UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:September 30, 2019March 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, (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 |
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. Yesx 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). Yesx 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¨ Nox
As of October 29, 2019,June 25, 2020, there were 81,071,83181,618,875 shares of common stock,Common Stock, $0.0001 par value, issued and outstanding.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
EXPLANATORY NOTE
FORMThis 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.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 76,061 | $ | 229,896 | ||||
Accounts receivable | 395,706 | 112,224 | ||||||
Inventory | 43,645 | 9,594 | ||||||
Prepaid expenses | 35,344 | 27,033 | ||||||
Other current assets | 37,389 | 27,569 | ||||||
Total Current Assets | 588,145 | 406,316 | ||||||
Property and equipment, net | 35,347 | 44,791 | ||||||
Total Assets | $ | 623,492 | $ | 451,107 | ||||
Liabilities and Stockholders' Deficiency | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 332,749 | $ | 117,995 | ||||
Accrued expenses and other current liabilities | 547,553 | 374,330 | ||||||
Accrued expenses and other current liabilities - related party | 18,919 | 83,919 | ||||||
Total Current Liabilities | 899,221 | 576,244 | ||||||
Commitments and contingencies (See Note 8) | ||||||||
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 September 30, 2019 and December 31, 2018 | - | - | ||||||
Series B Preferred Stock, 31,000 shares designated; 14,487 and 30,858 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 1 | 3 | ||||||
Series C Preferred Stock, 400 shares designated; 20.68 and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | - | - | ||||||
Common stock, $0.0001 par value, 500,000,000 shares authorized; 81,071,831 and 78,706,256 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 8,107 | 7,871 | ||||||
Additional paid-in capital | 7,587,365 | 6,283,548 | ||||||
Accumulated deficit | (7,871,202 | ) | (6,416,559 | ) | ||||
Total Stockholders' Deficiency | (275,729 | ) | (125,137 | ) | ||||
Total Liabilities and Stockholders' Deficiency | $ | 623,492 | $ | 451,107 |
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 OPERATIONS
(unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | $ | 526,722 | $ | 482,798 | $ | 777,984 | $ | 881,929 | ||||||||
Cost of revenue | 109,051 | 75,384 | 199,118 | 258,801 | ||||||||||||
Gross Profit | 417,671 | 407,414 | 578,866 | 623,128 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Research and development | 137,970 | 161,194 | 365,709 | 399,884 | ||||||||||||
Selling, general and administrative | 546,982 | 461,377 | 1,666,735 | 1,908,635 | ||||||||||||
Total Operating Expenses | 684,952 | 622,571 | 2,032,444 | 2,308,519 | ||||||||||||
Loss From Operations | (267,281 | ) | (215,157 | ) | (1,453,578 | ) | (1,685,391 | ) | ||||||||
Other (Expense) Income: | ||||||||||||||||
Interest expense, net | (503 | ) | (269 | ) | (1,315 | ) | (502 | ) | ||||||||
Other income | 250 | - | 250 | - | ||||||||||||
Change in fair value of accrued issuable equity | - | 24,175 | - | 24,175 | ||||||||||||
Total Other (Expense) Income | (253 | ) | 23,906 | (1,065 | ) | 23,673 | ||||||||||
Net Loss | $ | (267,534 | ) | $ | (191,251 | ) | $ | (1,454,643 | ) | $ | (1,661,718 | ) | ||||
Net Loss Per Share - Basic and Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||
Weighted Average Number of Common Shares Outstanding - Basic and Diluted | 80,380,640 | 77,785,191 | 79,803,396 | 77,513,560 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)DEFICIENCY
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 | ||||||||||||||||||||||||||||||||||||
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, 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 | ) | |||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 7,593 | - | 7,593 | |||||||||||||||||||||||||||
Common stock issued for cash | - | - | - | - | 1,126,210 | 112 | 743,188 | - | 743,300 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (621,416 | ) | (621,416 | ) | |||||||||||||||||||||||||
Balance - June 30, 2019 | 30,858 | 3 | - | - | 80,092,315 | 8,009 | 7,225,363 | (7,603,668 | ) | (370,293 | ) | |||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 160,966 | 16 | 188,082 | - | 188,098 | |||||||||||||||||||||||||||
Common stock issued upon conversion of Series B Convertible Preferred Stock | (16,371 | ) | (2 | ) | - | - | 818,550 | 82 | (80 | ) | - | - | ||||||||||||||||||||||||
Series C Convertible Preferred Stock and warrants issued for cash, net of issuance costs [1] | - | - | 20.68 | - | - | - | 139,000 | - | 139,000 | |||||||||||||||||||||||||||
Forgiveness of accrued expenses by related party | - | - | - | - | - | - | 35,000 | - | 35,000 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (267,534 | ) | (267,534 | ) | |||||||||||||||||||||||||
Balance - September 30, 2019 | 14,487 | $ | 1 | 20.68 | $ | - | 81,071,831 | $ | 8,107 | $ | 7,587,365 | $ | (7,871,202 | ) | $ | (275,729 | ) |
[1] Includes gross proceeds of $186,000, less cash issuance costs of $47,000.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Additional | Stockholders' | |||||||||||||||||||
Common Stock | Paid-In | Accumulated | Equity | |||||||||||||||||
