Washington, D.C. 20549
Indicate by check mark if registrant is
a well-known seasoned issuer, as defined under Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
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 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
x
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Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
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accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant
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As of June 30, 2018, the last business
day of the registrant’s most recently completed second fiscal quarter, there was no established public market for the registrant’s
common stock and, therefore, the registrant cannot calculate the aggregate market value of its voting and non-voting common stock
held by non-affiliates as of such date.
As of March 29, 2019, there were 78,966,105
shares of the issuer’s common stock, par value $0.0001 per share, issued and outstanding.
In this report, unless the context indicates
otherwise, the terms "Company," “KULR,” "we," "us," "our" and similar words
refer to KULR Technology Group, Inc. (“KUTG”), a Delaware corporation, and its wholly-owned subsidiary, KULR Technology
Corporation (“KTC”), a Delaware corporation.
This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, or the "Securities Act," and Section 21E of the Securities
Exchange Act of 1934 or the "Exchange Act." These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or anticipated results.
In some cases, you can identify forward-looking
statements by terms such as "may," "intend," "might," "will," "should," "could,"
"would," "expect," "believe," "anticipate," "estimate," "predict,"
"potential," or the negative of these terms. These terms and similar expressions are intended to identify forward-looking
statements. The forward-looking statements in this report are based upon management's current expectations and beliefs, which management
believes are reasonable. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor
or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any
forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent
our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
You should be aware that our actual results
could differ materially from those contained in the forward-looking statements due to a number of factors, including:
Other risks and uncertainties include such
factors, among others, as market acceptance and market demand for our products and services, pricing, the changing regulatory environment,
the effect of our accounting policies, potential seasonality, industry trends, adequacy of our financial resources to execute our
business plan, our ability to attract, retain and motivate key technical, marketing and management personnel, and other risks described
from time to time in periodic and current reports we file with the United States Securities and Exchange Commission, or the "SEC."
You should consider carefully the statements under "Item 1A. Risk Factors" and other sections of this report, which address
additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could
materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary
statements.
PART I
ITEM 1. BUSINESS
Overview
KULR Technology Group,
Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management
technologies for electronics, batteries, and other components across an array of applications. Currently, we are 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. 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 in 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-Mobility
products and other products safer and more stable.
Our management believes
that the E-Mobility industry has created and will create significant new opportunities for the application of our technology and
know-how. We believe these new opportunities will be further driven by certain changing preferences that we’ve observed in
younger generations that must increasingly cope with higher population density, global warming, and the rapidly evolving communications
and computing needs of their personal devices and the surrounding infrastructure. As a result, we predict that the younger generations
will increasingly prefer to attend meetings by video conference; rent a car, bike, or scooter, or call an app-based car service
instead of owning a vehicle; and leverage the Cloud to perform tasks traditionally done in person, such as shopping for lunch,
clothes, electronics and other consumer goods that also leverages an expanding E-Mobility delivery network.
In
addition to evolving demands led by consumer-preferences, we have observed trending manufacturer-led opportunities in industries
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 requirements
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 development 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 focus of the Company’s business development
plan.
We believe that our core technology and historical development focus on improving lithium-ion battery performance
and safety, positions us in a competitively advantageous position to enhance key components to the evolving mobile applications
for a wide range of consumer products and IoT. We have found that
as chip
performance increases, power consumption increases, and more heat is generated as a byproduct. When chip size reduces, there is
an increased potential for a hot spot on the chip, which can degrade system performance, or even cause spontaneous combustion.
However, electronic system components must operate within a specific temperature range on both the high and low end to operate
properly. After strenuous testing, we believe we have developed heat management solutions that significantly improve upon traditional
heat storage and dissipation solutions and that improve upon their rigidity and durability. We also believe that the traditional
solutions are not equipped to handle the evolving marketplace. However, through a combination of custom design services and provision
of proprietary hardware solutions, our products reduce manufacturing complexity and provide a lighter weight solution than traditional
thermal management materials and we believe our products can meet the heat management demands of components and batteries being
designed into the newest mobile technologies and applications.
Our management’s
growth strategy has put particular focus on targeting E-Mobility applications for its core technology. We believe we are well-positioned
to provide a broad range of E-mobility solutions, and intend to expand our business through internal growth and acquisition. In
the case of 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. 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.
Corporate History
KUTG was incorporated
in the State of Delaware in December 2015 and was formerly known as “KT High-Tech Marketing, Inc.” and, prior to that,
as “Grant Hill Acquisition Corporation.” In April 2016, KUTG implemented a change of control by issuing shares to new
shareholders, redeeming shares of existing shareholders, electing new officers and directors and accepting the resignations of
its then existing officers and directors.
Our wholly-owned subsidiary,
KULR Technology Corp, was formed in 2013 and is based in Santa Clara, California. Since its inception, KTC primarily focused on
developing and commercializing its thermal management technologies, which it acquired through assignment from and license with
KTC’s co-founder Dr. Timothy Knowles. Prior to 2013, KTC’s technologies were used in numerous advanced space and industrial
applications for National Aeronautics and Space Administration (“NASA”), Boeing, and Raytheon. A few notable achievements
were the use of KTC’s technologies in the X-31 aircraft (battery heat sink), Mercury Messenger (battery heat sink), and X-51
Scramjet (heat exchanger).
On June 19, 2017, KUTG
closed a share exchange with KTC and 100% of the shareholders of KTC (the “KTC Shareholders”) whereby the KTC Shareholders
agreed to transfer an aggregate of 25,000,000 shares of KTC’s common stock to KUTG in exchange for the issuance of an aggregate
of 50,000,000 shares of KUTG’s common stock to the KTC Shareholders (the “Share Exchange”), resulting in KTC
becoming a wholly-owned subsidiary of KUTG and KTC’s business of developing and commercializing its thermal management technologies
becoming KUTG’s main operation.
The Share Exchange
was accounted for as a reverse recapitalization i
n accordance with generally accepted accounting
principles in the United States of America, with K
TC
being treated as the acquiring
company for accounting purposes. Accordingly, the financial statements included in this Annual Report
reflect the
assets,
liabilities and
historical results of KTC prior to the completion of the Share Exchange
.
On
August 30, 2018, KUTG changed its name from “KT High-Tech Marketing, Inc.” to “KULR Technology Group, Inc.”
by filing a certificate of amendment to its Certificate of Incorporation with the office of the Secretary of State of the State
of Delaware.
On
December 4, 2018, KUTG filed a definitive Information Statement on Form 14C (the “December Information Statement”),
giving notice to KUTG’s shareholders that on November 5, 2018, KUTG executed a written consent in lieu of shareholder meeting
authorizing KUTG to: (i) amend KUTG’s Articles of Incorporation to increase the number of authorized shares of common stock
from 100,000,000 shares of common stock to 500,000,000 shares of common stock; (ii) adopt and ratify the KULR Technology Group
2018 Equity Incentive Plan and (iii) ratify the authorization of the issuance of 1,000,000 shares (the “Voting Preferred
Shares”) of Series A Voting Preferred Stock to Michael Mo, KUTG’s Chief Executive Officer. On December 28, 2018, twenty
(20) days after the mailing date of the December Information Statement, KUTG was deemed authorized by ratifying vote of its majority
shareholders and the authorization granted by its Board of Directors to issue the Voting Preferred Shares, which KUTG has not but
expects to do in the near future. On December 31, 2018, KUTG filed a certificate of amendment with the Secretary of State of the
State of Delaware, to increase the number of authorized shares of its common stock from 100,000,000 to 500,000,000. As a result,
the aggregate number of the Company’s authorized capital stock became 520,000,000 shares.
Market Opportunity and Strategy
Market
The world of electronics
continues to become more and more demanding and performance driven. The increasing demand for reliability of microelectronics and
lithium-ion batteries has pushed thermal management to the forefront of many industries. We target our solutions to serve four
application markets: electric transportation, mobile computing, cloud computing, and space exploration and communications.
According to Market
Research Future, the global thermal management market is expected to reach approximately $15 billion by end of 2023 with 7% compound
annual growth rate during the forecast period from 2017 to 2023. According to the report, in recent years, electronic devices and
systems have undergone tremendous technological growth. Advancements in the electronics industry have led to an increased need
for innovative thermal management technologies, which serve to improve performance and reliability. The report states that technological
progress has come on two fronts: increased functionality on a single device unit and miniaturization of each unit. As a result,
there has been an increased demand for thermal management technologies. The report analyzes the thermal market by four segments,
including hardware, software, interfaces, and substrates.
Electrical Transportation
Market.
According to Frost & Sullivan’s recently released “Global Electric Vehicle Market Outlook 2018,”
global EV sales will climb from 1.2 million units in 2017 to approximately 2 million units in 2019. The EV industry will need to
overcome major challenges related to battery technology and charging infrastructure, both of which have fallen far short of the
pace set by global EV sales. The charging infrastructure market, which includes batteries and battery technology, according to
an AT Kearney report, will be a $29 billion global market by 2020 within the overall $390 billion global E-Mobility market.
Mobile Computing
Market
. The next generation mobile computing platform, also known as the “5G” mobile wireless standard, presents
new challenges and demands to improve the performance and reliability of mobile infrastructures and consumer devices. According
to the IHS Markit’s global study, in 2035, when 5G’s full economic benefit should be realized across the globe, a broad
range of industries – from retail to education, transportation to entertainment, and everything in between – could
produce up to $12.3 trillion worth of goods and services enabled by 5G.
