The Company has not yet achieved profitability
and expects to continue to incur cash outflows from operations. As of September 30, 2020, the Company had cash of $2,809,656 and
a working capital deficit of $404,561. For the nine months ended September 30, 2020 and 2019, the Company incurred net losses of
$1,991,497 and $1,454,643, respectively, and used cash in operations of $2,076,035 and $1,206,135, respectively. It is expected
that research and development and general and administrative expenses will continue to increase and, as a result, the Company will
eventually need to generate significant revenues to achieve profitability. Further, as of September 30, 2020, the Company has debt
principal outstanding on notes payable in the amount of $3,150,000 which mature between May 31 and July 20, 2021 and $155,226 of
principal outstanding pursuant to the PPP loan agreement that matures in April 2022.
In January 2020, an outbreak of a
new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread
around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing
new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products
and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability
to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner.
Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the
imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations,
cash flows, or financial condition.
Effective February 27, 2020, the Company
entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with an Investor, pursuant to which
the Company may, at its discretion, sell up to an aggregate of $8,000,000 (subject to the Investor’s approval for amounts
over $100,000) of shares of the Company’s common stock at a price equal to 80% of the lowest daily volume weighted average
price for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the shares
under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived
by the Investor, at least 5 trading days shall have elapsed from the immediately preceding advance date (see Note 11 – Stockholders’
Deficiency). Additionally, the Company applied for, and in April 2020, received, a loan of $155,226 under the government Small
Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment
during the COVID-19 pandemic.
As of September 30, 2020, the Company had
approximately $5,847,300 available in connection with the SEDA, subject to certain conditions, in order to fund its ongoing operations;
however, there can be no assurance that the Company will be able to continue to sell common shares pursuant to the SEDA at an acceptable
price, or without causing undue dilution to existing investors. Further, there is also no assurance that the Company will be able
to continue to obtain additional funds on commercially acceptable terms, if at all. If the Company is unable to obtain adequate
funds on reasonable terms, it may be required to significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms. The Company’s operating needs include the planned costs to operate its business,
including amounts required to fund working capital and capital expenditures.
The aforementioned conditions indicate
that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the financial
statement issuance date. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation
of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business.
The unaudited condensed consolidated financial statements do not include any adjustment that might become necessary should the
Company be unable to continue as a going concern.
Since the date of the Annual Report on
Form 10-K for the year ended December 31, 2019, there have been no material changes to the Company’s significant
accounting policies, except as disclosed in this note.
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. A significant
portion of the Company’s cash is held at one major financial institution. The Company has not experienced any losses in such
accounts. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 at each institution. There was an uninsured balance of $2,559,656 as of September 30, 2020 and no uninsured cash
balances as of December 31, 2019.
The Company had certain customers whose
revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable, as follows:
There is no assurance the Company will
continue to receive significant revenues from any of these customers. Any reduction or delay in operating activity from any of
the Company’s significant customers, or a delay or default in payment by any significant customer, or termination of agreements
with significant customers, could materially harm the Company’s business and prospects. As a result of the Company’s
significant customer concentrations, its gross profit and results from operations could fluctuate significantly due to changes
in political, environmental, or economic conditions, or the loss of, reduction of business from, or less favorable terms with any
of the Company’s significant customers.
Vendor Concentrations
As of September 30, 2020 and December 31,
2019, certain vendors represented 10% or more of the Company’s total accounts payable, as follows:
|
|
|
|
Accounts Payable
|
|
|
|
|
|
As of
|
|
|
|
As of
|
|
|
|
|
|
September 30, 2020
|
|
|
|
December 31, 2019
|
|
|
Vendor A
|
|
|
*
|
|
|
|
15
|
%
|
|
Vendor B
|
|
|
*
|
|
|
|
16
|
%
|
|
Vendor C
|
|
|
*
|
|
|
|
17
|
%
|
|
Vendor D
|
|
|
*
|
|
|
|
12
|
%
|
|
Vendor E
|
|
|
47
|
%
|
|
|
*
|
|
|
Vendor F
|
|
|
10
|
%
|
|
|
*
|
|
|
All other vendors
|
|
|
43
|
%
|
|
|
40
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
* Less than 10%
|
|
|
|
|
|
|
|
|
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- CONTINUED
Revenue Recognition
The Company recognizes
revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with
Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and,
in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The following five steps are applied to
achieve that core principle:
· Step
1: Identify the contract with the customer;
· Step
2: Identify the performance obligations in the contract;
· Step
3: Determine the transaction price;
· Step
4: Allocate the transaction price to the performance obligations in the contract; and
· Step
5: Recognize revenue when the company satisfies a performance obligation.
The Company recognizes
revenue primarily from the following different types of contracts:
· Product
sales – Revenue is recognized at the point in time the customer obtains control of the goods and the Company satisfies
its performance obligation, which is generally at the time it ships the product to the customer.
· Contract
services – Revenue is recognized at the point in time that the Company
satisfies its performance obligation under the contract, which is generally at the time the services are fulfilled and/or accepted
by the customer.
The following table summarizes the revenue
recognized in the unaudited condensed consolidated statements of operations:
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Product sales
|
|
$
|
136,849
|
|
|
$
|
464,772
|
|
|
$
|
235,979
|
|
|
$
|
686,522
|
|
|
Contract services
|
|
|
-
|
|
|
|
61,950
|
|
|
|
179,498
|
|
|
|
91,462
|
|
|
Total revenue
|
|
$
|
136,849
|
|
|
$
|
526,722
|
|
|
$
|
415,477
|
|
|
$
|
777,984
|
|
As of September 30, 2020, and December 31,
2019, the Company had $36,600 and $15,000, respectively, of deferred revenue, 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,
or the customers have not officially accepted the goods or services provided under the contract. During the nine months ended September
30, 2020, the Company recognized $15,000 of revenues that were included in deferred revenue as of December 31, 2019.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
Sequencing Policy
Under ASC 815-40-35 (“ASC 815”),
the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or
liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares
as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the basis of
the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares.