Shares | Amount | Capital | Deficit | (Deficiency) | ||||||||||||||||
Balance - January 1, 2018 | 77,440,000 | $ | 7,744 | $ | 5,090,282 | $ | (4,358,320 | ) | $ | 739,706 | ||||||||||
Stock-based compensation | - | - | 182,957 | - | 182,957 | |||||||||||||||
Net loss | - | - | - | (825,845 | ) | (825,845 | ) | |||||||||||||
Balance - March 31, 2018 | 77,440,000 | 7,744 | 5,273,239 | (5,184,165 | ) | 96,818 | ||||||||||||||
Stock-based compensation | - | - | 124,835 | - | 124,835 | |||||||||||||||
Net loss | - | - | - | (644,622 | ) | (644,622 | ) | |||||||||||||
Balance - June 30, 2018 | 77,440,000 | 7,744 | 5,398,074 | (5,828,787 | ) | (422,969 | ) | |||||||||||||
Common stock issued for cash, net of issuance costs [2] | 581,819 | 58 | 352,342 | - | 352,400 | |||||||||||||||
Net loss | - | - | - | (191,251 | ) | (191,251 | ) | |||||||||||||
Balance - September 30, 2018 | 78,021,819 | $ | 7,802 | $ | 5,750,416 | $ | (6,020,038 | ) | $ | (261,820 | ) |
[2] Includes gross proceeds of $384,000, less issuance costs of $31,600 ($25,000 of cash and $6,600 of non-cash).
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 | ) |
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (1,454,643 | ) | $ | (1,661,718 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation expense | 9,444 | 11,824 | ||||||
Change in fair value of accrued issuable equity | - | (24,175 | ) | |||||
Write-down of inventory | 90 | - | ||||||
Stock-based compensation | 231,751 | 402,656 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (283,482 | ) | (3,638 | ) | ||||
Inventory | (34,141 | ) | - | |||||
Prepaid expenses | (8,311 | ) | 23,733 | |||||
Other current assets | (9,820 | ) | (2,362 | ) | ||||
Accounts payable | 214,754 | - | ||||||
Accrued expenses and other current liabilities | 158,223 | 216,267 | ||||||
Accrued expenses and other current liabilities - related party | (30,000 | ) | (78,680 | ) | ||||
Deferred revenue | - | 51,158 | ||||||
Total Adjustments | 248,508 | 596,783 | ||||||
Net Cash Used In Operating Activities | (1,206,135 | ) | (1,064,935 | ) | ||||
Cash Flows From Investing Activities: | ||||||||
Purchases of property and equipment | - | (15,476 | ) | |||||
Net Cash Used In Investing Activities | - | (15,476 | ) | |||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from sale of Series C Convertible Preferred Stock and warrants [1] | 169,000 | - | ||||||
Proceeds from sale of common stock [2] | 898,300 | 359,000 | ||||||
Payment of offering costs | (15,000 | ) | - | |||||
Net Cash Provided By Financing Activities | 1,052,300 | 359,000 | ||||||
Net Decrease In Cash | (153,835 | ) | (721,411 | ) | ||||
Cash - Beginning of Period | 229,896 | 895,761 | ||||||
Cash - End of Period | $ | 76,061 | $ | 174,350 |
[1] Includes gross proceeds of $186,000, less cash issuance costs of $17,000.
[2] Includes gross proceeds of $384,000, less withheld issuance costs of $25,000 for the nine months ended September 30, 2018. There were no issuance costs for the nine months ended September 30, 2019.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 446 | $ | 646 | ||||
Income taxes | $ | - | $ | 2,400 | ||||
Non-cash investing and financing activities: | ||||||||
Common stock equity offering issuance costs | $ | - | $ | 6,600 | ||||
Accrual of offering costs | $ | 15,000 | $ | - | ||||
Common stock issued upon conversion of Series B Convertible Preferred Stock | $ | 82 | $ | - | ||||
Forgiveness of accrued expenses by related party | $ | 35,000 | $ | - |
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)(unaudited)
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 September 30, 2019March 31, 2020 and for the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019. The results of operations for the three and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the operating results for the full year ending December 31, 20192020 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, 20182019 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on March 29, 2019.May 14, 2020.
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 product revenues to achieve profitability. These raise substantial doubt aboutFurther, 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
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NOTE 2 | GOING 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 abilitycommon stock at a price equal to continue asCompany 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 going concern within one year afterloan of $155,000 under the financial statement issuance date.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 is currently fundinghas $8,000,000 available in connection with the SEDA, in order to fund its operations on a month-to-month basis by means of private placements. Although the Company’s management believes that it has access to capital resources,ongoing operations; however, there are currently no commitments in place for new financing at this time and there iscan 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,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.
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Since the date of the Annual Report on Form 10-K for the year ended December 31, 2018,2019, 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 werewas an uninsured balance of $376,359 and no uninsured cash balances as of September 30, 2019March 31, 2020 and December 31, 2018.2019, respectively.
