
Cash - Beginning of Period     108,857       229,896  
                 
Cash - End of Period   $ 634,148     $ 98,476  
                 
Supplemental Disclosures of Cash Flow Information:                
                 
Cash paid during the period for interest   $ 1,367     $ 446  
                 
Non-cash investing and financing activities:                
Value of common stock issued as a commitment fee for the Standby Equity Distribution Agreement   $ 63,259     $ -  
Original issuance discount on note payable   $ 90,000     $ -  

 

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

 

 4 

 

 

KULR TECHONOLOGY GROUP, INC. & SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1BUSINESS ORGANIZATION AND NATURE OF OPERATIONS

 

Organization and Operations

 

KULR Technology Group, Inc., through its wholly-owned subsidiary, KULR Technology Corporation (collectively referred to as “KULR” or the “Company”), develops and commercializes high-performance thermal management technologies for electronics, batteries, and other components across a range of applications. Currently, the Company is focused on targeting the following applications: electric vehicles and autonomous driving systems (collectively referred to herein as “E-Mobility”); artificial intelligence and Cloud computing; energy storage; and 5G communication technologies. KULR provides heat management solutions to enhance the performance and safety of battery packs used in electric vehicles, communication devices, and aerospace and defense applications.

 

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 unaudited condensed consolidated financial statements of the Company as of March 31, 2020 and for the three months ended March 31, 2020 and 2019. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the full year ending December 31, 2020 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2019 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on May 14, 2020.

 

NOTE 2GOING CONCERN AND MANAGEMENT’S PLANS

 

The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations. As of March 31, 2020, the Company had cash of $634,148 and a working capital deficit of $1,163,280. For the three months ended March 31, 2020 and 2019, the Company incurred net losses of $550,253 and $565,693, respectively, and used cash in operations of $698,110 and $286,420, respectively. 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 revenues to achieve profitability. Further, as of March 31, 2020, the Company has debt principal in the amount of $1,450,000 which matures on May 31, 2021.

 

In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition

 

 5 

 

  

NOTE 2GOING CONCERN AND MANAGEMENT’S PLANS – CONTINUED

 

Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with an Investor, pursuant to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to the Investor’s approval for amounts over $100,000) of shares of the Company’s common stock at a price equal to Company 80% of the lowest daily volume weighted average price for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by the Investor, at least 5 trading days shall have elapsed from the immediately preceding advance date. See Note 9 – Stockholder Deficiency for additional details. Additionally, the Company applied for, and in April 2020, received, a loan of $155,000 under the government Small Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic (see Note 11 – Subsequent Events).

 

The Company currently has $8,000,000 available in connection with the SEDA, in order to fund its ongoing operations; however, there can be no assurance that the Company will be able to continue sell common shares pursuant to the SEDA at an acceptable price, or without causing undue dilution to existing investors beyond what the Company sold subsequent to March 31, 2020. Further, there is also no assurance that the Company will be able to continue to obtain additional 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.

 

The aforementioned 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. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustment that might become necessary should the Company be unable to continue as a going concern.

 

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Since the date of the Annual Report on Form 10-K for the year ended December 31, 2019, there have been no material changes to the Company’s significant accounting policies, except as disclosed in this note.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. A significant portion of the Company’s cash is held at one major financial institution. The Company has not experienced any losses in such accounts. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There was an uninsured balance of $376,359 and no uninsured cash balances as of March 31, 2020 and December 31, 2019, respectively.

 

Customer concentrations are as follows:

 

   Revenues   Accounts Receivable 
   For the Three Months Ended         
   March 31,   As of   As of 
   2020   2019   March 31, 2020   December 31, 2019 
                 
Customer A   *    61%   *    * 
Customer B   *    17%   *    * 
Customer C   *    *    *    33% 
Customer D   *    *    *    17% 
Customer E   *    *    *    20% 
Customer F   *    *    *    19% 
Customer G   59%   *    56%   * 
Customer H   23%   *    32%   * 
Customer I   *    *    11%   * 
Total   82%   78%   99%   89% 

* Less than 10 %

                    

 

 6 

 

 

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Concentrations of Credit Risk – Continued

  

There is no assurance the Company will continue to receive significant revenues from any of these customers. Any reduction or delay in operating activity from any of the Company’s significant customers, or a delay or default in payment by any significant customer, or termination of agreements with significant customers, could materially harm the Company’s business and prospects. As a result of the Company’s significant customer concentrations, its gross profit and results from operations could fluctuate significantly due to changes in political, environmental, or economic conditions, or the loss of, reduction of business from, or less favorable terms with any of the Company’s significant customers.