Pursuant to ASC 815, issuances of securities as compensation in a share-based payment arrangement are not subject to the sequencing
policy.
Net Loss Per Common Share
Basic net loss per common share is computed
by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net loss
per common share is computed by dividing net loss by the weighted average number of common shares outstanding, plus the impact
of common shares, if dilutive, resulting from the exercise of outstanding stock options and warrants and the conversion of convertible
instruments.
The following shares were excluded from
the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
|
As of
|
|
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Series B Convertible Preferred Stock
|
|
|
698,600
|
|
|
|
724,350
|
|
|
Series C Convertible Preferred Stock
|
|
|
189,000
|
|
|
|
206,800
|
|
|
Options
|
|
|
395,000
|
|
|
|
400,000
|
|
|
Warrants
|
|
|
210,025
|
|
|
|
201,700
|
|
|
Total
|
|
|
1,492,625
|
|
|
|
1,532,850
|
|
Reclassifications
Certain prior period balances have been
reclassified in order to conform to the current period presentation. These reclassifications have no effect on previously reported
results of operations or loss per share.
NOTE 4 PREPAID EXPENSES
As of September 30, 2020, and December 31,
2019, prepaid expenses consisted of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Marketing
|
|
$
|
61,298
|
|
|
$
|
-
|
|
|
Other
|
|
|
29,767
|
|
|
|
12,232
|
|
|
Professional
|
|
|
26,201
|
|
|
|
4,134
|
|
|
Filing
|
|
|
14,474
|
|
|
|
9,858
|
|
|
Security deposit
|
|
|
8,728
|
|
|
|
16,977
|
|
|
Total prepaid expenses
|
|
$
|
140,468
|
|
|
$
|
43,201
|
|
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of September 30, 2020 and December 31, 2019, accrued
expenses and other current liabilities consisted of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Payroll and vacation
|
|
$
|
321,519
|
|
|
$
|
525,917
|
|
|
Legal and professional fees
|
|
|
51,250
|
|
|
|
60,000
|
|
|
Other
|
|
|
16,920
|
|
|
|
73,482
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
389,689
|
|
|
$
|
659,399
|
|
See Note 10 – Related Party Transactions
for additional information on accrued expenses – related party.
NOTE 6 ACCRUED ISSUABLE EQUITY
As of September 30, 2020, accrued issuable
equity consists of the following:
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
Accrued issuable equity for services, current portion
|
|
$
|
83,530
|
|
|
Accrued issuable equity for services, non-current portion
|
|
|
100,000
|
|
|
|
|
$
|
183,530
|
|
Accrued Issuable Equity for Services
During the three and nine months ended
September 30, 2020, the Company agreed to issue an aggregate of 113,453 and 136,786 shares of common stock to certain consultants
in exchange for services valued at $147,977 and $164,577, respectively. The shares have not been issued as of September 30, 2020.
The fair value of the accrued but unissued shares as of September 30, 2020 was $183,530. During the three and nine months ended
September 30, 2020 the Company recorded $9,947 and ($15,853), respectively, of gains (losses) related to the change in fair value
of accrued issuable equity (see Note 11 – Stockholders’ Deficiency, Stock-Based Compensation).
NOTE 7 LINE OF CREDIT
On February 18, 2020, the Company entered into a financing agreement
(the “Line of Credit”) wherein it may borrow up to $10,000. The repayment terms (interest rate, repayment amount and
number of consecutive weekly periodic installments) are determined at the time the Company borrows proceeds under the Line of Credit.
On February 19, 2020, the Company borrowed and received gross
proceeds of $10,000 under the Line of Credit for its working capital needs, which is being repaid weekly for the next 26 weeks
at a weekly interest rate of 1.7%. As of September 30, 2020, the outstanding aggregate principal amount on the Line of Credit was
$0 During the three and nine months ended September 30, 2020, the Company recorded interest expense of $114 and $2,292, respectively,
related to the Line of Credit. There was no accrued interest related to the Line of Credit as of September 30, 2020. The outstanding
balance of the line of credit was paid off in July 2020.
NOTE 8 NOTES PAYABLE
On February 27, 2020, the Company
entered into a note purchase agreement with the YAII PN, Ltd., a Cayman Island exempt limited partnership (the “Investor”),
pursuant to which the Investor purchased a full recourse promissory note (the “Note”) in the original principal amount
of $1,500,000 (“Principal Amount”) for cash proceeds of $1,410,000. The Note included an original issue discount of
$90,000, which represents the difference between the principal and proceeds received. The original issue discount, along with the
$130,000 advisory fee were recorded as a debt discount which is being amortized over the term of the Note using the effective interest
rate method.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 8 NOTES PAYABLE
- CONTINUED
The Note bears no coupon interest (original
issue discount only) and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise
upon the occurrence of an event of default, as set forth in the Note and which includes the early termination of a standby equity
distribution agreement with the Investor (see Note 11 – Stockholders’ Deficiency, Standby Equity Distribution Agreement).
The Company is required to repay the Principal Amount in monthly installments as set forth in the agreement. The Company may, at
its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount
being prepaid.
During the three and nine months ended
September 30, 2020, the Company repaid principal on the Note of $250,000 and $475,000, respectively (of which $250,000 and
$391,000, respectively, was repaid from proceeds from the SEDA). As of September 30, 2020, the outstanding aggregate principal
balance of the Note was $1,025,000. During the three and nine months ended September 30, 2020, the Company recognized amortization
of debt discount of $53,709 and $150,620, respectively, related to the Note. Please see Note 13 – Subsequent Events
for additional information regarding further repayments of the Note.