Customer concentrations are as follows:
Revenues | Accounts Receivable | |||||||||||||||||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
Revenues | Accounts Receivable | March 31, | As of | As of | ||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | As of September 30, | As of December 31, | 2020 | 2019 | March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||
Customer A | 67 | % | 92 | % | 46 | % | 64 | % | 90 | % | 63 | % | * | 61% | * | * | ||||||||||||||||||||||||
Customer B | 14 | % | * | 10 | % | * | * | * | * | 17% | * | * | ||||||||||||||||||||||||||||
Customer C | * | * | 15 | % | * | * | * | * | * | * | 33% | |||||||||||||||||||||||||||||
Customer D | * | * | * | 17 | % | * | * | * | * | * | 17% | |||||||||||||||||||||||||||||
Customer E | * | * | * | 12 | % | * | * | * | * | * | 20% | |||||||||||||||||||||||||||||
Customer F | * | * | * | * | * | 37 | % | * | * | * | 19% | |||||||||||||||||||||||||||||
Customer G | 59% | * | 56% | * | ||||||||||||||||||||||||||||||||||||
Customer H | 23% | * | 32% | * | ||||||||||||||||||||||||||||||||||||
Customer I | * | * | 11% | * | ||||||||||||||||||||||||||||||||||||
Total | 82 | % | 92 | % | 71 | % | 93 | % | 90 | % | 100 | % | 82% | 78% | 99% | 89% | ||||||||||||||||||||||||
* Less than 10 % |
* Less than 10%
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NOTE 3 | SUMMARY 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 |
· | Step |
· | Step |
· | Step |
· | Step |
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NOTE 3 | SUMMARY 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 |
· | 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 | ||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | March 31, | ||||||||||||||||||||||
September 30, | September 30, | 2020 | 2019 | |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Product sales | $ | 464,772 | $ | 482,798 | $ | 686,522 | $ | 735,941 | $ | 28,000 | $ | 169,440 | ||||||||||||
Contract services | 61,950 | - | 91,462 | 145,988 | 49,500 | 25,512 | ||||||||||||||||||
Total revenue | $ | 526,722 | $ | 482,798 | $ | 777,984 | $ | 881,929 | $ | 77,500 | $ | 194,952 |
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company did not have any contract assets or contract liabilitieshad $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 and nine months ended September 30,March 31, 2020 and 2019, and 2018, 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 and dilutive common-equivalent shares outstanding, during each period. Dilutive common-equivalent shares consistplus the impact of sharescommon share, if dilutive, resulting from the exercise of non-vested restrictedoutstanding stock if not anti-dilutive.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 | ||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | March 31, | ||||||||||||||||||||||
September 30, | September 30, | 2020 | 2019 | |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Series B Convertible Preferred Stock | 724,350 | - | 724,350 | - | 724,350 | 1,542,900 | ||||||||||||||||||
Series C Convertible Preferred Stock | 206,800 | - | 206,800 | - | 240,100 | - | ||||||||||||||||||
Options | 400,000 | - | 400,000 | - | 395,000 | 300,000 | ||||||||||||||||||
Warrants | 201,700 | - | 201,700 | - | 210,025 | - | ||||||||||||||||||
Total | 1,532,850 | - | 1,532,850 | - | ||||||||||||||||||||
Total potentially dilutive shares | 1,569,475 | 1,842,900 |
Operating LeasesReclassification
The Company leases properties under operating leases. For leasesCertain prior period balances have been reclassified in order to conform to the current period presentation. These reclassifications have no effect upon adoptionon previously reported results of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” at January 1,operations or loss per share.
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NOTE 4 | PREPAID EXPENSES |
As of March 31, 2020 and December 31, 2019, and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The lease liability is measured at the present valueprepaid expenses consisted of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the right-of-use asset.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 |
The Company evaluated their operating leases and elected to apply the short-term lease measurement and recognition exemption in which the right of use assets and lease liabilities are not recognized for short-term leases.
Recently Issued Accounting Pronouncements
In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections — Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update)” (“ASU 2019-07”). ASU 2019-07 aligns the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. ASU 2019-07 is effective immediately. The adoption of ASU 2019-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
As of September 30, 2019March 31, 2020 and December 31, 2018,2019, accrued expenses and other current liabilities consisted of the following:
March 31, | December 31, | |||||||||||||||
September 30, 2019 | December 31, 2018 | 2020 | 2019 | |||||||||||||
(unaudited) | ||||||||||||||||
Payroll and vacation | $ | 459,259 | $ | 252,043 | $ | 510,830 | $ | 525,917 | ||||||||
Legal and professional fees | 45,500 | 47,502 | 102,676 | 60,000 | ||||||||||||
Credit card payable | 23,139 | 4,581 | ||||||||||||||
Travel expenses | 20,812 | 48,248 | 10,591 | 45,707 | ||||||||||||
Payroll and income tax payable | 7,818 | 12,678 | ||||||||||||||
Research and development expenses | - | 2,850 | ||||||||||||||
Credit card payable | 4,835 | 4,586 | ||||||||||||||
Accrued issuable equity | - | 3,960 | ||||||||||||||
Rent | 176 | 176 | ||||||||||||||
Other | 9,153 | 2,287 | 18,084 | 23,194 | ||||||||||||
Total accrued expenses and other current liabilities | $ | 547,553 | $ | 374,330 | $ | 665,320 | $ | 659,399 |
See Note 8 – Related Party Transactions for more information on accrued expenses – related party.