Cloud Computing
Market
. Market analysts at Forrester Research project the cloud computing market to be $178 billion in 2018, up from $146 billion
in 2017 with sustained growth at 22% annually. Forrester also predicts that more than 50% of global enterprises will rely on at
least one public cloud platform. A key area of cloud computing is optical data transfer and communications connections and lines.
Optical data is faster and more efficient and, as cloud computing banks move to acquire and utilize optical data, thermal management
will play a pivotal role in maintaining the peak performance and safety of these expensive and highly sensitive computer connections.
The processing demands of artificial intelligence (“AI”) technology in the cloud requires advanced thermal management
solutions for processors and memory modules.
Space Exploration
and Communications Market
.
According to BIS Research, the Space Industry, is valued at
$360 billion in 2018, is projected grow at a CAGR of 5.6%, to value $558 billion by 2026. Demand for nano-satellites and re-usable
launch vehicle systems is anticipated to be driven by the massive investment made by
governments and private enterprises.
The overall trend in space investment is stable financially but explosive numerically, providing vastly more opportunity for space
technology providers. Increasingly, investments in space exploration and commercialization are being led by well-funded private
companies with most focused-on satellite development and deployment. KULR’s heritage in space thermal management technology
positions us well in this market.
We believe KULR’s
technology solution excels in a number of categories important in the world of thermal management. KULR’s proprietary carbon
fiber-based solutions are generally more thermally conductive, lighter weight, require less contact pressure, and offer greater
design flexibility and durability compared to traditional solutions. As a result, we believe KULR has real potential to offer a
unique value proposition to customers in the multibillion-dollar thermal management industry. KULR aims to provide cost-effective,
superior thermal management solutions for a group of electronic manufacturers.
Marketing Strategy
The Company targets
four high growth segments for its thermal management and battery system development products:
|
·
|
Electric Transport – Electric/Hybrid cars, commercial vehicles, E-bikes, drones & autonomous vehicles
|
|
·
|
5G & IOT – Infrastructure, mobile and edge-based devices
|
|
·
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Cloud & AI – Servers, HPC, CPU, GPU and Memory Systems, AR &VR devices
|
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·
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Aerospace – Space, aircraft & military
|
These four areas have
significant thermal and/or battery system requirements and the Company believes that these will be rewarding segments to target.
In terms of customer
profile and time to revenue the Company will work with the following profile:
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·
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MNCs – the expectation is a twelve to twenty-four-month design-in cycle to high volume production
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Fast moving mid-tier companies – working with aggressive companies that want to move quickly adopting new differentiating technology, with a sub twelve-month time frame to production
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·
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Boutique/Startups – highly focused companies, often geographically local to the Company, that want to create disruptive products
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·
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Mass market – working with distribution partners to service this market with timeframes expected at three to six-months to production
|
For a traditionally
conservative thermal and battery industry the company is aiming to exploit potentially disruptive approaches to the way it markets
its products. Key to this approach is the creation of an ecosystem that adds broader value to the company’s products for
its customers. In addition, the company will generate leads and raise its profile through the attendance at Industrial Conferences,
use of press and social media and other channels.
Sales Strategy
The Company plans to
market and sell KULR thermal management products (“component products”) and finished end-products (“OEM products”)
that the Company develops with its partners into its sales and distribution channels. For the component products, the Company will
market directly to its customers and utilize distributor partners and agents in Japan, China and EU countries. For its OEM products,
the Company will sell into distributor channels primarily as a B2B business.
Advertising and Communications Strategy
We plan to utilize
all forms of advertising and communications tools at our disposal. This includes commissioning unbiased white papers and technical
papers, attending, sponsoring, and guest speaking at industry events, conferences, and symposiums. We have hired a public relations
consultant who will oversee our press releases and media relations interface with newspapers, magazines, and blogs. We have also
hired a SEO specialist for social media outreach activities and will also rely on the company’s pedigree within the thermal
management community to spread high praise via word of mouth. To date, as a result of these efforts, we have been mentioned in
Wall Street Journal (“WSJ”), Cheddar TV, CNBC, Forbes, EE Times, USA Today, Business Insider and others.
Acquisition Strategy
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 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. 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.
Intellectual Property and Patent Strategy
Our intellectual property
strategy includes pursuing patent protection for new innovations in core carbon fiber architecture development, application development,
acquisition of intellectual property, and licensing of third-party patents and intellectual property. As of
March 29, 2019, we have seven pending nonprovisional and provisional patent applications and we have four patents
granted and assigned to KULR. We also have an exclusive license to four third party patents.
Product and Services
Our heat management
products and services can be divided into the following categories, subcategories and functionalities:
Lithium Ion (“L-ion”)
Battery Thermal Runaway Shield (“TRS”)
: KULR has developed a vaporizing heatsink aimed at passive resistance to
thermal runaway propagation in L-ion batteries in partnership with National Aeronautics and Space Administration Johnson Space
Center (“NASA JSC”). The heatsink shield designed for NASA JSC is a novel configuration, thin and lightweight, for
use in conjunction with 18650 cells. The heatsink shield has proven to keep neighboring cells safe from thermal runaway propagation
after a trigger cell was intentionally overheated. This lightweight solution can be used in energy storage and industrial and consumer
electronics applications that require a lightweight and passive solution for battery safety.
Fiber Thermal Interface Material
(“FTI”)
: KULR thermal interface materials (“TIMs”) consist of vertically oriented carbon fiber velvets
attached to a film of polymer or metal. The fiber packing density and orientation are selected to serve a wide range of applications,
including hostile thermal and chemical environments, sliding interfaces, and interfaces with widely varying gaps. They can be coated
for electrical isolation. They require low contact pressure and provide high thermal conductivity. Their light weight and high
compliance make them uniquely suited for aerospace, industrial and high-performance commercial devices.
Phase Change Material (“PCM”)
Heat Sink
: KULR PCM composite heat sinks consisting of a conductive carbon fiber velvet embedded with a suitable alkane (“paraffin”)
having high latent heat at its melting point. Such heat sinks offer passive thermal control for instruments that would otherwise
overheat or under-cool during periodic operations. A typical application involves lasers that dissipate heat but need tight thermal
control where active cooling is unavailable.
Internal Short Circuit (“ISC”)
Device
: In March 2018, KULR reached an agreement with the National Renewable Energy Laboratory (“NREL”), a national
laboratory of the U.S. Department of Energy, to be the exclusive manufacturing and distribution partner for the patented ISC device,
which causes predictable battery cell failures in L-ion batteries, making them easier to study and, therefore, safer. L-ion batteries
are the industry and consumer standard for portable power; billions of individual battery cells exist and billions more are planned
for production. They provide power for everything from smart phones and laptops to electric cars and space crafts. But L-ion batteries
fail, sometimes with catastrophic results. Due to the relative rarity of cell failures, scientists and researchers had been unable
to reliably or accurately replicate latent defect cell failures in lab settings, impeding research into safer battery technology.
In 2015, researchers at NREL and NASA developed and patented a device – the ISC – that creates these cell failures
in predictable conditions. KULR will market both ISC devices to battery cell manufacturers and ISC embedded battery cells to OEM
manufacturers.
Competition
Currently, the battery
industry uses a number of solutions to mitigate thermal runaway propagation which solutions are offered by Unifrax, Lydall, Outlast,
3M, Engineered Syntactic Systems, Celono, AllCell and others. Each of their solutions offer unique features and benefits for a
specific application. We do not believe, however, that there is a one size fits all solution across all applications. We believe
our TRS solution offers competitive light-weight and effective solutions for high energy battery cells because it is more flexible
and can fit into different design configurations. For applications that require passive, light-weight solutions for high energy
density battery cells, TRS offers a competitive solution.
Thermal interface material
is a large and fragmented market with many large suppliers including: Henkel Bergquist, Fujipoly, Laird, 3M, Honeywell and others.
These solutions are typically based on silicone and thermal particles. KULR’s FTI offers high bulk thermal conductivity and
low contact pressure requirements, which we believe gives us a competitive advantage over other thermal interface solutions.
Our licensed ISC device
offers a reliable way to trigger battery cell thermal runaway compared to nail penetration, over-charging or over-heating the cell.
ISC d
oes not rely on mechanically damaging the battery exterior to activate
the short, as do most of the other evaluation methodologies. Instead, the ISC devices trigger true internal shorts. This makes
it possible to accurately pinpoint and fix problems leading to malfunctions, an ability that we believe will give us a competitive
advantage over other testing solutions.
Governmental Regulation and Environmental
Compliance
Certain
substances we use in our manufacturing process are subject to federal governmental regulations (such as Environmental Protect Agency
regulations).
We believe we are in material compliance with all applicable governmental regulations, and that the cost and
effect of compliance with environmental laws is not material.
As a small generator of hazardous
substances, we are subject to local governmental regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances, such as acetone that is used in very small quantities to manufacture
our products. We are currently in compliance with these regulations.
Most new materials sold in the U.S or in many other
countries require regulation by government authorities. In most other countries, there are no specific regulations that require
additional regulation, but some countries do have registration requirements with which we comply to the best our ability.