 

Vendor concentrations are as follows:

 

   Accounts Payable 
   As of   As of 
   March 31, 2020   December 31, 2019 
         
Vendor A   15%   15% 
Vendor B   *    16% 
Vendor C   17%   17% 
Vendor D   *   12% 
Vendor E   20%   * 
Vendor F   20%   * 
    72%   60% 
* Less than 10%          

 

Deferred Offering Costs

 

Deferred offering costs, which consist of direct, incremental professional fees incurred in connection with closing the SEDA for a potential sale of the Company’s equity securities (as described in Note 9 – Stockholders’ Deficiency), are capitalized as non-current assets on the balance sheet. Upon continued utilization of the SEDA, the deferred offering costs will be offset against the equity offering proceeds. As of March 31, 2020, the Company incurred deferred offering costs in the amount of $78,259. See Note – 9 Stockholders’ Deficiency, Standby Equity Distribution Agreement for more information.

  

Revenue Recognition

  

The Company recognizes revenue in accordance with Accounting Standards Codification (“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, 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 following five steps are applied to achieve that core principle:

 

  · Step 1: Identify the contract with the customer;

 

  · Step 2: Identify the performance obligations in the contract;

 

  · Step 3: Determine the transaction price;

 

  · Step 4: Allocate the transaction price to the performance obligations in the contract; and

 

  · Step 5: Recognize revenue when the company satisfies a performance obligation.

  

 7 

 

 

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

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

 

·Product sales – Revenue is recognized at the point in time the customer obtains control of the goods and the Company satisfies its performance obligation, which is generally at the time it ships the product to the customer.
·Contract services – Revenue is recognized at the point in time that the Company satisfies its performance obligation under the contract, which is generally at the time it delivers a report to the customer.

  

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

  

   For the Three Months Ended 
   March 31, 
   2020   2019 
         
Product sales  $28,000   $169,440 
Contract services   49,500    25,512 
Total revenue  $77,500   $194,952 

  

As of March 31, 2020 and December 31, 2019, the Company had $47,000 and $15,000 of deferred revenue, 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. During the three months ended March 31, 2020 and 2019, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.

 

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. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding, plus the impact of common share, if dilutive, resulting from the exercise of outstanding stock options and warrants and the conversion of convertible instruments.

 

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

 

   For the Three Months Ended 
   March 31, 
   2020   2019 
         
Series B Convertible Preferred Stock   724,350    1,542,900 
Series C Convertible Preferred Stock   240,100    - 
Options   395,000    300,000 
Warrants   210,025    - 
Total potentially dilutive shares   1,569,475    1,842,900 

  

Reclassification

 

Certain prior period balances have been reclassified in order to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

 8 

 

 

NOTE 4PREPAID EXPENSES

  

As of March 31, 2020 and December 31, 2019, prepaid expenses consisted of the following:

 

   March 31,
 2020
   December 31,
2019
 
         
Travel expenses  $56,544   $487 
Insurance   5,837    8,026 
Filing fees   5,365    11,625 
Research and development services   833    1,812 
Other   -    1,875 
Total prepaid expenses  $68,579   $23,825 

 

 

NOTE 5ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

As of March 31, 2020 and December 31, 2019, accrued expenses and other current liabilities consisted of the following:

 

   March 31,   December 31, 
   2020   2019 
         
Payroll and vacation  $510,830   $525,917 
Legal and professional fees   102,676    60,000 
Credit card payable   23,139    4,581 
Travel expenses   10,591    45,707 
Other   18,084    23,194 
Total accrued expenses and other current liabilities  $665,320   $659,399 

  

See Note 8 – Related Party Transactions for more information on accrued expenses – related party.

 

NOTE 6LINE OF CREDIT

 

On February 18, 2020, the Company entered into a financing agreement (the “Line of Credit”) wherein it may borrow up to $10,000. The repayment terms (interest rate, repayment amount and number of consecutive weekly periodic installments) are determined at the time the Company borrows proceeds under the Line of Credit.