NOTE 6 | LINE 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 7 | NOTE 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 7 | NOTE 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.
Accrued Expenses and Other Current LiabilitiesAccounts Payable – Related Party
Accrued expenses and other current liabilitiesAccounts payable – related parties consistparty consists of a liability of $18,919$3,622 and $83,919$4,253 as of September 30, 2019March 31, 2020 and December 31, 2018,2019, 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.solutions in prior periods.
On September 30, 2019, ESLI agreed to forgive $35,000 of previously accrued consulting fees. As a result, the Company accounted for the forgiveness as a capital contribution by reducing accruedAccrued 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 $35,000the Company’s Chief Technology Officer (“CTO”), in connection with a corresponding creditconsulting services provided by ESLI to additional paid-in capital.the Company associated with the development of the Company’s CFV thermal management solutions.
Common StockStandby Equity Distribution Agreement
DuringOn February 27, 2020, KULR Technology Group, Inc. entered into a SEDA with the nine months ended September 30, 2019,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 1,361,059$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 9 | STOCKHOLDERS’ 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 at $0.66 per shareissued to accredited investorsthe 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 aggregate cash proceedsadditional details regarding the sale of $898,300.Shares subsequent to March 31, 2020.
Series B Convertible Preferred Stock
During the nine months ended September 30, 2019, holders of Series B Convertible Preferred Stock elected to convert an aggregate of 16,371 shares of Series B Convertible Preferred Stock into an aggregate of 818,550 shares of common stock.
Series C Convertible Preferred StockOptions
On August 19, 2019,January 1, 2020, the Company filed with the Secretary of State of the State of Delaware the Certificate of Designation of Series C Convertible Preferred Stock (the “Certificate of Designation”), which became effective upon filing. Pursuant to the Certificate of Designation, the Company designated 400 shares as Series C Convertible Preferred Stock out of the authorized and unissued preferred stock of the Company, par value $0.0001 per share.
Series C Convertible Preferred Stock is senior in liquidation preference to the Company’s common stock for an amount equal to the stated value per share of $10,000 (“Stated Value”). Holders of shares of Series C Convertible Preferred Stock shall vote on an as-if-converted-to-common-stock basis with the common stock. Holders of shares of Series C Convertible Preferred Stock are entitled to receive dividends when, as and if declared by the Board of Directors, at an annual rate of twelve percent (12%) beginning one year after each share’s issuance. The Company may elect to redeem all or part of each share of Series C Convertible Preferred Stock for the Stated Value.
Each share of Series C Convertible Preferred Stock, if converted within 180 days of such share’s initial issuance, is convertible into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) $1.00 per share. Each share of Series C Convertible Preferred Stock, if converted on or after the 181st day of its initial issuance, is convertible into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) 75% of the average of the trading prices five days prior to conversion but in no case less than $0.90 per share. In addition, all outstanding shares of Series C Convertible Preferred Stock may be automatically converted upon the occurrence of a qualified offering of at least $5 million of gross proceeds (“Qualified Offering”) or an approved listing of common stock on a national stock exchange (“Uplisting”). In the event of a Qualified Offering, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) 85% of the price of the securities sold in the Qualified Offering. In the event of an Uplisting, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) if converted within 180 days of such share’s initial issuance, $1.00 per share, and if converted on or after the 181st day of its initial issuance, 75% of the average of the trading prices five days prior to conversion but in no case less than $0.90 per share.
During the three months ended September 30, 2019, the Company sold to certain investors an aggregate of 20.68 shares of Series C Convertible Preferred Stock and two-year immediately vested warrantsgranted five-year options to purchase an aggregatea total of 51,70010,000 shares of the Company’s common stock at an exercise price of $1.50$0.66 per share for aggregate gross proceedsto an employee pursuant to the 2018 Plan. One-fourth of $186,000, less cash issuance coststhe options will vest on the first-year anniversary of $47,000, for aggregate net proceeds of $139,000.the grant date and the remaining options vest monthly over three years. The warrants, which were determined to be classified within stockholders’ deficiency,options had an aggregate issuancegrant date fair value of $10,779.$3,609 which is recognized over the vesting period. The Company has computedestimated the fair value of warrantsthe options using the Black-Scholes pricing modelOption Pricing Model with the following assumptions: risk free(a) stock price of $0.66 per share; (b) volatility of 93%; (c) expected term of 2.5 years; (d) risk-free interest rate – 1.53% - 1.74%of 1.58%; expected term – 2 years, expected volatility – 97%, expected dividends – 0%.