Employees
As of March 29, 2019, we
had 12 employees and 5 consultants. We believe that we maintain a good working relationship with our employees and we have not
experienced any significant labor disputes.
Intellectual Property
We seek to establish and
maintain our proprietary rights in our technology and products through the use of patents, copyright, trademarks and trade secrets.
We have, and will continue to, file applications for and/or obtain patents, copyrights and trademarks in the United States and
selected foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets
and confidential information by implementing organizational nondisclosure policies and through the use of appropriate confidentiality
agreements. As of March 29, 2019, we held 4 U.S. patents and 7 non-provisional pending U.S. patent applications with expiration
dates ranging from 2022 to 2035. In addition, KULR has exclusive license on 4 patents from its partnerships. There can be no assurance,
however, that the rights obtained can be successfully enforced against infringing products in every jurisdiction. While our patents,
copyrights, trademarks, and trade secrets provide some advantage and protection, we believe our competitive position and future
success is largely determined by such factors as the system and application knowledge, innovative skills, technological expertise
and management ability and experience of our personnel; the range and success of new products being developed by us; our market
brand recognition and ongoing marketing efforts; and customer service and technical support. We also have trademarks that are used
in the conduct of our business to distinguish genuine KUTG products; KULR has been granted trademarks for Class 9 and Class 17
applications.
On April 15, 2013, KULR
entered into a license and development agreement (the “ESLI License Agreement”) with Energy Science Laboratories, Inc.
(“ESLI”) pursuant to which ESLI received a significant ownership stake in KULR, and in exchange ESLI granted to KULR
and its affiliates an irrevocable, exclusive, world-wide license to ESLI’s Thermal Management Technologies and Thermal Intellectual
Property (as such terms are defined in the ESLI License Agreement). Subsequently, on November 16, 2016, KULR and ESLI entered into
a patent assignment agreement (the “ESLI Patent Assignment”) pursuant to which ESLI assigned to KULR certain patents
and patent applications owned by ESLI.
ITEM 1A. RISK FACTORS
An investment in the
Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s common stock,
an investor should carefully consider all of the material risks described below, together with the other information contained
in this report before deciding to purchase the Company’s securities. An investor should only purchase the Company’s
securities if he or she can afford to suffer the loss of his or her entire investment.
Risks Related to Our Business and
Our Industry
We are a young
company with a limited operating history, making it difficult for you to evaluate our business and your investment.
KUTG was formed in 2015
and KTC was formed in 2013. The Company, as a whole, has limited operating history. We have not yet demonstrated sales of products
at a level capable of covering our fixed expenses. Since inception, we have not demonstrated the capability to produce sufficient
materials to generate the ongoing revenues necessary to sustain our operations in the long-term. Nor have we demonstrated the ability
to generate sufficient sales to sustain the business. There can be no assurance that the Company will ever produce a profit.
Many of the Company’s
products represent new products that have not yet been fully tested in commercial product settings and for which manufacturing
operations have not yet been fully scaled. This means that investors are subject to all the risks incident to the creation and
development of multiple new products and their associated manufacturing processes, and each investor should be prepared to withstand
a complete loss of their investment.
Because we are subject
to these uncertainties, there may be risks that management has failed to anticipate and you may have a difficult time evaluating
our business and your investment in our Company. Our ability to become profitable depends primarily on our ability to successfully
commercialize our products in the future. Even if we successfully develop and market our products, we may not generate sufficient
or sustainable revenue to achieve or sustain profitability, which could cause us to cease operations.
We have no sustainable
base of products approved for commercial use by our customers, have never generated significant product revenues and may never
achieve sufficient revenues for profitable operations, which could cause us to cease operations.
KULR primarily sells
bulk materials or products made with these materials to other companies for incorporation into their products. Although KULR’s
technologies were previously used in numerous advanced space and industrial applications for NASA, there has been no significant
incorporation of our materials or products into customer products that are released for commercial sale as of the date of this
report. Because there is no demonstrated history of large-scale commercial success for our products, it is possible that such commercial
success may never happen and that we will never achieve the level of revenues necessary to sustain our business.
There is substantial
doubt about our ability to continue as a going concern.
As of December 31, 2018,
we had a working capital deficit and accumulated deficit of $169,928 and $6,416,559, respectively. During the year ended December
31, 2018, we had a net loss and used cash in operations of $2,058,239 and $1,359,114, respectively. We have historically incurred
operating losses and may continue to incur operating losses for the foreseeable future. We believe that these conditions raise
substantial doubt about our ability to continue as a going concern. This may hinder our future ability to obtain financing or may
force us to obtain financing on less favorable terms than would otherwise be available. Although we have generated revenues from
the sale of our products, we have only recently begun to market and sell our products and solutions. If we are unable to develop
sufficient revenues and additional customers for our products and services, we will not generate enough revenue
to sustain our business, and we may fail. There can be no assurance that we will be able to continue as a going concern.
We will need
to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed
and on acceptable terms, which could have a materially adverse effect on our business.
We anticipate that
we will incur operating losses for the foreseeable future. We may require additional funds for our anticipated operations and if
we are not successful in securing additional financing, we may be required to delay significantly, reduce the scope of or eliminate
one or more of our research or development programs, downsize our general and administrative infrastructure, or seek alternative
measures to avoid insolvency, including arrangements with collaborative partners or others that may require us to relinquish rights
to certain of our technologies, product candidates or products.
We have limited
experience in higher volume manufacturing that will be required to support profitable operations, and the risks associated with
scaling to larger production quantities may be substantial.
We have limited experience
manufacturing our products. We have established small-scale commercial or pilot-scale production facilities for our carbon-based
thermal management products, but these facilities do not have the existing production capacity to produce sufficient quantities
of materials for us to reach sustainable sales levels. In order to develop the capacity to produce much higher volumes, it will
be necessary to produce multiples of existing processes or engineer new production processes in some cases. There is no guarantee
that we will be able to economically scale-up our production processes to the levels required. If we are unable to scale-up our
production processes and facilities to support sustainable sales levels, the Company may be forced to curtail or cease operations.
We have a long
and complex sales cycle and have not demonstrated the ability to operate successfully in this environment.
It has been our experience
since our inception that the average sales cycle for our products can range from one to five years from the time a customer begins
testing our products until the time that they could be successfully used in a commercial product. We have only demonstrated a limited
track record of success in completing customer development projects, which makes it difficult for you to evaluate the likelihood
of our future success. The sales and development cycle for our products is subject to customer budgetary constraints, internal
acceptance procedures, competitive product assessments, scientific and development resource allocations, and other factors beyond
our control. If we are not able to successfully accommodate these factors to enable customer development success, we will be unable
to achieve sufficient sales to reach profitability. In this case, the Company may not be able to raise additional funds and may
be forced to curtail or cease operations and you could lose all or a significant part of your investment.
We are dependent
on customers and partners to design and test our solution into new applications which may not be brought to market successfully.
The Company targets
its thermal management solution for new applications and devices that require high performance and unique features offered by its
products. Developing new applications and devices involves a lengthy and complex process, and they may not be commercialized on
a timely basis, or at all. The Company’s success is directly related to the success of these new products. Furthermore, because
the Company’s solutions are relatively new to mass market consumer electronics, the design and testing time is longer than
traditional solutions. Moreover, in transitioning to new technologies and products, we may not achieve design wins, our customers
may delay transition to these new technologies, our competitors may transition more quickly than we do, or we may experience product
delays, cost overruns or performance issues that could harm our operating results and financial condition.
We could be adversely
affected by our exposure to customer concentration risk.
We are subject to customer
concentration risk as a result of our reliance on a relatively small number of customers for a significant portion of our revenues.
For 2018, we had 2 customers whose purchases accounted for 79% of total product revenues. Due to the nature of our business and
the relatively large size of many of the applications our customers are developing, we anticipate that we will be dependent on
a relatively small number of customers for the majority of our revenues for the next several years. It is possible that only one
or two customers could place orders sufficient to utilize most or all of our existing manufacturing capacity.
In this case, there
would be at risk of significant loss of future revenues if one or more of these customers were to stop ordering our materials,
which could in turn have a material adverse effect on our business and on your investment.
We operate in
an advanced technology arena where hypothesized properties and benefits of our products may not be achieved in practice, or in
which technological change may alter the attractiveness of our products.
Because there is no
sustained history of successful use of our products in commercial applications, there is no assurance that broad successful commercial
applications may be technically feasible. Some of the scientific and engineering data related to our products has been generated
in our own laboratories or in laboratory environments at our customers or third-parties. It is well known that laboratory data
is not always representative of commercial applications.
Likewise, we operate
in a market that is subject to rapid technological change. Part of our business strategy is to monitor such change and take steps
to remain technologically current, but there is no assurance that such strategy will be successful. If the Company is not able
to adapt to new advances in materials sciences, or if unforeseen technologies or materials emerge that are not compatible with
our products and services or that could replace our products and services, our revenues and business prospects would likely be
adversely affected. Such an occurrence may have severe consequences, including the potential for our investors to lose all of their
investment.
Competitors that
are larger and better funded may cause the Company to be unsuccessful in selling its products.