New Note Purchase Agreement and Promissory
Note
The Company also entered into a Note Purchase
Agreement, dated July 20, 2020, with the Investor, pursuant to which the Investor purchased a full recourse promissory note
(the “July 2020 Note”) in the original principal amount of $2,500,000 (“July 2020 Principal Amount”)
for cash proceeds of $2,300,000. The July 2020 Note included an original issue discount of $200,000, which represents the difference
between the principal and proceeds received. The original issue discount, along with the $200,000 advisory fee were recorded as
a debt discount, which is being amortized over the term of the July 2020 Note using the effective interest rate method.
The July 2020 Note bears no interest
(original issuance discount only) and will become immediately due and payable on July 20, 2021 or upon acceleration, redemption
or otherwise upon the occurrence of an event of default, as set forth in the July 2020 Note. The Company will repay the July 2020
Principal Amount in monthly installments as set forth in the July 2020 Note. The Company may, at its discretion, prepay any
installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid. Further,
pursuant to the terms of the July 2020 Note, the Company may decrease any installment payment by up to 50%, of which the decreased
amount is added to the final installment due on the maturity date.
The Company elected to decrease the monthly
installment payments due during May and August 2020 by an aggregate of $225,000. The decrease of $225,000 will be added to the
final monthly installment on July 20, 2021.
During the three and nine months ended
September 30, 2020, the Company repaid principal on the July 2020 Note of $375,000 (of which $300,000 was repaid from proceeds
from the SEDA). As of September 30, 2020, the outstanding aggregate principal balance of the July 2020 Note was $2,125,000.
During the three and nine months ended September 30, 2020, the Company recognized amortization of debt discount of $156,693
related to the July 2020 Note. See Note 13 – Subsequent Events for additional information regarding further repayments
of the Note.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 9 LOAN PAYABLE
On April 27, 2020, the Company received
$155,226 of cash proceeds pursuant to an unsecured loan (the “PPP” Loan) provided in connection with the Paycheck Protection
Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES
Act”).
Under the terms of the CARES Act, as amended
by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to apply for and receive forgiveness for all
or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds
for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP)
and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent
to funding, and on the maintenance of employee and compensation levels, as defined, following the funding of the PPP Loan. The
Company intends to use the proceeds of the PPP Loan for Qualifying Expenses. However, no assurance is provided that KULR will be
able to obtain forgiveness of the PPP Loan in whole or in part. Any amounts not forgiven incur interest at 1.0% per annum and monthly
repayments of principal and interest are deferred until the Small Business Administration decides on forgiveness. While the Company’s
PPP Loan currently has a two-year maturity, the amended law will permit the Company to request a five-year maturity, subject to
the approval of the counterparty. During the three and nine months ended September 30, 2020, the Company recognized interest
expense of $387 and $659 respectively in connection with the PPP Loan. As of September 30, 2020, and December 31, 2019, the
Company’s accrued interest related to the PPP Loan was $659 and $0, respectively.
NOTE 10 RELATED
PARTY TRANSACTIONS
Accounts Payable – Related Party
Accounts payable – related party
consists of a liability of $3,454 and $4,253 as of September 30, 2020 and December 31, 2019, respectively, to Energy Science
Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”),
in connection with consulting services provided to the Company associated with the development of the Company’s carbon fiber
velvet (“CFV”) thermal management solutions in prior periods. During the three and nine months ended September 30,
2020, the Company paid $168 and $799, respectively, of certain bills on behalf of ESLI, which reduced the liability owed to ESLI.
Accrued Expenses and Other Current Liabilities
– Related Party
Accrued expenses and other current liabilities
– related party consist of a liability of $0 and $10,419 as of September 30, 2020 and December 31, 2019, respectively,
to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer
(“CTO”), in connection with consulting services provided by ESLI to the Company associated with the development of
the Company’s CFV thermal management solutions.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 11 STOCKHOLDERS’
DEFICIENCY
Standby Equity Distribution Agreement
On February 27, 2020, KULR Technology
Group, Inc. entered into a SEDA with the Investor, pursuant to which the Company may, at its discretion, sell to the Investor
up to $8,000,000 of shares of the Company’s common stock (the “Offering”), par value $0.0001 per share (the “Common
Stock”). For each share of Common Stock purchased under the SEDA (the “Shares”), the Investor will pay the Company
80% of the lowest daily volume weighted average price of the Common Stock on the OTC Markets OTCQB or other principal market on
which the Common Stock is traded for the five days immediately following the date the Company delivers notice requiring the Investor
to purchase the Shares under the SEDA.
The Investor’s obligation to purchase
the Shares under the SEDA is subject to certain conditions, including the Company maintaining the effectiveness of a registration
statement for the securities sold under the SEDA, and is subject to the Investor’s approval for amounts over $100,000. In
addition, the Company may not request advances if the Shares to be issued would result in the Investor owning more than 4.99% of
the Company’s outstanding Common Stock, with any such request being automatically modified to reduce the advance amount.
The Company shall not be able to request advances under the SEDA if the Registration Statement is not effective or if any issuances
of Common Stock pursuant to any Advances would violate any rules.
The commitment period under the SEDA commenced
on February 27, 2020 (the “Effective Date”) and expires on the earliest to occur of (i) first day of the
month following the twenty-four months after the Effective Date, (ii) the date on which the Investor has purchased an aggregate
amount of $8,000,000 of Shares under the SEDA, or (iii) the date the SEDA is earlier terminated.
The SEDA contains customary representations,
warranties and agreements of the Company and the Investor, indemnification rights and other obligations of the parties. The Company
has the right to terminate the SEDA at any time upon prior written notice, at no cost to the Company, provided that (i) there
are no outstanding advances which have yet to be issued and (ii) the Company has paid all amounts owed to the Investor, including
amounts borrowed under the Note (see Note 8 – Notes Payable). The Investor has covenanted not to cause or engage in any manner
whatsoever, any direct or indirect short selling or hedging of the Company’s shares of Common Stock.