 

On February 19, 2020, the Company borrowed and received gross proceeds of $10,000 under the Line of Credit for its working capital needs, which is being repaid weekly for the next 26 weeks at a weekly interest rate of 1.7%. As of March 31, 2020, the outstanding aggregate principal amount on the Line of Credit was $8,401. During the three months ended March 31, 2020 and 2019, the Company recorded interest expense of $797 and $0, respectively, related to the Line of Credit. There was no accrued interest related to the Line of Credit as of March 31, 2020.

  

NOTE 7NOTE PAYABLE

 

On February 27, 2020, the Company entered into a note purchase agreement with the YAII PN, Ltd., a Cayman Island exempt limited partnership (the “Investor”), pursuant to which the Investor purchased a full recourse promissory note (the “Note”) in the original principal amount of $1,500,000 (“Principal Amount”) for cash proceeds of $1,410,000. The Note included an original issue discount of $90,000, which represents the difference between the principal and proceeds received. The original issue discount, along with the $130,000 advisory fee were recorded as a debt discount and contra liability and is being amortized over the term of the Note using the effective interest rate method.

 

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NOTE 7NOTE PAYABLE – CONTINUED

 

The Note bears no coupon interest (original issue discount only) and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the Note and which includes the early termination of a standby equity distribution agreement with the Investor (see Note 9 – Stockholders’ Deficiency – Standby Equity Distribution Agreement for additional details). The Company will repay the Principal Amount in monthly installments as set forth in the Note. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid. During the three months ended March 31, 2020, the Company repaid principal on the Note of $50,000, and as of March 31, 2020, the outstanding aggregate principal balance of the Note was $1,450,000. During the three months ended March 31, 2020, the Company recognized amortization of debt discount of $19,220 related to the Note.

 

NOTE 8RELATED PARTY TRANSACTIONS

 

Accounts Payable – Related Party

 

Accounts payable – related party consists of a liability of $3,622 and $4,253 as of March 31, 2020 and December 31, 2019, 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 in prior periods.

 

Accrued Expenses and Other Current Liabilities – Related Party

 

Accrued expenses and other current liabilities – related parties consist of a liability of $0 and $10,419 as of March 31, 2020 and December 31, 2019, respectively, to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”), in connection with consulting services provided by ESLI to the Company associated with the development of the Company’s CFV thermal management solutions.

 

NOTE 9STOCKHOLDERS’ DEFICIENCY

 

Standby Equity Distribution Agreement

 

On February 27, 2020, KULR Technology Group, Inc. entered into a SEDA with the Investor, pursuant to which the Company may, at its discretion, sell to the Investor up to $8,000,000 of shares of the Company’s common stock (the “Offering”), par value $0.0001 per share (the “Common Stock”). For each share of Common Stock purchased under the SEDA (the “Shares”), the Investor will pay the Company 80% of the lowest daily volume weighted average price of the Common Stock on the OTC Markets OTCQB or other principal market on which the Common Stock is traded for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the Shares under the SEDA. See Note 7 – Note Payable.

 

The Investor’s obligation to purchase the Shares under the SEDA is subject to certain conditions, including the Company maintaining the effectiveness of a registration statement for the securities sold under the SEDA, and subject to the Investor’s approval for amounts over $100,000. In addition, the Company may not request advances if the Shares to be issued would result in the Investor owning more than 4.99% of the Company’s outstanding Common Stock, with any such request being automatically modified to reduce the advance amount. The Company shall not be able to request advances under the SEDA if the Registration Statement is not effective or if any issuances of Common Stock pursuant to any Advances would violate any rules.

 

The commitment period under the SEDA commenced on February 27, 2020 (the “Effective Date”) and expires on the earliest to occur of (i) first day of the month following the twenty-four months after the Effective Date, (ii) on which the Investor has purchased an aggregate amount of $8,000,000 of Shares under the SEDA, or (iii) the date the SEDA is earlier terminated.

 

The SEDA contains customary representations, warranties and agreements of the Company and the Investor, indemnification rights and other obligations of the parties. The Company has the right to terminate the SEDA at any time upon prior written notice, at no cost to the Company, provided that (i) there are no outstanding advances which have yet to be issued and (ii) the Company has paid all amounts owed to the Investor, including amounts borrowed under the Note (see Note 7 – Note Payable for additional details). The Investor has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of Common Stock.