The Company operates
in a market that is expected to have significant competition in the future. Global research is being conducted by substantially
larger companies who have greater financial, personnel, technical, and marketing resources. There can be no assurance that the
Company’s strategy of offering better thermal management solutions based on the Company’s proprietary carbon fiber-based
products will be able to compete with other companies, many of whom will have significantly greater resources, on a continuing
basis. In the event that we cannot compete successfully, the Company may be forced to cease operations.
Because of our
small size and limited operating history, we are dependent on key employees.
The Company’s
operations and development are dependent upon the experience and knowledge of Michael Mo, our Chief Executive Officer, and Dr.
Timothy Knowles, our Chief Technical Officer and Michael Carpenter, our Vice President of Engineering. If the services of any of
these individuals should become unavailable, the Company’s business operations might be adversely affected. If several of
these individuals became unavailable at the same time, the ability of the Company to continue normal business operations might
be adversely affected to the extent that revenue or profits could be diminished, and you could lose all or a significant amount
of your investment.
Our success depends
in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could have a material
adverse effect on our competitive position.
We rely on the patent,
trademark, copyright and trade-secret laws of the United States and to protect our intellectual property rights. We may be unable
to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual
property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the
event of unauthorized use of our intellectual property, litigation to protect or enforce our rights could be costly, and we may
not prevail.
Many of our technologies
are not covered by any patent or patent application, and our issued and pending U.S. patents may not provide us with any competitive
advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit
our ability to protect the intellectual property rights these pending patent applications were intended to cover. Our competitors
may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely
affect our market share. Furthermore, the expiration of our patents may lead to increased competition.
Our pending trademark
applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted,
third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations
in the United States and in other countries could limit our ability to protect our products and their associated trademarks and
impede our marketing efforts in those jurisdictions.
In addition, effective
patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. We also rely
on unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain
our competitive position. Although we generally enter into confidentiality agreements with our employees and third parties to protect
our intellectual property, these confidentiality agreements are limited in duration and could be breached and may not provide meaningful
protection of our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available if there is an unauthorized
use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge about our trade secrets
through independent development or by legal means. The failure to protect our processes, apparatuses, technology, trade secrets
and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business by jeopardizing
critical intellectual property.
Where a product formulation
or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical
to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such
processes and could potentially result in costly litigation in which we might not prevail.
We could face intellectual
property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products,
which could have a material adverse effect on our business, financial condition and results of operations.
If our technologies
conflict with the proprietary rights of others, we may incur substantial costs as a result of litigation or other proceedings and
we could face substantial monetary damages and be precluded from commercializing our products, which would materially harm our
business and financial condition.
Patents in the thermal
management solutions industry are numerous and may, at times, conflict with one another. As a result, it is not always clear to
industry participants, including us, which patents cover the multitude of product types. Ultimately, the courts must determine
the scope of coverage afforded by a patent and the courts do not always arrive at uniform conclusions.
A patent owner
may claim that we are making, using, selling or offering for sale an invention covered by the owner’s patents and may
go to court to stop us from engaging in such activities. Such litigation is not uncommon in our industry. Patent lawsuits can
be expensive and would consume time and other resources. There is a risk that a court would decide that we are infringing a
third party’s patents and would order us to stop the activities covered by the patents, including the commercialization
of our products. In addition, there is a risk that we would have to pay the other party damages for having violated the other
party’s patents (which damages may be increased, as well as attorneys’ fees ordered paid, if infringement is
found to be willful), or that we will be required to obtain a license from the other party in order to continue to
commercialize the affected products, or to design our products in a manner that does not infringe a valid patent. We may not
prevail in any legal action, and a required license under the patent may not be available on acceptable terms or at all,
requiring cessation of activities that were found to infringe a valid patent. We also may not be able to develop a
non-infringing product design on commercially reasonable terms, or at all.
We may not obtain U.S. Government
contracts to further develop our technology.
We can give no assurances
that we will be successful in obtaining government contracts. The process of applying for government contracts is lengthy, and
we cannot be certain that we will be successful in complying with all requirements throughout such application process. Accordingly,
we cannot be certain that we will be awarded any U.S. Government contracts utilizing our carbon fiber-based solutions.
Downturns in
general economic conditions could adversely affect our profitability.
Downturns in general
economic conditions can cause fluctuations in demand for our products, product prices, volumes and gross margins. Future economic
conditions may not be favorable to our industry. A decline in the demand for our products or a shift to lower-margin products due
to deteriorating economic conditions could adversely affect sales of our products and our profitability and could also result in
impairments of certain of our assets.
Furthermore, any uncertainty
in economic conditions may result in a slowdown to the global economy that could affect our business by reducing the prices that
our customers may be able or willing to pay for our products or by reducing the demand for our products.
An increase in
the cost of raw materials or electricity might affect our profits.
Any increase in the
prices of our raw materials or energy might affect the overall cost of our products. If we are not able to raise our prices to
pass on increased costs to our customers, we would be unable to maintain our existing profit margins. Our major cost components
include items such as production materials and electricity, which items are normally readily available industrial commodities.
During our history as a business, we have not seen any material impact (as defined by GAAP) on our cost structure from fluctuations
in raw material or energy costs, but this could change in the future.
Our results of
operations could deteriorate if our manufacturing operations were substantially disrupted for an extended period.
Our manufacturing operations
are subject to disruption due to extreme weather conditions, floods and similar events, major industrial accidents, strikes and
lockouts, adoption of new laws or regulations, changes in interpretations of existing laws or regulations or changes in governmental
enforcement policies, civil disruption, riots, terrorist attacks, war, and other events. We cannot assure you that no such events
will occur. If such an event occurs, it could have a material adverse effect on us.
We may become
subject to liabilities related to risks inherent in working with hazardous materials.
Our development and
manufacturing processes involve the controlled use of hazardous materials, such as acetone. We are subject to federal, provincial
and local laws and EPA regulations governing the use, manufacture, storage, handling and disposal of such materials and certain
waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could
exceed our resources. We are not specifically insured with respect to this liability. Although we believe that we are in compliance
in all material respects with applicable environmental laws and regulations and currently do not expect to make material capital
expenditures for environmental control facilities in the near-term, if we fail to comply with these regulations substantial fines
could be imposed on us and we could be required to suspend production, alter manufacturing processes or cease operations. In addition,
there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations
in the future, or that our operations, business or assets will not be materially adversely affected by current or future environmental
laws or regulations.
Future adverse
regulations could affect the viability of the business.
As
a small generator of hazardous substances, we are subject to local governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other hazardous substances, such as acetone that is used in
very small quantities to manufacture our products. We are currently in compliance with these regulations. However,
there
can be no assurance that future regulations might not change or raise the compliance standards, of which the Company may become
in violate or for which we may incur substantial costs to comply.
In most cases, as far
as we are aware, there are no current regulations elsewhere in the world that prevent or prohibit the sale of the Company’s
products. However, there is no assurance that any regulations will not be enacted in the future to require the Company’s
products or production materials to be subject to test for toxicity or other health effects before they can be sold or used in
the production process, if such regulations are enacted in the future, the Company’s business could be adversely affected
because of the requirement for expensive and time-consuming tests or other regulatory compliance. There can be no assurance that
future regulations might not severely limit or even prevent the sale of the Company’s products in major markets, in which
case the Company’s financial prospects might be severely limited, causing investors to lose some or all of their investment.
Our directors
and officers may be exposed to liability
.
We currently maintain
a policy for director and officer liability insurance, also known as “D&O Insurance.” However, the maximum coverage
under our D&O Insurance policy may not be sufficient to cover all such liability exposure and, as a result, it may be more
difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
Compliance with
changing regulation of corporate governance and public disclosure will result in additional expenses and will divert time and attention
away from revenue generating activities.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing
the public markets and public reporting. Our management team will need to invest significant management time and financial resources
to comply with both existing and evolving standards for public companies, which will lead to increased selling, general and administrative
expenses and a diversion of management time and attention from revenue generating activities to compliance activities, which could
have an adverse effect on our business.
If we fail to
maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
In the past, our management
identified weaknesses in our internal controls and although our management believes such weaknesses have been remediated, our internal
control over financial reporting may still or could in the future have weaknesses and conditions that could require correction
or remediation, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish
and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of
those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition
or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify
weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may
raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting
may have an adverse impact on the price of our common stock.
We are required
to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner,
our business could be harmed and our stock price could decline.
Rules adopted by the SEC
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting,
and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The
standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and
complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect
to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us
to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal control
over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a
result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation
requirements by our independent registered public accounting firm are not presently applicable to us, we could become subject to
these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes
to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine
that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators
will react or how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence
and share value may be negatively affected.
Risks Relating to Our Common Stock
The price of
our common stock is volatile and fluctuations in our operating results and announcements and developments concerning our business
affect our stock price, which may cause investment losses for our stockholders.
The market for our
common stock is highly volatile and the trading price of our stock quoted on the OTCQB is subject to wide fluctuations in response
to, among other things, operating results, the number of stockholders desiring to sell their shares, changes in general economic
conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other developments
affecting us. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry
analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common
stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities
class action litigation has been brought against companies following periods of volatility in the market price of their securities.
If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting
management’s attention and resources.