The Company paid cash of $15,000 and issued
95,847 shares of Common Stock to the Investor as consideration for entering into the SEDA. The shares of common stock issued to
the Investor had an issuance date fair value of $63,259. The aggregate consideration of $78,259 was recorded as deferred offering
costs and additional paid in capital on the condensed consolidated balance sheet. During the three and nine months ended September
30, 2020, the Company recorded $0 and $78,259, respectively, of expense related to the amortization of deferred offering costs.
During the three and nine months ended
September 30, 2020 the Company issued an aggregate of 1,159,449 and 1,721,013 shares of common stock, at prices between $0.73 -
$1.62 and $0.72 - $1.65 per share, for aggregate proceeds of $1,395,000 and $2,152,696, respectively, in connection with notices
submitted to the Investor under the SEDA, of which $550,000 and $691,000 of the proceeds, respectively, were applied directly against
the Notes (see Note 8 – Notes Payable).
See Note 11 – Stockholders’
Deficiency - Shares To Be Issued for additional information.
See Note 13 – Subsequent Events for
additional information regarding the sale of SEDA shares subsequent to September 30, 2020.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 11 STOCKHOLDERS’
DEFICIENCY - CONTINUED
Series B Convertible Preferred Stock
During the three and nine months ended
September 30, 2020, a holder of 515 shares of Series B Convertible Preferred Stock elected to convert their shares into 25,758
shares of restricted common stock.
Series C Convertible Preferred Stock
During the three and nine months ended
September 30, 2020, certain holders of 5.11 shares of Series C Convertible Preferred stock elected to convert their shares into
an aggregate of 56,777 shares of restricted common stock.
Stock-Based Compensation
Common Stock
During the three and nine months ended
September 30, 2020, the Company issued an aggregate of 35,000 and 65,000 shares of immediately vested common stock with a grant
date value of $25,000 and $55,000, respectively, for legal and consulting services provided. During the three and nine months
ended September 30, 2019, the Company issued 160,966 and 185,966 shares of immediately vested common stock with a grant date value
of $117,160 and $133,660, respectively, for legal and consulting services provided.
Stock Options
On January 1, 2020, the Company granted
five-year options to purchase a total of 10,000 shares of common stock at an exercise price of $0.66 per share to an employee pursuant
to the 2018 Plan. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options
vest monthly over three years. The options had an aggregate grant date value of $3,609 which is recognized over the vesting period.
The Company estimated the fair value of the options using the Black-Scholes Option Pricing Model with the following assumptions:
(a) stock price of $0.66 per share; (b) volatility of 93%; (c) expected term of 2.5 years; (d) risk-free interest rate of 1.58%;
and (e) a dividend rate of 0.0%.
Stock-Based Compensation Expense
During the three and nine months ended
September 30, 2020, the Company recognized stock-based compensation expense of $158,014 and $252,831, respectively, related to
restricted common stock and stock options, of which $7,424 and $22,961, respectively, was charged to research and development expense
and $150,590 and $229,870, respectively, was charged to general and administrative expense. As of September 30, 2020, there was
$66,290 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period
of 1.77 years.
During the three and nine months ended
September 30, 2019, the Company recognized stock-based compensation expense of $138,640 and $231,751 (which includes the issuance
of 185,966 shares common stock for $133,660 of services provided as described above), respectively, related to restricted common
stock, stock options and warrants, which are included within general and administrative expenses on the condensed consolidated
statements of operations.
KULR TECHNOLOGY GROUP, INC. AND
SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 11 STOCKHOLDERS’
DEFICIENCY - CONTINUED
Stock-Based Compensation - Continued
Stock-Based Compensation Expense, Continued
The following table presents information
related to stock-based compensation for the three and nine months ended September 30, 2020 and 2019:
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Common stock (issued)
|
|
$
|
-
|
|
|
$
|
75,710
|
|
|
$
|
55,000
|
|
|
$
|
121,181
|
|
|
Stock options
|
|
|
10,038
|
|
|
|
9,475
|
|
|
|
30,155
|
|
|
|
36,628
|
|
|
Warrants
|
|
|
-
|
|
|
|
40,976
|
|
|
|
-
|
|
|
|
61,463
|
|
|
Accrued issuable equity (common stock)
|
|
|
147,976
|
|
|
|
12,479
|
|
|
|
167,676
|
|
|
|
12,479
|
|
|
Total
|
|
$
|
158,014
|
|
|
$
|
138,640
|
|
|
$
|
252,831
|
|
|
$
|
231,751
|
|
Shares To Be Issued
On September 28, 2020, the Company delivered
a notice requiring the Investor to purchase 31,250 of shares under the SEDA, at $1.28 price per share, which was equal to 80% of
the lowest daily volume weighted average price at which the shares are traded for the five days immediately following the date
the Company delivered such notice. The shares were subsequently settled on October 1, 2020 for $40,000 of gross proceeds (see Note
13 – Subsequent Events).
Consulting Agreement
On September 30, 2020, the Company entered
into a 2-year consulting agreement with a contractor to provide services as an Advisory Board Member related to government and
defense acquisitions in exchange for 60,000 shares of restricted common stock. Pursuant to the consulting agreement, the shares
are subject to the Company’s claw back, based upon the achievement of certain performance obligations. As of September 30,
2020, the required performance obligations have not been identified, and the restricted common shares were issued on or about November
9, 2020.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Operating Lease
On June 15, 2020, the Company entered
into an agreement to extend the term of its original office space lease from September 30, 2020 to December 31, 2020. Monthly
rental payments under the renewed lease total $5,107, which are comprised of $4,552 of base rent plus $555 of association fees.