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NOTE 9STOCKHOLDERS’ DEFICIENCY – CONTINUED

 

Standby Equity Distribution Agreement – Continued

 

The Company paid cash of $15,000 and issued to the Investor 95,847 shares of Common Stock to the Investor and as consideration for entering into the SEDA. The shares of common stock issued to the Investor had an issuance date fair value of $63,259. The aggregate consideration of $78,259 was recorded as deferred offering costs and additional paid in capital on the condensed consolidated balance sheet.

 

The Company did not sell any Shares pursuant to the SEDA during the three months ended March 31, 2020. Please see Note 11 – Subsequent Events for additional details regarding the sale of Shares subsequent to March 31, 2020.

 

Stock Options

  

On January 1, 2020, the Company granted five-year options to purchase a total of 10,000 shares of common stock at an exercise price of $0.66 per share to an employee pursuant to the 2018 Plan. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options vest monthly over three years. The options had an aggregate grant date value of $3,609 which is recognized over the vesting period. The Company estimated the fair value of the options using the Black-Scholes Option Pricing Model with the following assumptions: (a) stock price of $0.66 per share; (b) volatility of 93%; (c) expected term of 2.5 years; (d) risk-free interest rate of 1.58%; and (e) a dividend rate of 0.0%.

  

Stock-Based Compensation

  

During the three months ended March 31, 2020 and 2019, the Company recognized stock-based compensation expense of $12,728 and $47,940 (which includes the issuance of 25,000 shares of immediately-vested common stock for legal fees), respectively, related to restricted common stock and stock options, of which $8,112 and $16,300, respectively was charged to research and development expense and $4,616 and $31,640, respectively was charged to general and administrative expense. As of March 31, 2020, there was $85,917 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of 2.22 years.

  

The following table presents information related to stock-based compensation for the three months ended March 31, 2020 and 2019:

 

   March 31,  
   2020   2019 
         
Common stock  $2,200   $28,380 
Stock options   10,528    19,560 
Total  $12,728   $47,940 

   

NOTE 10COMMITMENTS AND CONTINGENCIES

 

Operating Lease

 

On January 1, 2020, KULR Technology Group, Inc. renewed a lease agreement for the 5,296 square feet of space located in San Diego, California under a six-month lease agreement ending June 30, 2020. The base rent was increased to $4,552 per month plus association fees of $555 per month. For the three months ended March 31, 2020 and 2019, operating lease expense was $10,016 and $40,385, respectively. The Company evaluated their operating lease and determined that the short-term exemption available under ASC 842 applies since the lease term is less than 12 months and the lease does not include a purchase option whose exercise is reasonably certain. Since the short-term exemption applies, lease payments are recognized as expense and no right of use asset or lease liability is recorded.

 

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NOTE 11 SUBSEQUENT EVENTS

 

Common Stock

 

Subsequent to March 31, 2020, the Company issued an aggregate of 421,197 shares of common stock at prices between $0.72 - $1.53 per share for aggregate proceeds of $526,000 received against advance notices submitted to the Investor under the SEDA.

 

On June 12, 2020, the Company issued 30,000 shares of common stock that vest immediately with a grant date value of approximately $30,000 related to consulting services provided.

 

Note Purchase Agreement and Promissory Note

 

Subsequent to March 31, 2020, and pursuant to the terms of the Note, the Company repaid an aggregate of $175,000 against the Principal Amount.

 

Paycheck Protection Program Loan

 

On April 27, 2020, the Company received approximately $155,000 of cash proceeds pursuant to an unsecured loan provided in connection with the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES Act”).

 

Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to apply for and receive forgiveness for all or a portion of their respective PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee and compensation levels, as defined, following the funding of the PPP Loan. The Company intends to use the proceeds of their PPP Loans for Qualifying Expenses. However, no assurance is provided KULR will be able to obtain forgiveness of the PPP Loans in whole or in part. Any amounts not forgiven incur interest at 1.0% per annum and monthly repayments of principal and interest are deferred until the Small Business Administration decides on forgiveness. While the Company’s PPP loans currently have a two-year maturity, the amended law will permit the Company to request a five-year maturity.