Our common stock
is subject to the "Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions
in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and
Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant
to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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That a broker or dealer approve a person's account for transactions in penny stocks; and
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The broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve
a person's account for transactions in penny stocks, the broker or dealer must:
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Obtain financial information and investment experience objectives of the person; and
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Make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer
must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
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Sets forth the basis on which the broker or dealer made the suitability determination; and
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That the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers
may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market value of our stock.
Financial Industry
Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and
sell our common stock.
In addition to the
“penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of
these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at
least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our stock is
thinly traded, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell a significant number
of your shares.
The shares of our common
stock are thinly-traded on the OTCQB, meaning that the number of persons interested in purchasing our common stock at or near bid
prices at any given time may be relatively small or non-existent. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give
you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your
shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares.
Shares eligible
for future sale may adversely affect the market.
From time to time,
certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general,
pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information
requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current
public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material
adverse effect on the market price of our common stock.
We could issue
additional common stock, which might dilute the book value of our common stock.
Our Board of Directors
has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares. Such stock
issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our common stock.
In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for a significant
amount of our common stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing
your influence on matters on which our shareholders vote and might dilute the book value of our common stock. You may incur additional
dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if we issue
warrants in the future and such warrant holders exercise their warrants to purchase shares of our common stock.
Our common stock
could be further diluted as a result of the issuance of convertible securities, warrants or options.
In the past, we have
issued convertible securities (such as convertible debentures and notes), warrants and options in order to raise money or as compensation
for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon
the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance
of these convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market price
of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities becoming
exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue additional
shares of common stock to certain of our stockholders.
We do not intend
to pay dividends.
We do not anticipate
paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends.
Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The
declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend
upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements,
and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future,
and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Voting power
of our shareholders is highly concentrated by insiders.
Our officers, directors
and affiliates currently own approximately 54.08% of our outstanding Common Stock. Such concentrated control of the Company may
adversely affect the value of our Common Stock. If you acquire our Common Stock, you may have no effective voice in our management.
Sales by our insiders or affiliates, along with any other market transactions, could affect the value of our Common Stock.
Our articles
of incorporation allow for our board to create a new series of preferred stock without further approval by our stockholders, which
could adversely affect the rights of the holders of our Common Stock.
Our Board of Directors
has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors have the
authority to issue up to 20,000,000 shares of our preferred stock terms of which may be determined by the Board without further
stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would
grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of Common Stock and the right to the redemption of the shares, together with a premium, prior to the
redemption of our Common Stock.
In addition, our Board
of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our Common Stock or
that is convertible into our Common Stock, which could decrease the relative voting power of our Common Stock or result in dilution
to our existing stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Smaller reporting companies
such as us are not required to provide the information required by this item.
ITEM 2. PROPERTIES
Our principal executive
office is located 1999 S. Bascom Ave., Suite 700, Campbell, CA 95008, and the telephone number at such address is 408-663-5247.
The headquarters for KTC are located at 6861 Nancy Ridge Drive, San Diego CA 92121, and the telephone number at such address is
858-866-8478. We also rent approximately 6,000 square feet of production and research space in San Diego, California. We believe
these existing facilities are adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not currently
a party to any legal or administrative proceedings. Our current officers and directors have not been convicted in a criminal proceeding
nor have they been permanently or temporarily enjoined, barred, suspended or otherwise limited from involvement in any type of
business, securities or banking activities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 1
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BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
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Organization and Operations
KULR Technology Group, Inc. was incorporated
on December 11, 2015 under the laws of the State of Delaware as KT High-Tech Marketing, Inc. Effective August 30, 2018, KT High-Tech
Marketing, Inc. changed its name to KULR Technology Group, Inc.
KULR Technology Group, Inc. ("KUTG"),
through its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR”
or the “Company”), develops and commercializes high-performance thermal management technologies for electronics, batteries,
and other components across an array 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's proprietary, core technology is a carbon fiber material,
with roots in aerospace and defense.
Reverse Recapitalization
On June 8, 2017, KUTG entered into a Share
Exchange Agreement (the “Share Exchange Agreement”) with KTC and 100% of the shareholders of KTC (the “KTC
Shareholders”). On June 19, 2017 (the “Closing Date”), the Company closed the transaction contemplated by the
Share Exchange Agreement. Pursuant to the Share Exchange Agreement, the KTC Shareholders agreed to transfer an aggregate of 25,000,000
shares of KTC’s common stock to the Company in exchange for the Company’s issuance of an aggregate of 50,000,000 shares
of the Company’s common stock to the KTC Shareholders (the “Share Exchange”). On the Closing Date, KTC became
a wholly-owned subsidiary of KUTG, the KTC Stockholders beneficially owned approximately 64.57% of KUTG’s common stock on
a fully-diluted basis, KUTG began operating KTC’s business of developing and commercializing its thermal management technologies
and a representative of the KTC Stockholders was appointed to be the Company’s second Board Director.
The closing of the Share Exchange Agreement
was accounted for as a reverse recapitalization under the provisions of the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification (“ASC”) Topic 805-40. The consolidated statements of operations herein reflect the
historical results of KTC prior to the completion of the reverse recapitalization since it was determined to be the accounting
acquirer, and do not include the historical results of operations for KUTG prior to the completion of the reverse recapitalization.
KUTG’s assets and liabilities were consolidated with the assets and liabilities of KTC as of the Closing Date. The number
of shares issued and outstanding and additional paid-in capital of KUTG have been retroactively adjusted to reflect the equivalent
number of shares issued by KUTG in the Share Exchange, while KTC’s accumulated deficit is being carried forward as the Company’s
accumulated deficit. All costs attributable to the reverse recapitalization were expensed.
NOTE 2
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GOING CONCERN AND MANAGEMENT’S PLANS
|
The Company has not yet achieved profitability
and expects to continue to incur cash outflows from operations. It is expected that its research and development and general and
administrative expenses will continue to increase and, as a result, the Company will eventually need to generate significant product
revenues to achieve profitability. These conditions indicate that there is substantial doubt about the Company’s ability
to continue as a going concern within one year after the financial statement issuance date.
The Company is currently funding 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, there are currently no commitments in place for new financing at this time and there is no assurance that
the Company will be able to obtain funds on commercially acceptable terms, if at all. If the Company is unable to obtain adequate
funds on reasonable terms, it may be required to significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms. The Company’s operating needs include the planned costs to operate its business,
including amounts required to fund working capital and capital expenditures.
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of
liabilities in the normal course of business. The consolidated financial statements do not include any adjustment that might become
necessary should the Company be unable to continue as a going concern.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
The consolidated financial statements of
the Company include the accounts of KUTG and its wholly-owned subsidiary, KTC. All significant intercompany transactions have been
eliminated in the consolidation.
Use of Estimates
Preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the financial statements. The
Company’s significant estimates used in these financial statements include, but are not limited to, fair value calculations
for equity securities, stock-based compensation, the collectability of receivables, inventory valuations, the recoverability and
useful lives of long-lived assets, and the valuation allowance related to the Company’s deferred tax assets. Certain of the
Company’s estimates could be affected by external conditions, including those unique to the Company and general economic
conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could
cause actual results to differ from those estimates.
See Note 3 - Summary of Significant Accounting
Policies — Stock-Based Compensation for additional discussion of the use of estimates in estimating the fair
value of the Company’s common stock.
Concentrations of Credit Risk
The Company maintains cash with major financial
institutions. Cash held in U.S. bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 at each institution. There were aggregate uninsured cash balances of $0 and $611,450 at December 31, 2018 and 2017,
respectively.
Customer concentrations are as follows:
|
|
Revenues
|
|
|
Accounts Receivable
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
66
|
%
|
|
|
49
|
%
|
|
|
63
|
%
|
|
|
43
|
%
|
Customer B
|
|
|
13
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
|
|
24
|
%
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
37
|
%
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
Total
|
|
|
79
|
%
|
|
|
63
|
%
|
|
|
100
|
%
|
|
|
82
|
%
|
Accounts Receivable
Accounts receivable are carried at their
contractual amounts, less an estimate for uncollectible amounts. As of December 31, 2018 and 2017, there were no allowances for
uncollectable amounts determined to be necessary. Management estimates the allowance for bad debts based on existing economic conditions,
the financial conditions of the customers, and the amount and age of past due accounts. Receivables are considered past due if
full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for
bad debts only after all collection attempts have been exhausted.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Inventory
Inventory is comprised of carbon fiber
thermal interface solutions, which are available for sale. Inventories are stated at the lower of cost and net realizable value.
Cost is determined by the first-in, first-out method. Inventory that is sold to third parties is included within cost of sales
and inventory that is given as samples is included within operating expenses. The Company periodically reviews for slow-moving,
excess or obsolete inventories. Products that are determined to be obsolete, if any, are written down to net realizable value.
As of December 31, 2018 and 2017, the Company’s inventory was comprised solely of finished goods.
Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation which is recorded commencing at the in-service date using the straight-line method at rates sufficient
to charge the cost of depreciable assets to operations over their estimated useful lives, which range from 3 to 7 years. Leasehold
improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term. Maintenance and
repairs are charged to operations as incurred. The Company capitalizes cost attributable to the betterment of property and equipment
when such betterment extends the useful life of the assets.
The Company reviews for the impairment
of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
An impairment loss would be recognized when the present value of estimated future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying value.
