UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

  

(Mark One)

  

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

  

For the quarterly period ended:June 30, 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, California

(Address of principal executive offices)

 

95008

(Zip Code)

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

 

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

 

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

Title of each classTrading SymbolName of each exchange on which registered
NoneNone.N/AN/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 companyx
   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 August 12, 2019,June 25, 2020, there were 80,975,65581,618,875 shares of Common Stock, $0.0001 par value, issued and outstanding. 

 

 

EXPLANATORY NOTE

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

 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

 

TABLE OF CONTENTS

 

  Page
   
PART I – FINANCIAL INFORMATION
   
Item 1. Financial Statements.1
   
 Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited)March 31, 2020 (unaudited) and December 31, 201820191
   
 Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30,March 31, 2020 and 2019 and 20182
   
 Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficiency)Stockholders’ Deficiency for the
Six Three Months Ended June 30,March 31, 2020 and 2019 and 20183
   
 Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Three Months Ended June 30,March 31, 2020 and 2019 and 20184
   
 Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)5
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.1113
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk.1518
   
Item 4. Controls and Procedures.1518
   
PART II - OTHER INFORMATION
   
Item 1. Legal Proceedings.1619
   
Item 1A. Risk Factors.1619
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.1619
   
Item 3. Defaults Upon Senior Securities.1619
   
Item 4. Mine Safety Disclosures.1619
   
Item 5. Other Information.1619
   
Item 6. Exhibits.1619
   
SIGNATURES1720

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

   

 June 30, December 31, 
 2019  2018  March 31,
2020
 December 31,
2019
 
 (unaudited)     (unaudited)   
Assets             
             
Current Assets:             
Cash $144,314  $229,896  $634,148  $108,857 
Accounts receivable  62,475   112,224  56,812 30,101 
Inventory  8,304   9,594  31,605 27,091 
Prepaid expenses  41,410   27,033  68,579 23,825 
Other current assets  17,016   27,569   13,764  19,376 
Deferred expenses  92,516   - 
        
Total Current Assets  366,035   406,316  804,908 209,250 
Property and equipment, net  38,758   44,791  26,973 27,516 
Deferred offering costs  15,000   -   78,259  - 
        
Total Assets $419,793  $451,107  $910,140 $236,766 
             
Liabilities and Stockholders' Deficiency             
             
Current Liabilities:             
Accounts payable $184,598  $117,995  $210,008 $344,660 
Accounts payable - related party 3,622 4,253 
Accrued expenses and other current liabilities  546,569   374,330  665,320 659,399 
Accrued expenses and other current liabilities - related party  58,919   83,919  - 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  790,086   576,244  1,968,188 1,033,731 
             
Commitments and contingencies (See Note 9)        
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 June 30, 2019 and December 31, 2018  -   - 
Series B Preferred Stock, 31,000 shares designated;        
30,858 issued and outstanding        
at June 30, 2019 and December 31, 2018  3   3 
Common stock, $0.0001 par value, 500,000,000 shares authorized;        
80,092,315 and 78,706,256 shares issued and outstanding        
at June 30, 2019 and December 31, 2018, respectively  8,009   7,871 
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  7,225,363   6,283,548  7,665,016 7,591,239 
Accumulated deficit  (7,603,668)  (6,416,559)  (8,946,565)  (8,396,312)
        
Total Stockholders' Deficiency  (370,293)  (125,137)
        
Total Liabilities and Stockholders' Deficiency $419,793  $451,107 
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  For the Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
             
Revenue $56,310  $171,091  $251,262  $399,131 
                 
Cost of revenue  28,550   33,470   90,067   183,417 
                 
Gross Profit  27,760   137,621   161,195   215,714 
                 
Operating Expenses:                
Research and development  114,547   119,006   227,739   238,690 
Selling, general and administrative  534,262   663,018   1,119,753   1,447,258 
                 
Total Operating Expenses  648,809   782,024   1,347,492   1,685,948 
                 
Loss From Operations  (621,049)  (644,403)  (1,186,297)  (1,470,234)
                 
Other Expense:                
Interest expense, net  (367)  (219)  (812)  (233)
                 
Total Other Expense  (367)  (219)  (812)  (233)
                 
Net Loss $(621,416) $(644,622) $(1,187,109) $(1,470,467)
                 