For the three and nine months ended September 30, 2020, operating lease expense was $15,616 and $56,414, respectively. For the
three and nine months ended September 30, 2019, operating lease expense was $41,281 and $121,769, respectively. The Company evaluated
their operating lease and determined that the short-term exemption available under ASC 842 applies since the lease term is less
than 12 months and the lease does not include a purchase option whose exercise is reasonably certain. Since the short-term exemption
applies, lease payments are recognized as expense and no right of use asset or lease liability is recorded.
KULR TECHNOLOGY
GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 13 SUBSEQUENT EVENTS
Standby Equity Distribution Agreement and Repayments of the
Notes Payable
Subsequent to September 30, 2020, the Company
received cash of $40,000 in satisfaction of subscriptions receivable as of September 30, 2020 and the Company issued 31,250 shares
of common stock pursuant to the SEDA (see Note 6 – Accrued Issuable Equity, Accrued Issuable Equity for Subscriptions
Receivable and Note 10 – Stockholders’ Deficiency).
Subsequent to September 30, 2020, the Company
issued an aggregate of 89,285 shares of additional common stock at a price of $1.12 per share pursuant to new advance notices submitted
to the Investor under the SEDA. The entire proceeds of $100,000 were withheld by YAII to pay down a portion of the Notes (see Note
11 – Stockholders’ Deficiency, Standby Equity Distribution Agreement and Note 8 – Notes Payable).
Subsequent to September 30, 2020, the Company
made cash payments totaling $250,000 to pay down a portion of the Notes.
Subsequent to September 30, 2020, the Company
issued 76,453 shares of restricted common stock in satisfaction of $100,000 of accrued issuable equity, pursuant to a services
agreement.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion
and analysis of the results of operations and financial condition of KULR Technology Group, Inc. (the “Company”)
as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 should be read in conjunction with
our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures
as of December 31, 2019 and for the year then ended, which are included in the Form 10-K filed with the Securities and
Exchange Commission (“SEC”) on May 14, 2020. References in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer
to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements
that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties
and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,”
and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors”
elsewhere in this Quarterly Report, in our other reports filed with the SEC, and other factors that we may not know.
Overview
KULR Technology Group, Inc.,
through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management
technologies for batteries, electronics, and other components across an array of battery-powered applications. For aerospace and
DOD applications, our solutions target high performance applications in direct energy, hypersonic vehicles and satellite communications.
For commercial applications, our main focus is a total solution to battery safety by which we aim to mitigate the effects of thermal
runaway propagation. This total battery safety solution can be used for electric vehicles, energy storage, battery recycling transportation,
cloud computing and 5G communication devices. Our proprietary core technology is a carbon fiber material that provides what we
believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our
proprietary cooling solutions that have been developed through longstanding partnerships with NASA, the Jet Propulsion Lab and
others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter.
KULR’s business
model continues to evolve from being a component supply, to providing more design and testing services to our customers. The next
step of evolution is to provide total system solution to address market needs. To scale up as a systems provider more quickly and
efficiently in the directed energy, hypersonic vehicle thermal systems, energy storage and lithium-ion battery recycling markets,
KULR will actively seek partners for joint venture, technology licensing and other strategic partnership models. The goal is to
leverage the Company’s thermal design technology expertise to create market leading products, which KULR will take to market
directly to capture more value for KULR shareholders.
Our management expects high priority and growth in the aerospace
and defense sectors, specifically in regard to directed energy, hypersonic weapon programs, and space missions. Directed energy
is currently in the spotlight as experts predict it will greatly impact the future of warfare. Our CRUX cathode generates powerful
electron pulses by field emission from the tops of our carbon fiber coating which has the potential to further develop the current
technology. Thermal management is another critical component of both hypersonic weapons programs and space missions and is another
area in which our products excel. Our carbon fiber solutions are used for thermal management in missile defense programs and are
particularly effective because of their survivability at very high temperatures. They are also very effective at transferring heat
and mitigate the risk of overheating in such high-risk environments. Historically we have provided value to this sector and we
expect to further develop our relationships with Airforce Research Lab, Naval Research Lab and prime contractors to market our
solutions.
Battery safety technology is becoming increasingly vital to
our world in which battery-operated devices are everywhere. Lithium ion (“Li-ion”) batteries are widely used in consumer
electronics, aerospace, marine and automotive applications. In recent months, KULR has developed a total battery safety solution
for its customers that spans a wide array of industries and applications. KULR has seen great success in using our patented thermal
runaway shield (“TRS”) technology to prevent cell to cell thermal runaway propagation as well as module to module propagation.
We have designed a total solution for customers from the design stages incorporating our materials all the way to testing their
passive propagation resistant (“PPR”) battery packs. We are flexible and can work with different battery pack configurations
across various industries. We developed a PPR reference design for CubeSat battery in December 2019. Based on this reference
design platform, we were awarded a dual-used technology development agreement from NASA’s Marshall Space Flight Center to
build 3D printed battery systems for manned and robotic space applications in August 2020. Our research and testing, as well as
working alongside battery experts at NASA Johnson Space Center, has positioned us for further advancements at the forefront of
battery safety.
Hundreds of millions
of Li-ion cells are produced and transported annually and even those packaged to prevent external short can still experience thermal
runaway (“TR”) due to internal shorts, caused by latent defects, when fully charged. In these dangerous cases, a torch-like
fire is released as energy escapes from the cell and sends nearby cells into TR resulting in a large fire. As part of our total
battery safety solution, we have designed a bag out of our TRS material to suppress the flames and prevent the TR event. Suitably
placed, the TRS provides a means of protection not only from adjacent batteries but also outside fires of arbitrary origin. Experts
at NASA’s Propulsion & Power Division found our TRS successful at extinguishing the fire generated by cells when
they intentionally triggered the batteries into dangerous failures. Our TRS bag is currently being used on the International Space
Station (“ISS”) through a project with Leidos, for storing laptop batteries in order to reduce the risk of TR.