Fair Value of Financial Instruments
The Company measures the fair value of
financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC
820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active
markets for identical assets or liabilities
Level 2 — quoted prices for similar
assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable
(for example, cash flow modeling inputs based on assumptions)
The carrying amounts of the Company’s
financial instruments, such as cash, accounts receivable and accrued expenses and other current liabilities approximate fair values
due to the short-term nature of these instruments.
Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable
preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as
temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
During the year ended December 31, 2018, the
Company obtained a third-party 409A valuation of its Series B Convertible Preferred Stock, which was considered in management’s
estimation of the value of the equity instruments issued during that period. Under the 409A valuation, it was determined the Company’s
Series B Convertible Preferred Stock had a fair value of $33.00 per share.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Convertible Instruments
The Company evaluates its convertible instruments
to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately
accounted for in accordance with Topic 815 of the FASB ASC. The accounting treatment of derivative financial instruments requires
that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its
derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract
is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding
instruments are recorded as a discount to the host instrument.
If the instrument is determined to be a
derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the market price
of the Company’s common stock as of the commitment date to the effective conversion price of the instrument.
Offering Costs
Deferred offering costs, which primarily
consist of direct, incremental professional fees incurred in connection with a debt or equity financing, are capitalized as non-current
assets on the balance sheet. Once the financing closes, the Company reclassifies such costs as either discounts to notes payable
or as a reduction of proceeds received from equity transactions so that such costs are recorded as a reduction of additional paid-in
capital. If the completion of a contemplated financing was deemed to be no longer probable, the related deferred offering costs
would be charged to general and administrative expense in the consolidated financial statements.
Revenue Recognition
On January 1, 2018, the Company adopted
ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires
that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step
process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the
revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation.
The following five steps are applied to
achieve that core principle:
|
·
|
Step 1:
Identify the contract with the customer;
|
|
·
|
Step 2:
Identify the performance obligations in the contract;
|
|
·
|
Step 3:
Determine the transaction price;
|
|
·
|
Step 4:
Allocate the transaction price to the performance obligations in the contract; and
|
|
·
|
Step 5:
Recognize revenue when the company satisfies a performance obligation.
|
The Company adopted ASC 606 for all applicable
contracts using the modified retrospective method, which would have required a cumulative-effect adjustment, if any, as of the
date of adoption. The adoption of ASC 606 did not have a material impact on the Company's consolidated financial statements as
of the date of adoption. As a result, a cumulative-effect adjustment was not required.
The Company recognizes revenue primarily
from the following different types of contracts:
|
·
|
Product sales
– Revenue is recognized at the point the customer obtains controls 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 contract services to the customer.
|
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Revenue Recognition – Continued
The following table
summarizes the disaggregation of our revenue recognized in our consolidated statements of operations:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Product sales
|
|
$
|
1,096,040
|
|
|
$
|
215,271
|
|
Contract services
|
|
|
177,988
|
|
|
|
20,313
|
|
Total revenue
|
|
$
|
1,274,028
|
|
|
$
|
235,584
|
|
As of December 31, 2018 and 2017, the Company
did not have any contract assets and contract liabilities 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 years
ended December 31, 2018, and 2017, $0 of revenue was recognized from performance obligations satisfied (or partially satisfied)
in previous periods.
Reclassifications
Certain
prior year financial statement amounts have been reclassified for consistency with the current year presentation. These
reclassifications had no effect on the reported results of operations.
Shipping and
Handling Costs
Shipping and handling costs incurred by
the Company as well as fees received by customers for product shipped to customers are included in selling, general and administrative
expenses on the consolidated statements of operations. For the years ended December 31, 2018 and 2017, shipping and handling costs
amounted to $932 and $0, respectively.
Research and Development
Research and development expenses are charged to operations
as incurred. During the years ended December 31, 2018 and 2017, the Company incurred $508,144 and $801,055, respectively, of research
and development expenses.
Advertising Costs
Advertising costs are expensed in the period
incurred. Advertising costs charged to operations for the years ended December 31, 2018 and 2017 were $12,500 and $65,085, respectively,
and are included in selling, general and administrative on the consolidated statements of operations.
Stock-Based Compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured
on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in
exchange for the award, usually the vesting period. Upon the exercise of an award, the Company issues new shares of common stock
out of its authorized shares.
During the year ended December 31, 2018, the
Company obtained a third-party 409A valuation of its common stock, which was also considered in management’s estimation of
the value of the equity instruments issued during that period. Under the 409A valuation, it was determined the Company’s
common stock had a fair value of $0.66 per share.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
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 consist of shares of non-vested restricted stock, if not
anti-dilutive.
The following shares were excluded from
the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
Decemeber 31,
|
|
|
|
2018
|
|
|
2017
|
|
Non-vested restricted stock
|
|
|
-
|
|
|
|
312,500
|
|
Series B Convertible Preferred Stock
|
|
|
1,542,850
|
|
|
|
-
|
|
Total
|
|
|
1,542,850
|
|
|
|
312,500
|
|
Income Taxes
The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements
or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets
and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in
effect for the years in which the temporary differences are expected to reverse.
The Company utilizes a recognition threshold
and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return.
Management has evaluated and concluded
that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December
31, 2018 and 2017. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of
the reporting date.
The Company’s policy is to classify
assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses
in the consolidated statements of operations.
Subsequent Events
The Company has evaluated subsequent events
through the date which the consolidated financial statements were issued. Based upon the evaluation, the Company did not identify
any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial
statements, except as disclosed.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the
assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability
to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will
be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The FASB
issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11 “Leases (Topic 842)
Targeted Improvements" in July 2018, and ASU No. 2018-20 "Leases (Topic 842) - Narrow Scope Improvements for Lessors"
in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affect narrow aspects of the guidance issued in ASU
2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition method of adoption,
under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption. The Company adopted ASU 2016-02 effective January 1, 2019
and upon adoption it expects to recognize additional assets and corresponding liabilities pertaining to its operating leases on
its consolidated balance sheet. The Company does not expect the adoption of the new standard to have a significant impact on its
consolidated statements of operations and cash flows. Management believes the primary effect of adopting the new standard will
be to record right-of-use assets and obligations for current operating leases.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09”).
ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective
basis in the annual and interim periods for fiscal years beginning after December 15, 2017 for share-based payment awards modified
on or after the adoption date. The Company adopted ASU 2017-09 effective January 1, 2018 and its adoption did not have a material
impact on the Company’s consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
“Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) — Accounting for Certain Financial Instruments
with Down Round Features,” (“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments
may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings.
Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion
option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market).
However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether
liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share
(“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered
by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this
ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted, including adoption in any interim period. The Company expects to adopt ASU 2017-11 effective
January 1, 2019 and its adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
“Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce
cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements
for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic
718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based
payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and
employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal
year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with
Customers. The Company early adopted ASU 2018-07 effective April 1, 2018. The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
Recent Accounting Pronouncements –
Continued
In July 2018, the FASB issued ASU No. 2018-09,
“Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to
certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10),
Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10),
Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives
and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments
in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company expects to adopt ASU 2018-09
effective January 1, 2019 and its adoption is not expected to have a material impact on the Company’s consolidated financial
statements.
In August 2018, the FASB issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair
Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements
based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in
unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent
interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively
to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In November 2018, the FASB issued ASU No.
2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”),
which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC
606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction
in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted, including
adoption in any interim period, (1) for public business entities for periods for which financial statements have not yet been issued
and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. An entity
may not adopt the amendments earlier than its adoption date of Topic 606. The amendments in this Update should be applied retrospectively
to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments
as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual
period that includes the date of the entity’s initial application of Topic 606. An entity may elect to apply the amendments
in this Update retrospectively either to all contracts or only to contracts that are not completed at the date of initial application
of Topic 606. An entity should disclose its election. An entity may elect to apply the practical expedient for contract modifications
that is permitted for entities using the modified retrospective transition method in Topic 606. The Company is currently evaluating
the effect that adopting this new accounting guidance will have on its consolidated financial statements and related disclosures.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
As of December 31, 2018 and 2017, prepaid
expenses consisted of the following:
|
|
Decemeber 31,
|
|
|
|
2018
|
|
|
2017
|
|
Business development services
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Research and development services
|
|
|
7,500
|
|
|
|
25,000
|
|
Professional fees
|
|
|
94
|
|
|
|
10,000
|
|
Filing fees
|
|
|
8,750
|
|
|
|
-
|
|
Insurance
|
|
|
8,177
|
|
|
|
-
|
|
Other
|
|
|
2,512
|
|
|
|
31,466
|
|
Total prepaid expenses
|
|
$
|
27,033
|
|
|
$
|
106,466
|
|
NOTE 5
|
PROPERTY AND EQUIPMENT
|
As of December 31, 2018 and 2017, property and equipment consisted
of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Computer equipment
|
|
$
|
13,356
|
|
|
$
|
8,402
|
|
Leasehold improvement
|
|
|
8,834
|
|
|
|
8,834
|
|
Software
|
|
|
5,656
|
|
|
|
5,656
|
|
Machinery and equipment
|
|
|
26,304
|
|
|
|
17,954
|
|
Research and development equipment
|
|
|
12,810
|
|
|
|
12,811
|
|
Furniture and fixtures
|
|
|
3,306
|
|
|
|
-
|
|
|
|
|
70,266
|
|
|
|
53,657
|
|
Less: accumulated deprecation
|
|
|
(25,475
|
)
|
|
|
(10,164
|
)
|
Property and equipment, net
|
|
$
|
44,791
|
|
|
$
|
43,493
|
|
Depreciation expense amounted to $15,311 and $8,797 for the years
ended December 31, 2018 and 2017, respectively, which is included in selling, general and administrative expenses in the consolidated
statements of operations.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 6
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
As of December 31, 2018 and 2017, accrued
expenses and other current liabilities consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued payroll and vacation
|
|
$
|
252,043
|
|
|
$
|
69,847
|
|
Accrued legal and professional fees
|
|
|
47,502
|
|
|
|
67,933
|
|
Accrued travel expenses
|
|
|
48,248
|
|
|
|
28,254
|
|
Payroll and income tax payable
|
|
|
12,678
|
|
|
|
14,223
|
|
Accrued research and development expenses
|
|
|
2,850
|
|
|
|
-
|
|
Credit card payable
|
|
|
4,586
|
|
|
|
110
|
|
Accrued issuable equity
|
|
|
3,960
|
|
|
|
1,104
|
|
Accrued rent
|
|
|
176
|
|
|
|
-
|
|
Other
|
|
|
2,287
|
|
|
|
7,471
|
|
Total accrued expenses and other current liabilities
|
|
$
|
374,330
|
|
|
$
|
188,942
|
|
Accrued issuable equity as of December
31, 2018 consists of 6,000 shares of common stock that had not been issued that had a fair value of $3,960.