Net Loss Per Share                
- Basic and Diluted $(0.01) $(0.01) $(0.01) $(0.02)
                 
Weighted Average Number of Common Shares Outstanding                
- Basic and Diluted  79,918,048   77,385,972   79,365,031   77,303,030 

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

Other Expenses: 

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

  

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

 

 2 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

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

(unaudited)

 

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

  FOR THE SIX MONTHS ENDED JUNE 30, 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)
                             
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)

 

  FOR THE SIX MONTHS ENDED JUNE 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)

  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 Six Months Ended 
  June 30, 
  2019  2018 
       
Cash Flows From Operating Activities:        
Net loss $(1,187,109) $(1,470,467)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation expense  6,033   8,524 
Write-down of inventory  90   - 
Stock-based compensation  93,111   307,792 
Changes in operating assets and liabilities:        
Accounts receivable  49,749   32,862 
Inventory  1,200   - 
Prepaid expenses  (14,377)  64,801 
Other current assets  10,553   - 
Deferred expenses  (92,516)  - 
Accounts payable  66,603   169,291 
Accrued expenses and other current liabilities  122,781   37,946 
Accrued expenses and other current liabilities - related party  (25,000)  (92,038)
Deferred revenue  -   161,909 
         
Total Adjustments  218,227   691,087 
         
Net Cash Used In Operating Activities  (968,882)  (779,380)
         
Cash Flows From Investing Activities:        
Purchases of property and equipment  -   (8,350)
         
Net Cash Used In Investing Activities  -   (8,350)
         
Cash Flows From Financing Activities:        
Proceeds from sale of common stock  898,300   - 
Payment of deferred offering costs  (15,000)  - 
         
Net Cash Provided By Financing Activities  883,300   - 
         
Net Decrease In Cash  (85,582)  (787,730)
         
Cash - Beginning of Period  229,896   895,761 
         
Cash - End of Period $144,314  $108,031 
         
Supplemental Disclosures of Cash Flow Information:        
Cash paid during the period for:        
Interest $446  $294 
Income taxes $-  $2,400 
         
Non-cash investing and financing activities:        
Accrual of deferred offering costs $-  $30,000 

  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 TECHNOLOGYTECHONOLOGY GROUP, INC. AND& SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)(unaudited)

 

NoteNOTE 1Business Organization, Nature of Operations and Basis of PresentationBUSINESS ORGANIZATION AND NATURE OF OPERATIONS

 

Organization and Operations

 

KULR Technology Group, Inc., through its wholly-owned subsidiary, KULR Technology Corporation (collectively referred to as “KULR” or the “Company”), develops and commercializes high-performance thermal management technologies for electronics, batteries, and other components across a range of applications. Currently, the Company is focused on targeting the following applications: electric vehicles and autonomous driving systems (collectively referred to herein as “E-Mobility”); artificial intelligence and Cloud computing; energy storage; and 5G communication technologies. KULR provides heat management solutions to enhance the performance and safety of battery packs used in electric vehicles, communication devices, and aerospace and defense.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 June 30, 2019March 31, 2020 and for the three months ended March 31, 2020 and six months then ended.2019. The results of operations for the three and six months ended June 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.

 

NoteNOTE 2Going Concern and Management’s PlansGOING CONCERN AND MANAGEMENT’S PLANS

 

The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations. As of March 31, 2020, the Company had cash of $634,148 and a working capital deficit of $1,163,280. For the three months ended March 31, 2020 and 2019, the Company incurred net losses of $550,253 and $565,693, respectively, and used cash in operations of $698,110 and $286,420, respectively. It is expected that its research and development and general and administrative expenses will continue to increase and, as a result, the Company will eventually need to generate significant product revenues to achieve profitability. These conditions indicate that thereFurther, 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 substantial doubt aboutdependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition

5

NOTE 2GOING CONCERN AND MANAGEMENT’S PLANS – CONTINUED

Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with an Investor, pursuant to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to the Investor’s approval for amounts over $100,000) of shares of the Company’s 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.

 

5

NoteNOTE 3Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 June 30, 2019March 31, 2020 and December 31, 2018.2019, respectively.