Another key element
of our battery safety solution is KULR internal short circuit (“ISC”) device and trigger cells which are used for cell
testing and screening. Our patented ISC device, licensed from NASA/NREL, can be inserted by OEMs or manufacturers into cells to
mimic failure conditions in a cell. Once the trigger device is placed inside the cell, it can be intentionally triggered on demand
causing the cell to short circuit. Currently, we provide ISC devices to OEMs and cell manufacturers, as well as ready-made ISC
trigger cells to customers to identify failure modes and safety issues within their systems. Currently we are creating an ecosystem
based on our technology which can be applied to different battery architectures and chemistries.
Our management believes
that within commercial markets, aerospace and defense, and high-value applications, cell testing and screening has become a topic
of focus. Therefore, we plan to expand our capabilities to include full battery analysis and testing as outlined by NASA Johnson
Space Center. We plan to fully incorporate this into our holistic approach to battery safety along with our PPR battery pack design
and testing services, ISC device and trigger cell products and TRS bags. With increasing regulations and pressure from government
bodies to mitigate the dangers of battery fires and TR, we plan to further develop our capabilities in this arena.
In addition to evolving demands led by aerospace
and defense, we have observed trending manufacturer-led opportunities in industries such as electric motor vehicles (“EV”)
that have become increasingly more reliant on the Cloud, portability and high-demand processing power. KULR’s high performance
thermal interface materials can be used to accelerate 5G communications development due to our material’s core properties:
high thermal conductivity, light weight, and low contact pressure. 5G is one of the biggest opportunities going forward for transportation
technology and we plan to take part in testing of digital and RF tests for 5G. Testing is still in early phases for both digital
and RF communication chips, however, we are seeing a big growth opportunity for thermal management for 5G. Cloud computing is also
an application of interest since high power communications chips and optical communication modules require cooling.
We have not yet achieved
profitability and expect to continue to incur cash outflows from operations, as a result, we will eventually need to generate significant
revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue as a
going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds to support
our business operations, although there can be no assurance, even with the support of borrowing under the SEDA, that we will be
successful in raising additional funds in the future. Furthermore, we remain focused on growing our operations and eventually achieving
profitability, although no assurances can be made that we will achieve such goals.
Recent Developments
COVID-19
In January 2020,
an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease
became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business
is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to
reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place”
will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands
in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus
and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results
of operations, cash flows, or financial condition.
Standby Equity Distribution Agreement
On February 27,
2020, we entered into a Standby Equity Distribution Agreement (“SEDA”) with YAII PN, Ltd., a Cayman Island exempt
limited partnership (“YAII”), pursuant to which the Company may, at its discretion, subject to certain conditions,
sell to YAII up to $8,000,000 of shares common stock. For each share of common stock purchased under the SEDA (the “Shares”),
YAII will pay the Company 80% of the lowest daily volume weighted average price of the common stock on the OTC Markets OTCQB or
other principal market on which the common stock is traded for the five days immediately following the date the Company delivers
notice requiring YAII to purchase the Shares under the SEDA. For each advance, the Company shall have delivered all shares relating
to all prior advances, and, unless waived by YAII, at least 5 trading days shall have elapsed from the immediately preceding advance
date. The Company agreed to issue, without receiving additional consideration, to YAII 95,847 shares of common stock as commitment
shares in consideration for entering into the SEDA. Through September 30, 2020, the Company issued an aggregate of 1,721,013 shares
of common stock at prices between $0.72 - $1.65 per share for aggregate proceeds of $2,152,696 received against advance notices
submitted to YAII under the SEDA, of which $691,000 of the proceeds were applied directly against principal owed under a promissory
note agreement with YAII (see Promissory Note Agreements, below). Please also refer to Note 7 – Notes Payable, in the accompanying
financial statements, for more information.
Promissory Note Agreements
We entered into a Note
Purchase Agreement, dated February 27, 2020, with YAII, pursuant to which YAII purchased a full recourse promissory note (the
“Note”) in the original principal amount of $1,500,000 (“Principal Amount”). In consideration for the issuance
of the Note by the Company, the purchase price of the Note paid by YAII was equal to the Principal Amount minus an original issue
discount equal to 6%. The Note bears no interest and will become immediately due and payable on May 31, 2021 or upon acceleration,
redemption or otherwise upon the occurrence of an event of default, as set forth in the Note. The Company will repay the Principal
Amount in monthly installments as set forth in the Note. The Company may, at its discretion, prepay any installment amount or the
principal amount, subject to a payment premium equal to the 10% of the amount being prepaid.
We also entered into
a Note Purchase Agreement, dated July 20, 2020, with YAII, to which YAII purchased a full recourse promissory note (the “July
2020 Note”) in the original principal amount of $2,500,000. In consideration for the issuance of the July 2020 Note, the
purchase price of the July 2020 Note paid by YAII was equal to the Principal Amount minus an original issue discount equal to 8%.
The July 2020 Note was issued under substantially the same terms as the Note.
Through September 30, 2020, we repaid principal on the Note
and July 2020 Note (together, the “Notes) of $850,000 (of which $691,000 was repaid from proceeds from the SEDA).
Subsequent to September 30, 2020, we received
cash of $40,000 in satisfaction of subscriptions receivable as of September 30, 2020 and we issued 31,250 shares of common stock
pursuant to the SEDA.
Subsequent to September
30, 2020, we issued an aggregate of 89,285 shares of additional common stock at a price of $1.12 per share pursuant to new advance
notices submitted to YAII under the SEDA. The entire proceeds of $100,000 were withheld by YAII to pay down a portion of the Notes.
Subsequent to September
30, 2020, we made cash payments totaling $250,000 to pay down a portion of the Notes.