 

Operating Lease Renewal

 

On June 15, 2020, the Company entered into an agreement to extend the term of its original lease from June 30, 2020 to December 31, 2020. Monthly rental payments under the renewed lease total $5,107, which comprises of $4,552 of base rent plus $555 of association fees.

 

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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 KULR Technology Group, Inc. (the “Company”) as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 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, 2019 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2020. 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 Quarterly Report, in our other reports filed with the SEC, and other factors that we may not know.

 

Overview

 

KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of applications. Currently, our main focus is a total solution to battery safety by which we aim to mitigate the effects of thermal runaway propagation. We also target and provide thermal solutions for the following applications: electric vehicles, cloud computing, 5G communication technologies, and energy storage for commercial markets as well as directed energy weapons and high-power missile programs for aerospace and defense. Our proprietary, core technology is a carbon fiber material that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter.

 

Battery safety technology is becoming increasingly vital to our world in which battery-operated devices are everywhere. Lithium ion (“Li-ion”) batteries are widely used in consumer electronics, aerospace, marine and automotive applications. In recent months, KULR has developed a total battery safety solution for its customers that spans a wide array of industries and applications. KULR has seen great success in using our patented thermal runaway shield (“TRS”) technology to prevent cell to cell thermal runaway propagation as well as module to module propagation. We have designed a total solution for customers from the design stages incorporating our materials all the way to testing their passive propagation resistant (“PPR”) battery packs. We are flexible and can work with different battery pack configurations across various industries. We developed a PPR reference design for CubeSat battery in December 2019. Our research and testing, as well as working alongside battery experts at NASA Johnson Space Center, has positioned us for further advancements at the forefront of battery safety.

 

Hundreds of millions of Li-ion cells are produced and transported annually and even those packaged to prevent external short can still experience thermal runaway (“TR”) due to internal shorts, caused by latent defects, when fully charged. In these dangerous cases, a torch-like fire is released as energy escapes from the cell and sends nearby cells into TR resulting in a large fire. As part of our total battery safety solution, we have designed a bag out of our TRS material to quench the flames and prevent the TR event. Suitably placed, the TRS provides a means of protection not only from adjacent batteries but also outside fires of arbitrary origin. Experts at NASA’s Propulsion & Power Division found our TRS successful at extinguishing the fire generated by cells when they intentionally triggered the batteries into dangerous failures. Our TRS bag is currently being used on the International Space Station (“ISS”) through a project with Leidos, for storing laptop batteries in order to reduce the risk of TR.

 

Another key element of our battery safety solution is KULR internal short circuit (“ISC”) device and trigger cells which are used for cell testing and screening. Our patented ISC device, licensed from NASA/NREL, can be inserted by OEMs or manufacturers into cells to mimic failure conditions in a cell. Once the trigger device is placed inside the cell, it can be intentionally triggered on demand causing the cell to short circuit. Currently, we provide ISC devices to OEMs and cell manufacturers, as well as ready-made ISC trigger cells to customers to identify failure modes and safety issues within their systems. Currently we are creating an ecosystem based on our technology which can be applied to different battery architectures and chemistries.

 

Our management believes that within commercial markets, aerospace and defense, and high-value applications, cell testing and screening has become a topic of focus. Therefore, we plan to expand our capabilities to include full battery screening and testing as outlined by NASA Johnson Space Center. We plan to fully incorporate this into our holistic approach to battery safety along with our PPR battery pack design and testing services, ISC device and trigger cell products and TRS bags. With increasing regulations and pressure from government bodies to mitigate the dangers of battery fires and TR, we plan to further develop our capabilities in this arena.

 

Our management projects high priority and growth in the aerospace and defense sectors, specifically in regard to directed energy, hypersonic weapon programs, and space missions. Directed energy is currently in the spotlight as experts predict it will greatly impact the future of warfare. Our CRUX cathode generates powerful electron pulses by field emission from the tops of our carbon fiber coating which has the potential to further develop the current technology. Thermal management is another critical component of both hypersonic weapons programs and space missions and is another area in which our products excel. Our carbon fiber velvets are used for thermal management in missile defense programs and are particularly effective because of their survivability at very high temperatures. They are also very effective at transferring heat, and mitigate the risk of overheating in such high-risk environments. Historically we have provided value to this sector and we look forward to further developing our relationships with Airforce Research Lab, Naval Research Lab and prime contractors to market our solutions.