 

Customer concentrations are as follows:

  Revenues  Accounts Receivable 
  For the Three Months Ended  For the Six Months Ended  As of As of 
  June 30,  June 30,  June 30, 2019 December 31, 2018 
  2019 2018  2019 2018      
                
Customer A  *  21%  *  37%  *  * 
Customer B  *  *   *  27%  *  * 
Customer C  *  70%  *  30%  *  63%
Customer D  17% *   *  *   16% 37%
Customer E  64% *   14% *   68% * 
Customer F  18% *   *  *   16% * 
Customer G  *  *   47% *   *  * 
Total  99% 91%  61% 94%  100% 100%

* Less than 10%

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

* Less than 10 %

                

6

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Concentrations of Credit Risk – Continued

  

There is no assurance the Company will continue to receive significant revenues from any of these customers. A reductionsAny 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. BecauseAs a result of the Company’s significant customer concentrations, its gross profit and operating incomeresults from operations could fluctuate significantly due to changes in political, environmental, or economic conditions, or the loss of, reduction of business from, or less favorable terms with any of the Company’s significant customers.

Vendor concentrations are as follows:

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

Deferred Offering Costs

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

  

Revenue Recognition

  

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

The following five steps are applied to achieve that core principle:

·Step 1:1: Identify the contract with the customer;

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

·Step 3:3: Determine the transaction price;

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

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

  

 67 

 

 

NoteNOTE 3Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinuedCONTINUED

 

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

 

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

  

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

  

 For the Three Months Ended For the Six Months Ended  For the Three Months Ended 
 June 30,  June 30,  March 31, 
 2019  2018  2019  2018  2020  2019 
              
Product sales $52,310  $134,791  $221,750  $253,143  $28,000  $169,440 
Contract services  4,000   36,300   29,512   145,988   49,500   25,512 
Total revenue $56,310  $171,091  $251,262  $399,131  $77,500  $194,952 

  

As of June 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 six months ended June 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 Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
             
Non-vested restricted stock  -   54,028   -   136,970 
Series B Convertible Preferred Stock  1,542,900   -   1,542,900   - 
Options  300,000   -   300,000   - 
Total  1,842,900   54,028   1,842,900   136,970 

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

  

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, 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 value 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 prepaidoperations 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.loss per share.

 

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.

 78 

 

 

NoteNOTE 4Deferred ExpensesPREPAID EXPENSES

  

Deferred expenses consist of labor and materials that are attributable to customer contracts that the Company has not completed itsperformance obligation under the contractand, as a result, has not recognized revenue. As of June 30,March 31, 2020 and December 31, 2019, deferredprepaid expenses were $92,516, which consisted of labor and materials, totaling $43,843 and $48,673, respectively. As of December 31, 2018, there were no deferred expenses.the following:

 

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

NoteNOTE 5Accrued Expenses and Other Current LiabilitiesACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

As of June 30, 2019March 31, 2020 and December 31, 2018,2019, accrued expenses and other current liabilities consisted of the following:

 

 June 30, December 31,  March 31, December 31, 
 2019  2018  2020  2019 
 (unaudited)         
Payroll and vacation $388,894  $252,043  $510,830  $525,917 
Legal and professional fees  29,745   47,502   102,676   60,000 
Credit card payable  23,139   4,581 
Travel expenses  55,226   48,248   10,591   45,707 
Payroll and income tax payable  10,792   12,678 
Research and development expenses  -   2,850 
Credit card payable  4,475   4,586 
Accrued issuable equity  49,459   3,960 
Rent  176   176 
Other  7,802   2,287   18,084   23,194 
Total accrued expenses and other current liabilities $546,569  $374,330  $665,320  $659,399 

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

NOTE 6LINE OF CREDIT

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

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

NOTE 7NOTE PAYABLE

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

9

NOTE 7NOTE PAYABLE – CONTINUED

 

The Note bears no coupon interest (original issue discount only) and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the Note and which includes the early termination of a standby equity distribution agreement with the Investor (see Note 9 – Stockholders’ Deficiency – Standby Equity Distribution Agreement for additional details). The Company has agreedwill 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 issue an aggregatea payment premium equal to the 10% of 43,895 sharesthe amount being prepaid. During the three months ended March 31, 2020, the Company repaid principal on the Note of common stock and warrants to purchase 75,000 shares of common stock for consulting fees. As of June 30, 2019, the stock and warrants had not been issued$50,000, and as a result, $49,459 of accrued issuable equity at fair valueMarch 31, 2020, the outstanding aggregate principal balance of the Note was included within accrued expenses and other current liabilities.$1,450,000. During the three months ended March 31, 2020, the Company recognized amortization of debt discount of $19,220 related to the Note.