The Series C Convertible Preferred Stock is redeemable at the Company’s option, therefore it has been classified within stockholders’ deficiency on the condensed consolidated balance sheet. An overall analysisand (e) a dividend rate of its features performed by the Company determined that the Series C Convertible Preferred Stock was more akin to equity. As a result, while the embedded conversion option (“ECO”) contained certain anti-dilution price protection mechanisms, since the ECO was clearly and closely related to the equity host, it was not required to be bifurcated and accounted for as a derivative liability under ASC 815. The Company determined that the Series C Convertible Preferred Stock did not contain a beneficial conversion feature, since the conversion price exceeded the estimated fair value of the Company’s common stock as of the commitment date, except upon a conversion in the event of a Qualified Offering, which was determined to be a contingent beneficial conversion feature, which will be measured when the contingency is resolved and, if determined to be beneficial at such time, will be recognized.0.0%.
Stock-Based Compensation
During the three and nine months ended September 30,March 31, 2020 and 2019, the Company recognized stock-based compensation expense of $138,640$12,728 and $231,751$47,940 (which includes the issuance of 185,96625,000 shares of immediately-vested common stock for $133,660 of services provided)legal fees), respectively, and during the three and nine months ended September 30, 2018, the Company recognized stock-based compensation expense of $94,864 and $402,656, respectively, related to restricted common stock and stock options, of which $8,112 and warrants, which are included within$16,300, respectively was charged to research and development expense and $4,616 and $31,640, respectively was charged to general and administrative expenses on the condensed consolidated statements of operations.expense. As of September 30, 2019,March 31, 2020, there was $152,794$85,917 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of1.98 2.22 years.
The Company has two operating leasesfollowing table presents information related to stock-based compensation for real estate which have remaining terms that are less than one year. The Company elected not to recognize short-term leases on the balance sheet and all costs were recognized as selling, general and administrative expenses on the condensed consolidated statements of operations. For the three and nine months ended September 30, 2019, operating lease expense was $41,281March 31, 2020 and $121,769, respectively. For the three and nine months ended September 30, 2018, operating lease expense was $40,373 and $87,039, respectively. As of September 30, 2019, the Company does not have any financing leases.2019:
March 31, | ||||||||
2020 | 2019 | |||||||
Common stock | $ | 2,200 | $ | 28,380 | ||||
Stock options | 10,528 | 19,560 | ||||||
Total | $ | 12,728 | $ | 47,940 |
Patent License AgreementOperating 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 21, 2018,31, 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 withto extend the National Renewable Energy Laboratory (“NREL”) grantingterm of its original lease from June 30, 2020 to December 31, 2020. Monthly rental payments under 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 paymentrenewed lease total $5,107, which comprises of $12,000 payable over one year, (ii) royalties ranging from 1.5% to 3.75% on the net sales price$4,552 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. For the three and nine months ended September 30, 2019, the Company recorded royaltiesbase rent plus $555 of $450 and $1,140, respectively, that were included within cost of revenues. There were no royalties earned during the three and nine months ended September 30, 2018. association fees.
Securities Purchase Agreement
On April 2, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the stockholders (the “Sellers”) holding 100% of the ownership interest in TECHTOM Co., Ltd. (“TECHTOM”), a Japanese limited liability company, pursuant to which the Company agreed to purchase from the Sellers, subject to the satisfaction of certain closing conditions, all ownership interests in TECHTOM and any and all claims, notes and other liabilities owed by TECHTOM to the Sellers (the “Acquisition”).
On July 5, 2019, the Company entered into a Rescission and Termination Agreement (the “Termination Agreement”) with the Sellers (each Seller, individually, and the Company, a “Party” or collectively, the “Parties”) holding 100% of the ownership interest in TECHTOM to terminate the Purchase Agreement.
Pursuant to the Termination Agreement, each of the Parties mutually agreed (i) to rescind and terminate the Purchase Agreement, relieving each Party of their respective duties and obligations arising under the Purchase Agreement; and (ii) to a general release of all other respective Parties from all claims arising out of the Purchase Agreement or the Termination Agreement. Each Party is responsible for all costs and expenses incurred by such Party in connection with the Purchase Agreement or the Termination Agreement.
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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. ("KULR" and, including its subsidiary, KULR Technology Corporation (“KULR”), the(the “Company”) as of September 30, 2019March 31, 2020 and for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 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, 20182019 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 29, 2019.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, batteries, and other components across an array of applications. Currently, our main focus is a total solution to battery safety by which we are focused on targetingaim to mitigate the effects of thermal runaway propagation. We also target and provide thermal solutions for the following applications: electric vehicles, and autonomous driving systems (collectively referred to herein as “E-Mobility”); artificial intelligence and Cloud computing; energy storage; andcloud computing, 5G communication technologies.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 with roots in aerospace and defense, that provides what we believe to be superior thermal conductivity and heat dissipation infor 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 E-Mobilitycommercial battery powered products safer and more stable.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 E-Mobility industry has createddangers 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 create significant new opportunities forgreatly impact the applicationfuture of warfare. Our CRUX cathode generates powerful electron pulses by field emission from the tops of our technologycarbon fiber coating which has the potential to further develop the current technology. Thermal management is another critical component of both hypersonic weapons programs and know-how. We believe these new opportunities will be further driven by certain changing preferences that we’ve observedspace missions and is another area in younger generations that must increasingly cope with higher population density, global warming,which our products excel. Our carbon fiber velvets are used for thermal management in missile defense programs and the rapidly evolving communications and computing needsare particularly effective because of their personal devicessurvivability at very high temperatures. They are also very effective at transferring heat, and mitigate the surrounding infrastructure. As a result,risk of overheating in such high-risk environments. Historically we predict that the younger generations will increasingly preferhave provided value to attend meetings by video conference; rent a car, bike, or scooter, or call an app-based car service instead of owning a vehicle;this sector and leverage the Cloudwe look forward to perform tasks traditionally done in person, such as shopping for lunch, clothes, electronicsfurther developing our relationships with Airforce Research Lab, Naval Research Lab and other consumer goods that also leverages an expanding E-Mobility delivery network.prime contractors to market our solutions.