NOTE 7
|
RELATED PARTY TRANSACTIONS
|
See Note 9 – Stockholders’
Equity – Common Stock
Accrued Expenses and Other Current Liabilities
On December 20, 2018, Energy Science Laboratories,
Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Office (“CTO”), forgave $50,000
of previously accrued consulting fees that were due to them by the Company. As a result, the Company accounted for the forgiveness
as a capital contribution by reducing accrued expenses and other current liabilities by $50,000 with a corresponding credit to
stockholders’ equity.
KULR
TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 7
|
RELATED PARTY TRANSACTIONS – CONTINUED
|
Accrued Expenses and Other Current
Liabilities – Continued
Accrued expenses and other current liabilities
– related party consists of a liability of $83,919 and $254,344 as of December 31, 2018 and 2017, respectively, to ESLI in
connection with consulting services provided by ESLI to the Company associated with the development of the Company’s CFV
thermal management solutions.
Note Receivable
On June 13, 2017, the Company collected
a $85,000 note receivable from its Chief Executive Officer (“CEO”) in full as well as outstanding accrued interest
in the amount of $3,488. The note receivable was related to a loan made prior to the Share Exchange. For the years ended December
31, 2018 and 2017, respectively, the Company recorded $0 and $1,336, respectively, of interest income in connection with the note
receivable.
Consulting Agreements
On June 2, 2014, KULR entered into consulting
agreements with its CEO and CTO. The agreements provide for a monthly retainer of $6,250 for June 2014 through November 2014 and
$6,500 thereafter. The term of each agreement is twelve months and provide for automatic extensions, in the absence of termination.
The consulting agreements were terminated in connection with the closing of the Share Exchange. During the years ended December
31, 2018 and 2017, the Company recorded aggregate expense of $0 and $57,000, respectively, related to the consulting agreements.
On November 11, 2017, the Company’s CEO
and CTO waived $25,000 and $110,000, respectively, related to compensation previously owed to them by the Company in connection
with their respective consulting agreements with KTC discussed above. As a result, the Company accounted for the waiver by reducing
accrued expenses and other current liabilities by $135,000 with a corresponding credit to stockholders’ equity.
During the years ended December 31, 2018 and
2017, the Company recorded research and development expense of $0 and $407,324, respectively, related to consulting services provided
to the Company by ESLI associated with the development of the Company’s CFV thermal management solutions. ESLI is controlled
by the Company’s CTO.
The income tax provision for the years ended
December 31, 2018 and 2017 consists of the following:
|
|
For The Years Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(347,767
|
)
|
|
|
(393,945
|
)
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(121,933
|
)
|
|
|
(175,455
|
)
|
|
|
|
(469,700
|
)
|
|
|
(569,400
|
)
|
Change in valuation allowance
|
|
|
469,700
|
|
|
|
569,400
|
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 8
|
INCOME TAXES – CONTINUED
|
A reconciliation of the statutory federal income tax rate to the
Company’s effective tax rate is as follows:
|
|
For The Years Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax benefit at federal statutory rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
(6.0
|
)%
|
|
|
(6.0
|
)%
|
Permanent differences
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
Incremental research and development tax credits
|
|
|
0.0
|
%
|
|
|
(2.9
|
)%
|
Prior year true-ups
|
|
|
4.0
|
%
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
22.8
|
%
|
|
|
20.8
|
%
|
Change in federal tax rate
|
|
|
0.0
|
%
|
|
|
21.7
|
%
|
Effective income tax rate
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
The Company has determined that a valuation
allowance for the entire net deferred tax asset is required. A valuation allowance is required if, based on the weight of evidence,
it is more likely than not that some or the entire portion of the deferred tax asset will not be realized. After consideration
of all the evidence, management has determined that a full valuation allowance is necessary to reduce the deferred tax asset to
zero.
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities are presented below:
|
|
For The Years Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,544,300
|
|
|
$
|
1,062,400
|
|
Research and development credit carryforwards
|
|
|
-
|
|
|
|
79,000
|
|
Stock-based compensation
|
|
|
187,200
|
|
|
|
184,400
|
|
Accruals
|
|
|
64,000
|
|
|
|
-
|
|
Gross deferred tax assets
|
|
|
1,795,500
|
|
|
|
1,325,800
|
|
Valuation allowance
|
|
|
(1,795,500
|
)
|
|
|
(1,325,800
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation allowance
|
|
$
|
469,700
|
|
|
$
|
569,400
|
|
At December 31, 2018 and 2017, the Company
had net operating loss carry forwards for federal and state income tax purposes of approximately $5.7 million and $3.9 million,
respectively. At December 31, 2018 approximately $3.9 million of federal net operating losses will expire from 2033 to 2037, and
approximately $1.8 million have no expiration.
The net operating loss carryovers may be
subject to annual limitations under Internal Revenue Code Section 382, and similar state provisions, should there be a greater
than 50% ownership change as determined under the applicable income tax regulations. The amount of the limitation would be determined
based on the value of the company immediately prior to the ownership change and subsequent ownership changes could further impact
the amount of the annual limitation. An ownership change pursuant to Section 382 may have occurred in the past or could happen
in the future, such that the NOLs available for utilization could be significantly limited.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 8
|
INCOME TAXES – CONTINUED
|
The Tax Cuts and Jobs Act (the "Act")
was enacted in December 2017. Among other things, the primary provision of Tax Reform impacting the Company is the reduction to
the U.S. corporate income tax rate from 35% to 21%, eliminating certain deductions and imposing a mandatory one-time transition
tax on accumulated earnings of foreign subsidiaries. The change in tax law required the Company to remeasure existing net deferred
tax assets using the lower rate in the period of enactment resulting in an income tax expense of approximately $0.6 million which
is fully offset by a corresponding tax benefit of $0.6 million which related to the corresponding reduction in the valuation allowance
for the year ended December 31, 2017. There were no specific impacts of Tax Reform that could not be reasonably estimated which
the Company accounted for under prior tax law.
NOTE 9
|
STOCKHOLDERS' (DEFICIENCY) EQUITY
|
Reverse Recapitalization
See Note 1 - Business Organization and
Nature of Operations - Reverse Recapitalization for details of the Share Exchange.
Authorized Capital
The Company is authorized to issue 500,000,000
shares of common stock, par value of $0.0001 per share, and 20,000,000 shares of preferred stock, par value of $0.0001 per share.
The holders of the Company’s common stock are entitled to one vote per share. The preferred stock is designated as follows:
1,000,000 shares designated as Series A Preferred Stock and 31,000 shares designated as Series B Convertible Preferred Stock.
On December 31, 2018, the Company filed
a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary
of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock of the Company.
Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its common stock, par value
$0.0001, to 500,000,000 from 100,000,000 (the “Authorized Increase”). On November 21, 2018, the Company’s board
of directors authorized the Company to effectuate the Authorized Increase, which Authorized Increase was approved by the written
consent of the majority shareholders of the Company as of November 5, 2018.
Equity Incentive Plan
On August 15 and November 5, 2018, the
Board of Directors and a majority of the Company’s shareholders, respectively, approved the 2018 Equity Incentive Plan
(the “2018 Plan”). Under the 2018 Plan, 15,000,000 shares of common stock of the Company are authorized for issuance.
The 2018 Plan provides for the issuance of incentive stock options, non-statutory stock options, rights to purchase common stock,
stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants of the Company and
its affiliates. The 2018 Plan requires the exercise price of stock options to be not less than the fair value of the Company’s
common stock on the date of grant.
Series A Preferred Stock
The Series A Preferred Stock are not convertible
into any series or class of stock of the Company. In addition, holders of the Series A Preferred Stock shall not be entitled to
receive dividends, nor shall them have right to distribution from the assets of the Company in the event of any liquidation, dissolution,
or winding up of the Company.