 

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In addition to evolving demands led by aerospace and defense, we have observed trending manufacturer-led opportunities in industries such as electric motor vehicles (“EV”) that have become increasingly more reliant on the Cloud, portability and high-demand processing power. KULR’s high performance thermal interface materials can be used to accelerate 5G communications development due to our material’s core properties: high thermal conductivity, light weight, and low contact pressure. 5G is one of the biggest opportunities going forward for transportation technology and we would like to take part in testing of digital and RF tests for 5G. Testing is still in early phases for both digital and RF communication chips, however, we are seeing a big growth opportunity for thermal management for 5G. Cloud computing is also an application of interest since high power communications chips and optical communication modules require cooling.

 

Our management’s growth strategy has put particular focus on targeting E-Mobility applications for its core technology. We believe we are well-positioned to provide a broad range of E-mobility solutions, and intend to expand our business through internal growth and acquisition. In the case of potential acquisitions, we seek to acquire businesses in related markets that are synergistic to our existing operations, technologies, and management experience. This focus will highlight markets in which we can: (1) integrate our existing technology into the acquiree’s product offerings or simultaneously offer our products and services through the acquiree’s customer base and channels; (2) gain a leading market position and provide vertically integrated services where we can secure economies of scale, premium market positioning, and operational synergies; and/or (3) establish a leading position in selected markets and channels of the acquiree through a joint broad-based, hi-tech, E-Mobility branding campaign. We have developed an acquisition discipline based on a set of financial, market and management criteria to evaluate opportunities. To date, we have evaluated two acquisition opportunities under such criteria and, together with the management of the potential target, determined that the anticipated synergies would not be realized in the anticipated timetable. If we were to successfully close an acquisition, we would seek to integrate it while minimizing disruption to our existing operations and those of the acquired business, while exploiting the technical and managerial synergies from integration.

 

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 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 that we will be successful in raising additional funds in the future. Furthermore, as described below, we remain focused on growing our operations in order to limit cash outflows and eventually achieve profitability, although no assurances can be made that we will achieve such goals.

 

Recent Developments

 

COVID-19

 

In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.

 

Decontamination Solutions

 

In response to the unprecedented demand for solutions to combat the spread of COVID-19 (and other viruses) and in response to an opportunity that arose out of the recognition of our technical and thermal expertise by our governmental clients, we recently explored the launch of a suite of products that utilize a Hypochlorous-Acid based microbial decontamination liquid. Although no assurance can be made that we will be able to commercialize these decontamination products or that there will be demand for such products, we believe that we are capable of producing or acquiring substantial quantities of the decontamination liquid to deploy in a suite of decontamination delivery products and technology that we are actively developing. In order to advance these efforts and to test the efficacy of the decontamination liquid, we engaged an independent lab to test our solution, but we do not yet have any lab results.

 

Paycheck Protection Program Loan

 

On April 27, 2020, the Company received approximately $155,000 of cash proceeds pursuant to an unsecured loan provided in connection with the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES Act”).

 

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Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to apply for and receive forgiveness for all or a portion of their respective PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee and compensation levels, as defined, following the funding of the PPP Loan. The Company intends to use the proceeds of their PPP Loans for Qualifying Expenses. However, no assurance is provided KULR will be able to obtain forgiveness of the PPP Loans in whole or in part. Any amounts not forgiven incur interest at 1.0% per annum and monthly repayments of principal and interest are deferred until the Small Business Administration decides on forgiveness. While the Company’s PPP loans currently have a two-year maturity, the amended law will permit the Company to request a five-year maturity.

 

Standby Equity Distribution Agreement

 

On February 27, 2020, we entered into a Standby Equity Distribution Agreement (“SEDA”) with YAII PN, Ltd., a Cayman Island exempt limited partnership (“YAII”), pursuant to which the Company may, at its discretion, subject to certain conditions, sell to YAII up to $8,000,000 of shares common stock. For each share of common stock purchased under the SEDA (the “Shares”), YAII will pay the Company 80% of the lowest daily volume weighted average price of the common stock on the OTC Markets OTCQB or other principal market on which the common stock is traded for the five days immediately following the date the Company delivers notice requiring YAII to purchase the Shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by the Investor, at least 5 trading days shall have elapsed from the immediately preceding advance date. The Company agreed to issue, without receiving additional consideration, to YAII 95,847 shares of common stock as commitment shares in consideration for entering into the SEDA.