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In addition to evolving demands led by consumer-preferences,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, on portability and on high-demand processing power. For example, car manufacturersKULR’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 increasingly providing options that take over the responsibilityseeing a big growth opportunity for driving, diagnosing its own service requirementsthermal management for 5G. Cloud computing is also an application of interest since high power communications chips and analyzing on-board systems data and efficiency. The communications and entertainment industries are leveraging increasingly more powerful and portable devices to deliver live and high-definition content and experiences. These innovations willoptical communication modules require high bandwidth communication devices that can handle the power drain and computational requirements to keep up with the sophisticated security and software tools that will power these advanced product offerings. As a result of these manufacturer and consumer trends, we believe that the new generations of high-powered, small form-factor semiconductors are out-pacing the ability to control unwanted heat generation in lithium ion batteries.cooling.
The above-described advances in micro technology, portable power, and compact energy efficient devices linked to an ever-widening Internet of Things (“IoT”) via the Cloud are driving opportunities that forms the focus of the Company’s business development plan. We believe that our core technology and historical development focus on improving lithium-ion battery performance and safety, positions us in a competitively advantageous position to enhance key components to the evolving mobile applications for a wide range of consumer products and IoT. We have found that 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, or even cause spontaneous combustion. However, electronic system components must operate within a specific temperature range on both the high and low end to operate properly. After strenuous testing, we believe we have developed heat management solutions that significantly improve upon traditional heat storage and dissipation solutions and improve upon their rigidity and durability. We also believe that the traditional solutions are not equipped to handle the evolving marketplace. However, through a combination of custom design services and provision of proprietary hardware solutions, our products reduce manufacturing complexity and provide a lighter weight solution than traditional thermal management materials and, we believe, can meet the heat management demands of components and batteries being designed into the newest mobile technologies and applications.
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 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 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
Series C Convertible Preferred StockCOVID-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 September 30, 2019,March 31, 2020, the Company soldrepaid $50,000 of the Principal Amount on the Note. Subsequent to certain investorsMarch 31, 2020, and pursuant to the terms of the Note, we repaid an aggregate of 20.68 shares of Series C Convertible Preferred Stock$175,000 against the Principal Amount.
PPR Product License and two-year immediately vested warrants to purchase an aggregate of 51,700 shares of the Company’s common stock at an exercise price of $1.50 per share for aggregate gross proceeds of $186,000, less cash issuance costs of $47,000, for aggregate net proceeds of $139,000. The warrants, which were determined to be classified within stockholders’ deficiency, had an aggregate issuance date fair value of $10,779.Supply Agreement - Americase’s Battery Bag
On August 19, 2019, the Company filedApril 13, 2020, we announced that we entered into a license and supply agreement with the SecretaryAmericase, LLC, granting a license for Americase’s use of State of the State of Delaware the Certificate of Designation of Series C Convertible Preferred Stock (the “Certificate of Designation”), which became effective upon filing. Pursuantour passive propagation resistant (PPR) technology and agreeing to the Certificate of Designation, the Company designated 400 shares as Series C Convertible Preferred Stock out of the authorized and unissued preferred stock of the Company, par value $0.0001 per share.supply our PPR materials for Americase’s “Battery Bag” products.
Series C Convertible PreferredCommon Stock is senior in liquidation preference to the Company’s common stock for an amount equal to the stated value per share of $10,000 (“Stated Value”). Holders of shares of Series C Convertible Preferred Stock shall vote on an as-if-converted-to-common-stock basis with the common stock. Holders of shares of Series C Convertible Preferred Stock are entitled to receive dividends when, as and if declared by the Board of Directors, at an annual rate of twelve percent (12%) beginning one year after each share’s issuance. The Company may elect to redeem all or part of each share of Series C Convertible Preferred Stock for the Stated Value.
Each share of Series C Convertible Preferred Stock, if converted within 180 days of such share’s initial issuance, is convertible into a number ofOn June 12, 2020, we issued 30,000 shares of common stock equalthat vest immediately with a grant date value of approximately $30,000 related to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) $1.00 per share. Each share of Series C Convertible Preferred Stock, if converted on or after the 181st day of its initial issuance, is convertible into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) 75% of the average of the trading prices five days prior to conversion but in no case less than $0.90 per share. In addition, all outstanding shares of Series C Convertible Preferred Stock may be automatically converted upon the occurrence of a qualified offering of at least $5 million of gross proceeds (“Qualified Offering”) or an approved listing of common stock on a national stock exchange (“Uplisting”). In the event of a Qualified Offering, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) 85% of the price of the securities sold in the Qualified Offering. In the event of an Uplisting, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) if converted within 180 days of such share’s initial issuance, $1.00 per share, and if converted on or after the 181st day of its initial issuance, 75% of the average of the trading prices five days prior to conversion but in no case less than $0.90 per share.consulting services provided.