 

Note 6NOTE 8Related Party TransactionsRELATED PARTY TRANSACTIONS

 

Accrued Expenses and Other Current LiabilitiesAccounts Payable – Related Party

 

Accrued expenses and other current liabilitiesAccounts payable – related parties consistparty consists of a liability of $58,919$3,622 and $83,919$4,253 as of June 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 in prior periods.

Accrued Expenses and Other Current Liabilities – Related Party

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

 

Note 7NOTE 9Stockholders' DeficiencySTOCKHOLDERS’ DEFICIENCY

 

Common StockStandby Equity Distribution Agreement

 

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

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

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

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

10

NOTE 9STOCKHOLDERS’ DEFICIENCY – CONTINUED

Standby Equity Distribution Agreement – Continued

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

The Company did not sell any Shares pursuant to the SEDA during the three months ended June 30, 2019,March 31, 2020. Please see Note 11 – Subsequent Events for additional details regarding the sale of Shares subsequent to March 31, 2020.

Stock Options

On January 1, 2020, the Company sold an aggregategranted five-year options to purchase a total of 1,361,05910,000 shares of common stock at an exercise price of $0.66 per share to accredited investors foran employee pursuant to the 2018 Plan. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options vest monthly over three years. The options had an aggregate gross cash proceedsgrant date value of $898,300.$3,609 which is recognized over the vesting period. The Company estimated the fair value of the options using the Black-Scholes Option Pricing Model with the following assumptions: (a) stock price of $0.66 per share; (b) volatility of 93%; (c) expected term of 2.5 years; (d) risk-free interest rate of 1.58%; and (e) a dividend rate of 0.0%.

  

Stock-Based Compensation

  

During the three and six months ended June 30,March 31, 2020 and 2019, the Company recognized stock-based compensation expense of $45,171$12,728 and $93,111$47,940 (which includes the issuance of 25,000 shares of immediately-vested common stock for legal fees of $36,060)fees), respectively, and during the three and six months ended June 30, 2018, the Company recognized stock-based compensation expense of $124,835 and $307,792, 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 June 30, 2019,March 31, 2020, there was $137,003$85,917 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of 2.52.22 years.

8

Note 7Stockholders' Deficiency – Continued

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”). Although no assurances can be made that the Acquisition will be completed, upon such Acquisition, TECHTOM would become a wholly-owned subsidiary of the Company.

Pursuant to the Purchase Agreement, the Company agreed to pay the Sellers, against delivery of all Ownership and Claims, the following aggregate acquisition price: (i) $1,700,000 cash consideration (the “Cash Consideration”); and (ii) one hundred (100) shares of the Company’s Series C Convertible Preferred Stock (“Series C Preferred”), which class of Series C Preferred is to be designated prior to the closing of the Acquisition. It is contemplated that the Series C Preferred will have, among others, the following rights, preferences and limitation: (i) a stated value of $10,000 per share; (ii) no right to receive dividends; (iii) the right to convert each share into twenty thousand shares of the Company’s common stock, which right is subject to a 4.99% beneficial ownership limitation; and (iv) the right to vote with the Company’s shareholders on an as-converted basis. The rights and preferences of the Series C Preferred are set forth in further detail in the form of Certificate of Designation attached as an exhibit to the Purchase Agreement and which description is qualified in its entirety to such exhibit, which is incorporated herein by reference.

See Note 10 - Subsequent Events for details associated with the termination of the Purchase Agreement.

Note 8Leases

  

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 six months ended June 30, 2019, operating lease expense was $40,103March 31, 2020 and $80,488, respectively. For the three and six months ended June 30, 2018, operating lease expense was $31,505 and $46,666, respectively. As of June 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 

Note 9NOTE 10Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES

 

Patent License AgreementOperating Lease

 