Each
record holder of Series A Preferred Stock shall have the right to vote on any matter with holders of the Company’s common
stock and other securities entitled to vote, if any, voting together as one (1) class. Each record holder of Series A Preferred
Stock has that number of votes equal to one-hundred (100) votes per share of Series A Preferred Stock held by such holder.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 9
|
STOCKHOLDERS' (DEFICIENCY) EQUITY – CONTINUED
|
Series A Preferred Stock – Continued
On November 5, 2018, the Company received a
written consent of the majority of the stockholders to issue 1,000,000 shares of the Company’s Series A Preferred Stock to
Mr. Mo, as a measure to protect the Company from an uninvited takeover. As of the date of filing, the shares of Series A Preferred
Stock have not been issued.
Series B Convertible Preferred Stock
On November 30, 2018, the Company filed
with the Secretary of State of the State of Delaware the Certificate of Designation of Series B Convertible Preferred Stock (the
“Certificate of Designation”), which became effective upon filing.
The Company designated 31,000 shares as Series
B Convertible Preferred Stock out of the authorized and unissued preferred stock of the Company, par value $0.0001 per share. The
Series B Convertible Preferred Stock does not contain any redemption provisions or other provisions requiring cash settlement within
control of the holder. Series B Convertible Preferred Stock is senior in liquidation preference to common stock. Holders of shares
of Series B Convertible Preferred Stock are not entitled to voting rights and dividend rights. Each share of Series B Convertible
Preferred Stock, after 181 days after issuance and without the payment of additional consideration, shall be convertible at the
option of the holder into fifty (50) fully paid and non-assessable shares of common stock. It was determined that the embedded
conversion option is clearly and closely related to the equity host, therefore it is not bifurcated and not accounted for as a
derivative. Each share of Series B Convertible Preferred Stock shall have a stated value of $1.00 per share.
On November 30, 2018, the Company issued an
aggregate of 30,858 shares of Series B Convertible Preferred Stock to certain existing common shareholders for aggregate proceeds
of $30,858, which was determined to be nominal consideration. The Company analyzed the transaction and concluded that the issuance
represented a deemed dividend in the form of the Series B Convertible Preferred Stock that was issued to a subset of the Company’s
common stockholders, since the transaction’s primary purpose was not to raise capital and required no action by the recipients.
The shares of Series B Convertible Preferred Stock were determined to have an aggregate issuance date fair value of $1,018,314,
which was reduced by the consideration paid of $30,858, to arrive at the deemed dividend of $987,456. The Company recognized the
deemed dividend by debiting and crediting additional paid-in capital.
Common Stock
During the year ended December 31, 2017,
the Company received aggregate consideration of $32,000 related to certain restricted common stock awards that were issued in
2013 and 2014, $2,000 of which was related to related parties.
During the year ended December 31, 2018,
the Company sold an aggregate of 1,081,819 shares of common stock at $0.66 per share to accredited investors for aggregate gross
and net proceeds of $714,000 and $672,400, respectively. Of the $41,600 of issuance costs, $35,000 were cash costs and $6,600 were
non-cash costs in the form of 10,000 shares of common stock that was issued during 2018.
A summary of restricted stock award activity
during the year ended December 31, 2018 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
Total
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Fair Value
|
|
Non-vested, December 31, 2017
|
|
|
312,500
|
|
|
$
|
0.99
|
|
|
$
|
309,375
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(312,500
|
)
|
|
|
(0.99
|
)
|
|
|
(309,375
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested, December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 9
|
STOCKHOLDERS' (DEFICIENCY) EQUITY – CONTINUED
|
Stock Options
On December 28, 2018, the Company granted five-year
options to purchase a total of 300,000 shares of common stock at an exercise price of $0.66 per share to employees pursuant to
the 2018 Plan. The options vested one-fifth on the date of grant and the remaining options vest monthly over three years. The options
had an aggregate grant date value of $113,312 which is recognized over the vesting period.
In applying the Black-Scholes option pricing
model, the Company used the following assumptions:
|
|
For the Years Ended
|
|
|
|
Decemeber 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk free interest rate
|
|
|
2.50
|
%
|
|
|
N/A
|
|
Expected term (years)
|
|
|
3.09
|
|
|
|
N/A
|
|
Expected volatility
|
|
|
87.00
|
%
|
|
|
N/A
|
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
N/A
|
|
Estimated fair value of common stock
|
|
$
|
0.66
|
|
|
|
N/A
|
|
The Company has computed the fair value
of stock options granted using the Black-Scholes option pricing model. Option forfeitures are accounted for at the time of occurrence.
The expected term used is the estimated period of time that options granted are expected to be outstanding. The Company utilizes
the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option
grants. The Company does not yet have a trading history to support its historical volatility calculations. Accordingly, the Company
is utilizing an expected volatility figure based on a review of the historical volatility of comparable entities over a period
of time equivalent to the expected life of the instrument being valued. The risk-free interest rate was determined from the implied
yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
The weighted average grant date fair value
of options granted during the years ended December 31, 2018 was $0.18 per share. There were no options granted during 2017.
A summary of options activity during the
year ended December 31, 2018 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Yrs)
|
|
|
Value
|
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
300,000
|
|
|
$
|
0.66
|
|
|
|
5.0
|
|
|
$
|
-
|
|
Exercisable, December 31, 2018
|
|
|
60,000
|
|
|
$
|
0.66
|
|
|
|
5.0
|
|
|
$
|
-
|
|
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 9
|
STOCKHOLDERS' (DEFICIENCY) EQUITY – CONTINUED
|
Stock Options – Continued
The following table presents information
related to stock options as of December 31, 2018:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Outstanding
|
|
|
Weighted
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$
|
0.66
|
|
|
|
300,000
|
|
|
|
5.0
|
|
|
|
60,000
|
|
|
|
|
|
|
300,000
|
|
|
|
5.0
|
|
|
|
60,000
|
|
Stock-Based Compensation
During the years ended December 31, 2018 and
2017, the Company recognized stock-based compensation expense of $457,713 (which includes the issuance of 174,437 shares of immediately
vested common stock for legal and consulting fees) and $598,204, respectively, related to restricted common stock and stock options
which is included within selling, general and administrative expenses on the consolidated statements of operations. As of December
31, 2018, there was $90,649 of unrecognized stock-based compensation expense that will be recognized over the weighted average
remaining vesting period of 3.0 years.
NOTE 10
|
COMMITMENTS AND CONTINGENCIES
|
Operating Lease
On January 1, 2017, KUTG entered into a one-year
lease agreement to lease 5,296 square feet of space located in San Diego, California with respect to its research and development
activities. The base rent was $4,364 per month plus association fees of $531 per month. In connection with the lease, the Company
paid the landlord a security deposit of $8,729. The aggregate base rent payable over the lease term was recognized on a straight-line
basis. On December 30, 2017, the rent was increased to $4,452 per month plus association fees of $531 per month. On December 30,
2018, the lease was extended until December 31, 2019, the base rent was $4,452 per month plus association fees of $555 per month.
On March 8, 2018, KTC took over ESLI’s
lease agreement and entered into a one-year lease agreement to lease 6,754 square feet of space located in San Diego, California
with respect to its research and development activities starting May 1, 2018. The base rent was $8,150 per month. In connection
with the lease, the Company recorded a liability to ESLI in connection with the security deposit of $8,150. The aggregate base
rent payable over the lease term was recognized on a straight-line basis.
Patent License Agreement
On March 21, 2018, the Company entered
into an agreement with the National Renewable Energy Laboratory (“NREL”) granting the Company an exclusive license
to commercialize its patented Internal Short Circuit technology. The agreement shall be effective for as long as the licensed patents
are enforceable, subject to certain early termination provisions specified in the agreement. In consideration, the Company agreed
to pay to NREL the following: (i) a cash payment of $12,000 payable over one year, (ii) royalties ranging from 1.5% to 3.75% on
the net sales price of the licensed products, as defined in the agreement, with minimum annual royalty payments ranging from $0
to $7,500. In addition, the Company shall use commercially reasonable efforts to bring the licensed products to market through
a commercialization program that requires that certain milestones be met, as specified in the agreement. As of the date of filing,
there had been no sales of the licensed products, such that no royalties had been earned.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
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NOTE 10
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COMMITMENTS AND CONTINGENCIES – CONTINUED
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Sales Taxes
States impose sales tax on certain sales
to nonexempt customers. The Company believes it is currently exempt from collecting and remitting sales tax as a result of the
following: (i) the products are shipped to states with sales tax exemptions, (ii) the Company’s customers are a reseller
of the products that the Company sells or (iii) the Company’s customers are government agencies. The Company did not collect
sales taxes during the years ended December 31, 2018 and 2017. If, during an inspection by a tax authority, the Company was unable
to support its customers’ tax exemption status, the Company may be subject to a liability for sales taxes not collected.
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NOTE 11
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SUBSEQUENT EVENTS
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Common Stock
Subsequent to December 31, 2018, the Company
issued 25,000 shares of common stock for legal services.
Subsequent to December 31, 2018, the Company
issued 234,849 shares of restricted common stock to investors for cash proceeds of $155,000.