Customer EngagementsOperating Lease Renewal
DuringOn June 15, 2020, we entered into an agreement to extend the current fiscal year, we have successfully addedterm of our original lease from June 30, 2020 to our listDecember 31, 2020. Monthly rental payments under the renewed lease total $5,107, which comprises of active customers and continue to expand our relationships with prospective customers. Typically, a new customer engagement starts out with initial service projects that include the analysis$4,552 of customer heat management challenges, evaluationbase rent plus $555 of potential solutions and designs, and selection of solutions that may be addressed by our existing product or that require new designs and features, leading to new general or custom products. The process of designing next generation products for prospective customers is lengthy. However, we believe we have made significant progress working with existing and prospective customers on developing product solutions. Once customer solutions are identified and developed, we would expect the customer to submit product purchase orders. Although no assurances can be made that such purchase orders would be placed, such orders could not only lead to higher-volume production sales but could (i) generate significantly higher gross margins as compared to the earlier engagement stage service projects, and (ii) provide greater prospects for scaling.association fees.
Active Development Projects
As we continue to advance our new customer engagements and submit our solutions against competitor solutions in various independent and customer testing, we believe our carbon-fiber based electronics and battery cooling technologies are superior to traditionally used heat sinks (such as aluminum and copper heat sinks) and thermal interface materials (such as thermal gels and pads). We believe that our solutions are not only generally more thermally conductive, but also lighter in weight and in many cases offer product design flexibility. For instance, our HYDRA TRS products have been independently tested to show that they have outperformed our competitors’ solutions in preventing cell-to-cell thermal runaway propagation and requiring higher trigger temperatures at which the thermal runaway event occurs. Our TRS battery storage bags were selected by the U.S. government’s NASA to transport and store laptop batteries aboard the International Space Station. Additionally, we are currently working with top tier companies in the medical device, electric aircraft, and global automaker industries on designing safer, more effective battery heat sink solutions. No assurances can be made, however, that any of our active development projects will result in continued or future sales revenues.
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Results of Operations
Three and Nine Months Ended September 30, 2019March 31, 2020 Compared With Three and Nine Months Ended September 30, 2018March 31, 2019
Revenues
Our revenues consisted of the following types:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Product sales | $ | 464,772 | $ | 482,798 | $ | 686,522 | $ | 735,941 | ||||||||
Contract services | 61,950 | - | 91,462 | 145,988 | ||||||||||||
Total revenue | $ | 526,722 | $ | 482,798 | $ | 777,984 | $ | 881,929 |
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 September 30,March 31, 2020 and 2019, and 2018, we generated $526,722$77,500 and $482,798$194,952 of revenues, an increasea decrease of $43,924,$117,452, or 9%60%. The increasedecrease in product shipments in 2019 was primarily due to contract services provided during the 2019 period.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 September 30,March 31, 2020 and 2019 primarily consisted of sales of our component product, Carbon Fiber Velvet (“CFV”) thermal management solution, Internal Short Circuit (“ISC”) battery cell products, as well as certain research and development contract and onsite engineering services. Our revenues during the three months ended September 30, 2018 consisted of sales of our component product and CFV thermal management solution.
Our revenue for the three months ended September 30, 2019 and 2018 was generated from 11 and 6 different customers, respectively.
For the nine months ended September 30, 2019 and 2018, we generated $777,984 and $881,929 of revenues, a decrease of $103,946, or 12%. The decrease was primarily due to the lumpy nature of conversion of project-based services into orders of products during the 2019 period.
Our revenues during the nine months ended September 30, 2019 consisted of our component product, CFV thermal management solution, ISC battery cell products, as well as certain research and development contract and onsite engineering services. Our revenues during the nine months ended September 30, 2018 consisted of sales of our component product, CFV thermal management solution, sales of an Original Equipment Manufacturer (“OEM”) product as well as certain research and development contract services.
Our revenue for the nine months ended September 30, 2019 and 2018 was generated from 21 and 11 different customers, respectively.
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 in the early stages of 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.
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 September 30,March 31, 2020 and 2019, and 2018, cost of revenues was $109,051$25,926 and $75,384, respectively, an increase of $33,667, or 45%. The increase was primarily due to the manufacturing of ISC battery cells related to the sales during the three months ended September 30, 2019. The gross margin percentage was 79% and 84% for the three months ended September 30, 2019 and 2018,$61,517, respectively. The decrease in margins during the 2019 period was primarily due to a reduction in sales of higher margin products as compared to the 2018 period as well as a result of a difference in product mix in the 2019 period as compared to the 2018 period.
For the nine months ended September 30, 2019 and 2018, cost of revenues was $199,118 and $258,801, respectively, a decrease of $59,683, or 23%. The decrease was primarily due to an increased volumelower sales of contractsproducts.