On March 21, 2018,January 1, 2020, KULR Technology Group, Inc. renewed a lease agreement for the Company entered into an5,296 square feet of space located in San Diego, California under a six-month lease agreement with the National Renewable Energy Laboratory (“NREL”) granting the Company an exclusive licenseending June 30, 2020. The base rent was increased to commercialize its patented Internal Short Circuit technology. The agreement shall be effective for as long as the licensed patents are enforceable, subject to certain early termination provisions specified in the agreement. In consideration, the Company agreed to pay to NREL the following: (i) a cash payment$4,552 per month plus association fees of $12,000 payable over one year, (ii) royalties ranging from 1.5% to 3.75% on the net sales price of the licensed products, as defined in the agreement, with minimum annual royalty payments ranging from $0 to $7,500. In addition, the Company shall use commercially reasonable efforts to bring the licensed products to market through a commercialization program that requires that certain milestones be met, as specified in the agreement.$555 per month. For the three and six months ended June 30,March 31, 2020 and 2019, operating lease expense was $10,016 and $40,385, respectively. The Company evaluated their operating lease and determined that the Company recorded royalties of $690 that were included within cost of revenues. There were no sales ofshort-term exemption available under ASC 842 applies since the licensed products during 2018, such that no royalties were earned during the three and sixlease term is less than 12 months ended June 30, 2018.

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,lease does not include a “Party”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 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 Partylease liability is responsible for all costs and expenses incurred by such Party in connection with the Purchase Agreement or the Termination Agreement.recorded.

 

 911 

 

 

NOTE 11Note 10Subsequent EventsSUBSEQUENT EVENTS

 

Common Stock

 

On July 8, 2019, the Company issued 25,000 shares of common stock at $0.66 per share in connection with services provided.

On July 9, 2019,Subsequent to March 31, 2020, the Company issued an aggregate of 39,790421,197 shares of common stock at $0.66prices between $0.72 - $1.53 per share in connectionfor 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.

 

Registration Statement

On July 11, 2019, the Company filed a shelf registration statement on Form S-3 with the United States SecuritiesNote Purchase Agreement and Exchange Commission (“SEC”). The shelf registration was declared effective by the SEC, on August 1, 2019. The registration statement will allow the Company to issue, from time to time at prices and on terms to be determined at or prior to the time of the offering, shares of its common stock, shares of our preferred stock or warrants, either individually or in units, with a total value of up to $50,000,000.

Series B Convertible Preferred StockPromissory Note

 

Subsequent to June 30, 2019, holdersMarch 31, 2020, and pursuant to the terms of Series B Convertible Preferred Stock convertedthe Note, the Company repaid an aggregate of 16,371 shares$175,000 against the Principal Amount.

Paycheck Protection Program Loan

On April 27, 2020, the Company received approximately $155,000 of Series B Convertible Preferred Stockcash 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 aggregateagreement to extend the term of 818,550 sharesits original lease from June 30, 2020 to December 31, 2020. Monthly rental payments under the renewed lease total $5,107, which comprises of common stock.

$4,552 of base rent plus $555 of association fees.

 

 1012 

 

 

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 June 30, 2019March 31, 2020 and for the three and six months ended June 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 manufacturers are increasingly providing options that take over the responsibility for driving, diagnosing its own service requirementsKULR’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 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 will 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.

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 focuslow contact pressure. 5G is one of the Company’s business development plan. We believe that our corebiggest opportunities going forward for transportation technology and historical development focus on improving lithium-ion battery performancewe would like to take part in testing of digital and safety, positions usRF tests for 5G. Testing is still in early phases for both digital and RF communication chips, however, we are seeing a competitively advantageous position to enhance key components to the evolving mobile applicationsbig growth opportunity 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 materialsfor 5G. Cloud computing is also an application of interest since high power communications chips and we believe, can meet the heat management demands of components and batteries being designed into the newest mobile technologies and applications.

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optical communication modules require cooling.

 

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

 

We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant 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

TerminationCOVID-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 Securities Purchase Agreementpotential 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 July 5, 2019,April 27, 2020, the Company entered into a Rescission and Termination Agreement (the “Termination Agreement”) with the stockholders (the “Sellers”) (each Seller, individually, and the Company, a “Party” or collectively, the “Parties”) holding 100%received approximately $155,000 of the ownership interest in TECHTOM Co., Ltd. (“TECHTOM”)cash proceeds pursuant to terminate the Securities Purchase Agreement between the Company and the Sellers, dated April 2, 2019 (the “Purchase Agreement”). The Company originally entered into the Purchase Agreement to, among other things, purchase all the ownership interests of TECHTOM from the Sellers, as previously disclosed in the Company’s Form 8-K filed on April 3, 2019.