 

Subsequent to the three months ended March 31, 2020, we issued an aggregate of 421,197 shares of common stock at a price between $0.72 - $1.53 per share for $526,000 of proceeds received against advance notices submitted to YAII under the SEDA.

 

Note Purchase Agreement and Promissory Note

 

The Company also entered into a Note Purchase Agreement, dated February 27, 2020, with YAII, pursuant to which YAII purchased a full recourse promissory note (the “Note”) in the original principal amount of $1,500,000 (“Principal Amount”). In consideration for the issuance of the Note by the Company, the purchase price of the Note paid by YAII was equal to the Principal Amount minus an original issue discount equal to 6%. The Note bears no interest and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the Note. The Company will repay the Principal Amount in monthly installments as set forth in the Note. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid.

 

During the three months ended March 31, 2020, the Company repaid $50,000 of the Principal Amount on the Note. Subsequent to March 31, 2020, and pursuant to the terms of the Note, we repaid an aggregate of $175,000 against the Principal Amount.

 

PPR Product License and Supply Agreement - Americase’s Battery Bag

 

On April 13, 2020, we announced that we entered into a license and supply agreement with Americase, LLC, granting a license for Americase’s use of our passive propagation resistant (PPR) technology and agreeing to supply our PPR materials for Americase’s “Battery Bag” products.

 

Common Stock

 

On June 12, 2020, we issued 30,000 shares of common stock that vest immediately with a grant date value of approximately $30,000 related to consulting services provided.

 

Operating Lease Renewal

 

On June 15, 2020, we entered into an agreement to extend the term of our original lease from June 30, 2020 to December 31, 2020. Monthly rental payments under the renewed lease total $5,107, which comprises of $4,552 of base rent plus $555 of association fees.

 

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Results of Operations

 

Three Months Ended March 31, 2020 Compared With Three Months Ended March 31, 2019

 

Revenues

 

Our revenues consisted of the following types:

 

   For the Three Months Ended 
   March 31, 
   2020   2019 
         
Product sales  $28,000   $169,440 
Contract services   49,500    25,512 
Total revenue  $77,500   $194,952 

 

For the three months ended March 31, 2020 and 2019, we generated $77,500 and $194,952 of revenues, a decrease of $117,452, or 60%. The decrease in product shipments in 2019 was primarily due to the impact of COVID-19 related shut-downs by us, and by our clients, which restricted decisions on the timing of shipments. Because our service based revenue was not restricted by physical shipment issues, we were actually able to increase service revenues.

 

Our revenues during the three months ended March 31, 2020 and 2019 consisted of sales of our component product, CFV thermal management solution, ISC battery cell products, as well as certain research and development contract services.

 

Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable and lumpy, which can influence the timing, consistency and reporting of sales growth.

 

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.

 

Generally, we earn greater margins on revenue from products compared to revenue from services, so product mix plays an important part in our reported average margins for any period. Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between period, customers and products due to the learning process, customer negotiating strengths, and product mix.

 

For the three months ended March 31, 2020 and 2019, cost of revenues was $25,926 and $61,517, respectively. The decrease was primarily due to lower sales of products.

 

We generated a gross profit of $51,574 for the three months ended March 31, 2020 as compared to a gross profit of $133,435 for the three months ended March 31, 2019, representing a decrease in gross profit of $81,861, or 61%. The gross margin percentage was 67% and 68% for the three months ended March 31, 2020 and 2019, respectively. The decrease during the three months ended March 31, 2020 is attributable to the change of product mix.

 

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 March 31, 2020, R&D expenses decreased by $17,779 or 14%, to $129,492 from $113,192, for the three months ended March 31, 2019. The decrease is primarily due to $7,000 of patent costs and $8,000 of stock-based compensation.

 

We expect that our R&D expenses will increase as we expand our future operations.

 

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Selling, General and Administrative

 

Selling, general and administrative expenses consist primarily of travel, salaries, payroll taxes and other benefits, and rent expense.