Common Stock Issuances
Subsequent to September
30, 2020, we issued 76,453 shares of restricted common stock in satisfaction of $100,000 of accrued issuable equity, pursuant to
a services agreement.
Subsequent to September
30, 2020, the Company issued 60,000 shares of common stock to a consultant, which are subject to clawback, at the sole discretion
of our Board of Directors, in the event certain milestones are not achieved.
Patents
On July 28, 2020, the
U.S. Patent and Trademark Office has issued patent No. 10727462 covering the Company’s thermal runaway shield technology.
On August 4, 2020,
the U.S. Patent and Trademark Office has issued patent No. 10734302 covering the Company’s fiber thermal interface technology.
Results of Operations
Three and Nine Months Ended September
30, 2020 Compared With Three and Nine Months Ended September 30, 2019
Revenues
Our revenues consisted
of the following types:
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Product sales
|
|
$
|
136,849
|
|
|
$
|
464,772
|
|
|
$
|
235,979
|
|
|
$
|
686,522
|
|
|
Contract services
|
|
|
-
|
|
|
|
61,950
|
|
|
|
179,498
|
|
|
|
91,462
|
|
|
Total revenue
|
|
$
|
136,849
|
|
|
$
|
526,722
|
|
|
$
|
415,477
|
|
|
$
|
777,984
|
|
For the three months ended September 30, 2020 and 2019, we generated
$136,849 and $526,722 of revenues, respectively, representing a decrease of $389,873, or 74%. Revenue from product sales during
the three months ended September 30, 2020 decreased by 71% compared to the three months ended September 30, 2019, mainly due to
a large contract received during the three months ended September 30, 2019. Product sales during these periods included sales of
our component products, carbon fiber velvet (“CFV”) thermal management solutions, ISC battery cells and devices, patented
TRS technology, and thermal fiber thermal interface (“FTI”) materials. Contract services during the comparable period
consisted of certain research and development contracts and onsite engineering services.
For the nine months
ended September 30, 2020 and 2019, we generated $415,477 and $777,984 of revenues from 20 and 21 customers, respectively, representing
a decrease of $362,507, or 47%. Revenue from product sales during the nine months ended September 30, 2019 decreased by 66% compared
to the nine months ended September 30, 2019, mainly due to a large DOD contract of about $355,000 received during the three months
ended September 30, 2019. The customer has pushed the next shipment of product to 2021. Product sales during these periods included
sales of our component products, CFV thermal management solutions, ISC battery cells and devices, patented technology, and thermal
FTI materials. Revenue from services increased by 96% for the nine months ended September 30, 2020 as compared to the nine months
ended September 30, 2019, due to increased project requirements from some of our new and existing customers. Our service revenues,
which include certain research and development contracts and onsite engineering services, were not hampered by restrictions arising
from working under COVID-19 shelter-in-place regulations.
Our customers and prospective
customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization.
Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the
business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable,
and lumpy, which can influence the timing, consistency and reporting of sales growth.
Cost of Revenues
Cost of revenues consists
of the cost of our products as well as labor expenses directly related to product sales or research contract services.
Generally, we earn
greater margins on revenue from products compared to revenue from services, so product mix plays an important role in our reported
average margins for any period. Also, we are introducing new products at an early stage in our development cycle and the margins
earned can vary significantly between period, customers and products, due to the learning process, customer negotiating strengths,
and product mix.
For the three
months ended September 30, 2020 and 2019, cost of revenues was $60,967 and $109,051, respectively, a decrease of $48,084 or 44%.
The decrease was primarily due to higher salaries paid and purchase of materials related to higher product sales during the three
months ended September 30, 2019. The gross margin percentage was 55% and 79% for the three months ended September 30, 2020 and
2019, respectively. The decrease in margins during 2020 reflects our ongoing efforts to build upon existing customer relationships
over a growing pool of referrals and business development leads. We are pivoting solutions to cater to the specific needs of existing
customers, which requires a higher up-front cost as compared to the preceding period.
For the nine months
ended September 30, 2020 and 2019, cost of revenues was $128,306 and $199,118, respectively, a decrease of $70,812, or 36%. The
decrease was primarily due to reduced costs as a result of reduced revenues. The gross margin percentage was 69% and 74% for the
nine months ended September 30, 2020 and 2019, respectively. The decrease in margins during 2020 was primarily the result of an
unfavorable change in product mix and higher up-front costs related to existing customer service contracts.
Research and Development
Research and development
(“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution. R&D
expenses are expensed as they are incurred.
For the three months
ended September 30, 2020 and 2019, R&D expenses were $51,820 and $137,970, respectively, representing a decrease of $86,150
or 62%. The decrease is primarily due to reductions in salaries and other salary related costs, such as payroll taxes and other
benefits, implemented during the end of the first quarter of 2020 due to COVID-19, as well as a reduction in head count between
the comparable periods.
For the nine months
ended September 30, 2020 and 2019, R&D expenses were $221,524 and $365,709, respectively, representing a decrease of $144,185
or 39%. The decrease is attributable to reductions in salaries and other salary related costs, such as payroll taxes and other
benefits, implemented during the end of the first quarter of 2020 due to COVID-19, as well as a reduction in head count between
the comparable periods.
We expect that our
R&D expenses will increase as we expand our future operations.
Selling, General and Administrative
Selling, general and
administrative expenses consist primarily of travel, salaries, payroll taxes and other benefits, and rent expense.
For the three months
ended September 30, 2020 and 2019, selling, general and administrative expenses were $834,582 and $546,982, respectively, an increase
of $287,600 or 53%. The increase is primarily attributable to an increase of approximately $215,000 of marketing and advertising
expense, $104,000 of stock-based compensation related to consultants and employees, partially offset by a decrease of $26,000 of
rent expense due to the termination of an operating lease during the end of the fourth quarter of 2019 and a $17,000 decrease in
professional and legal fees.