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 Partyan unsecured loan provided in connection with the Purchase Agreement orPaycheck Protection Program (“PPP”) under the Termination Agreement.Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES Act”).

Change of Ticker Symbol

Effective on July 11, 2019, the Company changed its trading symbol from “KUTG” to “KULR.”

 

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

Standby Equity Distribution Agreement

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

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

Note Purchase Agreement and Promissory Note

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

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

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

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

Common Stock

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

Operating Lease Renewal

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

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Results of Operations

 

Three and Six Months Ended June 30, 2019March 31, 2020 Compared With Three and Six Months Ended June 30, 2018March 31, 2019

 

Revenues

 

Our revenues consisted of the following:following types:

 

  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
             
Product sales $52,310  $134,791  $221,750  $253,143 
Contract services  4,000   36,300   29,512   145,988 
Total revenue $56,310  $171,091  $251,262  $399,131 

  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 June 30,March 31, 2020 and 2019, and 2018, we generated $56,310$77,500 and $171,091$194,952 of revenues, a decrease of $114,781,$117,452, or 67%60%. The decrease in product shipments in 2019 was primarily due to a decrease in the volumeimpact of product sales, as well asCOVID-19 related shut-downs by us, and by our clients, which restricted decisions on the decrease intiming of shipments. Because our service contract completions during the second quarter of 2019.based revenue was not restricted by physical shipment issues, we were actually able to increase service revenues.

 

Our revenues during the three months ended June 30,March 31, 2020 and 2019 primarily consisted of sales 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 three months ended June 30, 2018 consisted of sales of our component product, CFV thermal management solution as well as certain research and development contract services.

Our revenue for the three months ended June 30, 2019 and 2018 was generated from 4 and 6 different customers, respectively.

For the six months ended June 30, 2019 and 2018, we generated $251,262 and $399,131 of revenues, a decrease of $147,869, or 37%. The decrease was primarily due to a decrease in service contract completions during the 2019 period.

Our revenues during the six months ended June 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 six months ended June 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 six months ended June 30, 2019 and 2018 was generated from 13 and 10 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 June 30,March 31, 2020 and 2019, and 2018, cost of revenues was $28,550$25,926 and $33,470, respectively, a decrease of $4,920, or 15%.$61,517, respectively. The decrease was primarily due to lower sales of higher margin products.

We generated a gross profit of $51,574 for the three months ended March 31, 2020 as compared to a gross profit of $133,435 for the three months ended March 31, 2019, representing a decrease in gross profit of $81,861, or 61%. The gross margin percentage was 49%67% and 80%68% for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively. The decrease in margins during the 2019 period was primarily due to a reduction in sales of higher margin products as comparedthree months ended March 31, 2020 is attributable to the 2018 period.

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For the six months ended June 30, 2019 and 2018, costchange of revenues was $90,067 and $183,417, respectively, a decrease of $93,350, or 51%. The decrease was primarily due to increased volume of contracts in the 2018 period, which requested additional labor and materials. The gross margin percentage was 64% and 54% for the six months ended June 30, 2019 and 2018, respectively. The increase during the 2019 period resulted primarily from a more favorable product mix being sold as compared to the previous period.mix.

 

Research and Development

 

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

 

For the three months ended June 30, 2019,March 31, 2020, R&D expenses decreased by $4,459,$17,779 or 4%14%, to $114,547$129,492 from $119,006$113,192, for the three months ended June 30, 2018.March 31, 2019. The decrease is attributableprimarily due to expenses associated with R&D supplies.

For the six months ended June 30, 2019, R&D expenses decreased by $10,951, or 5%, to $227,739 from $238,690 for the six months ended June 30, 2018. The decrease is attributable to expenses associated with R&D supplies.$7,000 of patent costs and $8,000 of stock-based compensation.

 

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

 

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Selling, General and Administrative

 

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

 

For the three months ended June 30, 2019,March 31, 2020, selling, general and administrative expenses decreased by $128,756,$99,664 or 19%18%, to $534,262$469,527 from $663,018$569,191 for the three months ended June 30, 2018.March 31, 2019. The decrease is primarily due to decreased professional fees of approximately $50,000 resulting froman approximate $43,000 decrease in travel expenses, $29,000 decrease in rent expense due to the termination of multiple consulting agreements, non-cash stock-based compensation expensean operating lease during the end of approximately $80,000, payrollfourth quarter of 2019, and benefit expense$20,000 decrease in salaries and other benefits due to the salary cuts implemented during the end of approximately $31,000, partially offset by increased travel expense of approximately $26,000.the current quarter due to COVID-19.