 

For the three months ended March 31, 2020, selling, general and administrative expenses decreased by $99,664 or 18%, to $469,527 from $569,191 for the three months ended March 31, 2019. The decrease is primarily due to an approximate $43,000 decrease in travel expenses, $29,000 decrease in rent expense due to the termination of an operating lease during the end of fourth quarter of 2019, and $20,000 decrease in salaries and other benefits due to the salary cuts implemented during the end of the current quarter due to COVID-19.

 

Other Expense

 

For the three months ended March 31, 2020, other expense increased by $20,142 to $20,587 from $445 for the three months ended March 31, 2019. The increase in other expense is primarily due to the amortization of debt discount related to the issuance of a note payable during the current quarter.

 

Liquidity and Capital Resources

 

As of March 31, 2020 and December 31, 2019, we had cash balances of $634,148 and $108,857, respectively, and working capital deficits of $1,163,280 and $824,481, respectively.

 

For the three months ended March 31, 2020 and 2019, cash used in operating activities was $698,110 and $286,420, respectively. Our cash used in operations for the three months ended March 31, 2020 was primarily attributable to our net loss of $550,253, adjusted for non-cash expenses in the aggregate amount of $32,826, and $180,683 of net cash used in the levels of operating assets and liabilities. Our cash used in operations for the three months ended March 31, 2019 was primarily attributable to our net loss of $565,693, adjusted for non-cash expenses in the aggregate amount of $51,030, partially offset by $228,243 of net cash provided by changes in the levels of operating assets and liabilities.

 

There were no cash flows from investing activities for the three months ended March 31, 2020 and 2019.

 

For the three months ended March 31, 2020 and 2019, cash provided by financing activities was $1,223,401 and $155,000, respectively. Our cash provided by financing activities for the three months ended March 31, 2020 was due to $1,410,000 of net proceeds from the issuance of a note payable, offset by the payment of debt issuance costs and a debt repayment. The cash provided from financing activities during the three months ended March 31, 2019 was proceeds from the sale of common stock.

 

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 revenues and/or raise additional capital to fund our operations. Further, as of March 31, 2020, there is outstanding debt principal in the amount of $1,450,000 which matures on May 31, 2021.

 

In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.

 

Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with an Investor, pursuant to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to the Investor’s approval for amounts over $100,000) of shares of the Company’s common stock at a price equal to Company 80% of the lowest daily volume weighted average price for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by the Investor, at least 5 trading days shall have elapsed from the immediately preceding advance date. See Note 9 – Stockholder Deficiency for additional details. Additionally, the Company applied for, and in April 2020, received, a loan of $155,000 under the government Small Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic (see Note 11 – Subsequent Events).

 

The Company currently has $8,000,000 available in connection with the SEDA, in order to fund its ongoing operations; however, there can be no assurance that the Company will be able to continue sell common shares pursuant to the SEDA at an acceptable price, or without causing undue dilution to existing investors beyond what the Company sold subsequent to March 31, 2020. Further, there is also no assurance that the Company will be able to continue to obtain additional 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.

 

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Although our management believes that we have access to capital resources through the SEDA or other sources, 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. The conditions outlined above indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date.

 

Our unaudited 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 consolidated financial statements do not necessarily purport to represent realizable or settlement values. The unaudited 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.

 

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 by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the first quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

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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 May 14, 2020.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

 None.

 

Item 6. Exhibits. 

 

10.1 Standby Equity Distribution Agreement dated February 27, 2020 (1)
   
10.2 Note Purchase Agreement dated February 27, 2020 (1)
   
10.3 Promissory Note dated February 27, 2020 (1)
   
31.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
   
31.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
   
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
   
101.INS  XBRL Instance*
   
101.SCH  XBRL Taxonomy Extension Schema*
   
101.CAL  XBRL Taxonomy Extension Calculation*
   
101.DEF  XBRL Taxonomy Extension Definition*
   
101.LAB  XBRL Taxonomy Extension Labels*
   
101.PRE  XBRL Taxonomy Extension Presentation*

 

*Filed herewith

**Furnished herewith

(1) Previously filed as an exhibit to Form 8-K on March 4, 2020 and incorporated herein by this reference.


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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.

 

 

June 25, 2020 By /s/ Michael Mo
   

Michael Mo

Chief Executive Officer and Chairman

(Principal Executive Officer)

 

June 25, 2020 By /s/ Simon Westbrook
   

Simon Westbrook

Chief Financial Officer

(Principal Financial and Accounting Officer)

     

 

 

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