For the nine months
ended September 30, 2020 and 2019, selling, general and administrative expenses were $1,728,974 and $1,666,735, respectively, an
increase of $62,239, or 4%. The increase is primarily due to an increase of approximately $260,000 of marketing and advertising
expense, $139,000 of stock-based compensation related to consultants and employees, partially offset by a decrease of $103,000
of travel, meals, and entertainment expense due to COVID-19 restrictions, $78,000 of rent expense due to the termination of an
operating lease during the end of the fourth quarter of 2019, $75,000 of professional fees, $71,000 of payroll and benefits due
to salary reductions implemented during the end of the first quarter of 2020 as a result of COVID-19, and $13,000 of conference
and seminar expenses due to the travel restrictions and stay-at-home orders as a result of COVID-19.
Other Expenses
For the three months ended September
30, 2020 and 2019, other expense was $201,739 and $253, respectively, an increase of $201,486. The increase in other expense is
primarily due to the amortization of debt discount related to the issuance of notes payable.
For the nine months ended September 30,
2020 and 2019, other expense was $328,170 and $1,065, respectively, an increase of $327,105. The increase in other expense is primarily
due to the amortization of debt discount related to the issuance of notes payable and the change in fair value of accrued issuable
equity during the period.
Liquidity and Capital Resources
As of September 30,
2020 and December 31, 2019, we had cash balances of $2,809,656 and $108,857, respectively, and working capital deficits $404,561
and $824,481, respectively.
For the nine months
ended September 30, 2020 and 2019, cash used in operating activities was $2,076,035 and $1,206,135, respectively. Our cash used
in operations for the nine months ended September 30, 2020 was primarily attributable to our net loss of $1,991,497, adjusted for
non-cash expenses in the aggregate amount of $587,503, and $672,041 of net cash used to fund changes in the levels of operating
assets and liabilities. Our cash used in operations for the nine months ended September 30, 2019 was primarily attributable to
our net loss of $1,454,643, adjusted for non-cash expenses in the aggregate amount of $241,285, partially offset by $7,223 of net
cash provided by changes in the levels of operating assets and liabilities.
For the nine months
ended September 30, 2020 and 2019, cash used in investing activities was $46,087 and $0, respectively. Cash used in investing activities
during the nine months ended September 30, 2020 was related to the purchases of equipment.
For the nine months
ended September 30, 2020 and 2019, cash provided by financing activities was $4,822,921 and $1,052,300, respectively. Our cash
provided by financing activities for the nine months ended September 30, 2020 was due to $3,710,000 of net proceeds from the issuance
of notes payable, $155,226 of proceeds from the Paycheck Protection Program loan, and $1,461,695 of net proceeds from the sale
of common stock. These amounts were partially offset by $330,000 for the payment of debt issuance costs, $159,000 for the repayments
on notes and $15,000 of cash paid in offering costs. Cash provided by financing activities during the nine months ended September
30, 2019 consisted of $898,300 of proceeds from the sale of common stock and $169,000 of proceeds from the sale of Series C Convertible
Preferred Stock and warrants, offset by $15,000 cash paid for offering costs.
In January 2020,
an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease
became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business
is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to
reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place”
will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands
in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus
and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results
of operations, cash flows, or financial condition.
During the nine months ended September 30,
2020, we received net proceeds of $3,710,000 pursuant to a two Note Purchase Agreements with YAII (the “Notes”). The
Notes bear no interest and mature between May 31 through July 20, 2020 and will be paid in monthly installments through the maturity
date.
Additionally, in April
2020, the Company received a loan of $155,226 under the government Small Business Administration (“SBA”) sponsored
Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic.
Effective February 27,
2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with YAII, pursuant
to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to YAII’s approval for amounts
over $100,000) of shares of the Company’s common stock at a price equal to Company 80% of the lowest daily volume weighted
average price for the five days immediately following the date the Company delivers notice requiring YAII to purchase the shares
under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived
by YAII, at least 5 trading days shall have elapsed from the immediately preceding advance date. Through September 30, 2020, the
Company issued an aggregate of 1,721,013 shares of common stock at prices between $0.72 - $1.65 per share for aggregate proceeds
of $2,152,696 in connection with advance notices submitted to YAII under the SEDA, of which $691,000 of the proceeds were applied
directly against the principal due under the Notes.
As of September 30,
2020, we had approximately $5,847,300 available in connection with the SEDA, in order to fund our ongoing operations; however,
there can be no assurance that we will be able to continue sell common shares pursuant to the SEDA at an acceptable price, or without
causing undue dilution to our existing investors.
Subsequent to September
30, 2020, we issued an aggregate of 89,285 shares of common stock at a price of $1.12 per share pursuant to advance notices submitted
to the Investor under the SEDA. The entire proceeds of $100,000 were withheld by the Investor to pay down a portion of the principal
due under the Notes.
Subsequent to September
30, 2020, we made cash payments totaling $250,000 to pay down a portion of the principal due under the Notes.
We have not yet achieved
profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and
general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant
revenues and/or raise additional capital to fund our operations. Although our management believes that we have access to capital
resources through the SEDA or other sources, there is no assurance that we will be able to obtain funds on commercially acceptable
terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or
discontinue operations or obtain funds by entering into financing agreements on unattractive terms. Our operating needs include
the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. The conditions
outlined above indicate that there is substantial doubt about our ability to continue as a going concern within one year after
the financial statement issuance date.
Our unaudited condensed
consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity
with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our
continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business.
The carrying amounts of assets and liabilities presented in the unaudited condensed consolidated financial statements do not necessarily
purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include
any adjustment that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
There are no off-balance
sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial
conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
Critical Accounting Policies
For a description of
our critical accounting policies, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of
this Quarterly Report on Form 10-Q.