Other Expense

 

For the sixthree months ended June 30, 2019, selling, general and administrative expenses decreasedMarch 31, 2020, other expense increased by $327,505, or 23%,$20,142 to $1,119,753$20,587 from $1,447,258$445 for the sixthree months ended June 30, 2018.March 31, 2019. The decreaseincrease in other expense is primarily due to the amortization of debt discount related to the issuance of a reduction in payroll and benefit expenses of $66,000, professional fees of approximately $75,000, non-cash stock-based compensation expense of approximately $215,000, partially offset by increased rent expense of approximately $34,000.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 sixthree months ended June 30,March 31, 2020 and 2019, and 2018, cash used in operating activities was $968,882$698,110 and $779,380,$286,420, respectively. Our cash used in operations for the sixthree months ended June 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 $1,187,109,$565,693, adjusted for non-cash expenses in the aggregate amount of $99,234,$51,030, partially offset by $118,993$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 sixthree months ended June 30, 2018 was primarily attributable to our net loss of $1,470,467, adjusted for non-cash expenses in the aggregate amount of $316,316, partially offset by $374,771 of net cash provided by changes in the levels of operating assetsMarch 31, 2020 and liabilities.2019.

 

For the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, cash used in investing activities was $0 and $8,350, respectively. Cash used in investing activities during the six months ended June 30, 2018 was due to purchases of equipment.

For the six months ended June 30, 2019, and 2018, cash provided by financing activities was $883,300$1,223,401 and $0,$155,000, respectively. CashOur cash provided by financing activities for the sixthree months ended June 30, 2019 consistedMarch 31, 2020 was due to $1,410,000 of approximately $898,000net proceeds from salethe issuance of common stock, partiallya note payable, offset by the payment of $15,000debt issuance costs and a debt repayment. The cash provided from financing activities during the three months ended March 31, 2019 was proceeds from the sale of deferred offering costs.common stock.

 

We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant 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.

 

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

The Company currently has $8,000,000 available in connection with the SEDA, in order to fund its ongoing operations; however, there can be no assurance that the Company will be able to continue sell common shares pursuant to the SEDA at an acceptable price, or without causing undue dilution to existing investors beyond what the Company sold subsequent to March 31, 2020. Further, there is also no assurance that the Company will be able to continue to obtain additional funds on commercially acceptable terms, if at all. If the Company is unable to obtain adequate funds on reasonable terms, it may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures.

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We are currently funding our operations on a month-to-month basis. 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 over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the secondfirst 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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PART II.II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

  

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on March 29, 2019.May 14, 2020.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits. 

 

3.110.1Certificate of AmendmentStandby Equity Distribution Agreement dated December 31, 2018February 27, 2020 (1)
  
10.110.2SecuritiesNote Purchase Agreement dated April 2, 2019 (2)February 27, 2020 (1)
  
10.3Promissory Note dated February 27, 2020 (1)
 
31.1Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
  
31.2Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
  
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
  
101.INSXBRL Instance*
  
101.SCHXBRL Taxonomy Extension Schema*
  
101.CALXBRL Taxonomy Extension Calculation*
  
101.DEFXBRL Taxonomy Extension Definition*
  
101.LABXBRL Taxonomy Extension Labels*
  
101.PREXBRL Taxonomy Extension Presentation*

 

*Filed herewith

**Furnished herewith

(1) Previously filed as an exhibit to Form 8-K on January 7, 2019March 4, 2020 and incorporated herein by this referencereference.

(2) Previously filed as an exhibit to Form 8-K on April 3, 2019 and incorporated herein by this reference


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SIGNATURES

  

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

 

August 14, 2019June 25, 2020By/s/Michael Mo
  

Michael Mo

Chief Executive Officer and Chairman

(Principal Executive Officer)

 

August 14, 2019June 25, 2020By/s/Simon Westbrook
  

Simon Westbrook

Chief Financial Officer

(Principal Financial and Accounting Officer)

   

 

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