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 the 2018 period, which required additional labor and materials.gross profit of $81,861, or 61%. The gross margin percentage was 74%67% and 71%68% for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. The increasedecrease during the 2019 period resulted primarily from a more favorable product mix being sold as comparedthree months ended March 31, 2020 is attributable to the 2018 period.change of product mix.
Research and Development
Research and development (“R&D”) includeincludes expenses incurred in connection with the R&D of our CFV thermal management solution and ISC cells.solution. R&D expenses are expensed as they are incurred.
For the three months ended September 30, 2019,March 31, 2020, R&D expenses decreased by $23,224,$17,779 or 14%, to $137,970$129,492 from $161,194$113,192, for the three months ended September 30, 2018, relatedMarch 31, 2019. The decrease is primarily due to a reduction$7,000 of R&D supplies in the 2019 period. Having completed our early R&D foundation work, we reallocated certain resources from R&D to production which resulted in lower R&D spending in 2019 than in the prior year.
For the nine months ended September 30, 2019, R&D expenses decreased by $34,175, or 9%, to $365,709 from $399,884 for the nine months ended September 30, 2018, related to a reductionpatent costs and $8,000 of R&D supplies in the 2019 period.stock-based compensation.
We expect that our R&D expenses will increase as we receive further performance feedback from current customers and identify new target features and product opportunities.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, legal and professional fees, stock-based compensation, marketing, travel, rent and office expenses.expense.
For the three months ended September 30, 2019, selling, general and administrative expenses increased by $85,605, or 19%, to $546,982 from $461,377 for the three months ended September 30, 2018. The increase is primarily due to increases in the 2019 period of approximately $76,000 of professional fees incurred in connection with our Form S-3 filing as well as new consulting agreements initiated in 2019 and $9,000 of non-cash stock-based compensation expense.
For the nine months ended September 30, 2019,March 31, 2020, selling, general and administrative expenses decreased by $241,900,$99,664 or 13%18%, to $1,666,735$469,527 from $1,908,635$569,191 for the ninethree months ended September 30, 2018.March 31, 2019. The decrease is primarily due to decreasesan approximate $43,000 decrease in the 2019 period of approximately $66,000 of payroll and benefittravel expenses, $251,000 of non-cash stock-based compensation expense, partially offset by increases$29,000 decrease in the 2019 period of approximately $35,000 of rent expense due to the termination of an operating lease during the end of fourth quarter of 2019, and $46,000$20,000 decrease in salaries and other benefits due to the salary cuts implemented during the end of professional fees.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 ninethree months ended September 30,March 31, 2020 and 2019, and 2018, cash used in operating activities was $1,206,135$698,110 and $1,064,953,$286,420, respectively. Our cash used in operations for the ninethree months ended September 30,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 $1,454,643,$565,693, adjusted for non-cash expenses in the aggregate amount of $237,325,$51,030, partially offset by $11,183$228,243 of net cash provided by changes in the levels of operating assets and liabilities.Our
There were no cash used in operationsflows from investing activities for the ninethree months ended September 30, 2018 was primarily attributable to our net loss of $1,661,718, adjusted for non-cash expenses in the aggregate amount of $390,305, partially offset by $206,478 of net cash provided by changes in the levels of operating assetsMarch 31, 2020 and liabilities.2019.
For the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, cash used in investing activities was $0 and $15,476, respectively. Cash used in investing activities during the nine months ended September 30, 2018 was due to purchases of property and equipment.
For the nine months ended September 30, 2019, and 2018, cash provided by financing activities was $1,052,300$1,223,401 and $359,000,$155,000, respectively. CashOur cash provided by financing activities duringfor the ninethree months ended September 30, 2019March 31, 2020 was due to $898,300$1,410,000 of net proceeds from salethe issuance of common stocka note payable, offset by the payment of debt issuance costs and $169,000 ofa debt repayment. The cash provided from financing activities during the three months ended March 31, 2019 was proceeds from the sale of Series C Convertible Preferred stock and warrants, partially offset by the payment of $15,000 of offering costs. Cash provided by financing activities during the nine months ended September 30, 2018 was due to the sale of common stock in our private placement.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 product revenues and/or raise additional capital to fund our operations. These conditions indicate thatFurther, as of March 31, 2020, there is substantial doubt aboutoutstanding 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 continuemaintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a going concern within one year aftertimely 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 statement issuance date.condition.
We areEffective 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 funding ourhas $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 a month-to-month basis. 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 there are currently no commitments in place for new financing at this time andthrough 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 BalanceOff-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 Overover Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the thirdfirst quarter of 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as noted above.
reporting.
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None.
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 March 29, 2019.May 14, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended September 30, 2019, we issued 45,966 shares of restricted common stock for consulting services. The issuances of securities were exempt from the registrations requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.None.
During the three months ended September 30, 2019, certain holders of Series B Convertible Preferred Stock elected to convert an aggregate of 16,371 shares of Series B Convertible Preferred Stock pursuant to which the Company issued an aggregate of 818,550 shares of restricted common stock. Shares of common stock issued upon the exercise of conversion rights are exempt securities pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
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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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.
By | /s/Michael Mo | |
Michael Mo Chief Executive Officer and Chairman ( |
By | /s/Simon Westbrook | |
Simon Westbrook Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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