Note 2 Going Concern and Management’s Plans
Subsequent to June 30, 2018, the
Company sold common stock for aggregate net proceeds of $159,000. See Note 9 – Subsequent Events – Private
Placement for details. 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.
Based upon the Company’s forecast
for continued operating losses, it expects that the cash it currently has available will fund its operations into the fourth quarter
of 2018 while it continues to apply efforts to raise additional capital. Thereafter, the Company will require external funding
to sustain operations and to follow through on the execution of its business plan. 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.
Note 3 Summary of Significant Accounting Policies
The Company’s significant accounting
policies are disclosed in Note 2 – Summary of Significant Accounting Policies in the Company’s Annual Report on Form
10-K for the year ended December 31, 2017. Since the date of the Annual Report, there have been no material changes to the Company’s
significant accounting policies, except as disclosed below.
Concentrations of Credit Risk
The Company maintains cash with major financial
institutions. Cash held in US 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 June 30, 2018 and December
31, 2017, respectively.
Customer concentrations are as follows:
|
|
Revenues
|
|
|
Accounts
Receivable
|
|
|
|
For the
Three Months Ended
|
|
|
For the
Six Months Ended
|
|
|
As of
|
|
|
As of
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
21
|
%
|
|
|
|
*
|
|
|
37
|
%
|
|
|
|
*
|
|
|
31
|
%
|
|
|
15
|
%
|
Customer B
|
|
|
|
*
|
|
|
|
*
|
|
|
27
|
%
|
|
|
|
*
|
|
|
51
|
%
|
|
|
|
*
|
Customer C
|
|
|
70
|
%
|
|
|
|
*
|
|
|
30
|
%
|
|
|
|
*
|
|
|
|
*
|
|
|
43
|
%
|
Customer D
|
|
|
|
*
|
|
|
100
|
%
|
|
|
|
*
|
|
|
100
|
%
|
|
|
|
*
|
|
|
16
|
%
|
Total
|
|
|
91.00
|
%
|
|
|
100.00
|
%
|
|
|
94.00
|
%
|
|
|
100.00
|
%
|
|
|
82
|
%
|
|
|
74
|
%
|
* Less than 10%
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 accounting principles generally accepted in
the United States of America (“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 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 condensed
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 a report to the customer.
|
The following
table summarizes our revenue recognized in our condensed consolidated statements of operations:
|
|
For the
Three Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
134,791
|
|
|
$
|
10,900
|
|
|
$
|
253,143
|
|
|
$
|
10,900
|
|
Contract services
|
|
|
36,300
|
|
|
|
-
|
|
|
|
145,988
|
|
|
|
-
|
|
Total revenue
|
|
$
|
171,091
|
|
|
$
|
10,900
|
|
|
$
|
399,131
|
|
|
$
|
10,900
|
|
As of June 30,
2018, the Company had $0 and $161,909 contract assets and contract liabilities, respectively, from contracts with customers. The
contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance obligation
under the contract. As of December 31, 2017, the Company did not have any contract assets or contract liabilities from contracts
with customers. During the three and six months ended June 30, 2018 and 2017, there was no revenue recognized from performance
obligations satisfied (or partially satisfied) in previous periods.
Reclassifications
Certain prior
year balance sheet amounts have been reclassified for consistency with the current year presentation. These reclassifications had
no effect on the reported results of operations.
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. The following
shares were excluded from basic weighted average common stock outstanding:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
54,028
|
|
|
|
789,196
|
|
|
|
136,970
|
|
|
|
876,496
|
|
Total
|
|
|
54,028
|
|
|
|
789,196
|
|
|
|
136,970
|
|
|
|
876,496
|
|
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:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
-
|
|
|
|
687,500
|
|
Total
|
|
|
-
|
|
|
|
687,500
|
|
Recently Issued and Adopted Accounting
Pronouncements
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 condensed consolidated financial statements.
In June 2018, the FASB issued Accounting
Standards Update (“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 condensed consolidated financial statements.
Note 4 Prepaid Expenses
As of June 30, 2018 and December 31, 2017,
prepaid expenses consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
Business development services
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Research and development services
|
|
|
25,669
|
|
|
|
25,000
|
|
Professional fees
|
|
|
-
|
|
|
|
10,000
|
|
Other
|
|
|
15,996
|
|
|
|
31,466
|
|
Total prepaid expenses
|
|
$
|
41,665
|
|
|
$
|
106,466
|
|
Note 5 Accrued Expenses and Other Current Liabilities
As of June 30, 2018 and December 31, 2017,
accrued expenses and other current liabilities consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued legal and professional fees
|
|
$
|
222,345
|
|
|
$
|
71,241
|
|
Accrued payroll and vacation
|
|
|
66,793
|
|
|
|
69,425
|
|
Payroll and income tax payable
|
|
|
8,224
|
|
|
|
14,223
|
|
Accrued research and development expenses
|
|
|
7,635
|
|
|
|
14,611
|
|
Credit card payable
|
|
|
8,381
|
|
|
|
110
|
|
Other
|
|
|
121,572
|
|
|
|
28,103
|
|
Total accrued expenses and other current
liabilities
|
|
$
|
434,950
|
|
|
$
|
197,713
|
|
Note 6 Related Party Transactions
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities – related
parties consist of: (i) a liability of $154,269 and $254,344 as of June 30, 2018 and December 31, 2017, respectively, to Energy
Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”),
in connection with consulting services provided to the Company associated with the development of the Company’s CFV thermal
management solutions; and (ii) a liability of $36,290 and $28,253 as of June 30, 2018 and December 31, 2017, respectively, to the
Company’s Chief Executive Officer (“CEO”) in connection with Company-related travel and entertain expenses incurred
by the CEO.
Consulting Agreements
During the three and six months ended June
30, 2017, the Company recorded aggregate expense of $26,000 (of which, $13,000 and $13,000 was included within research and development
expenses and selling, general and administrative expenses, respectively) and $65,000 (of which, $32,500 and $32,500 was included
within research and development expenses and selling, general and administrative expenses, respectively), respectively, related
to consulting agreements with its CEO and CTO, which were terminated in connection with the closing of the Share Exchange Agreement
on June 19, 2017.
During the three and six months ended June
30, 2017, the Company recorded research and development expense of $256,942 and $368,557, respectively, related to consulting services
provided to the Company by ESLI associated with the development of the Company’s CFV thermal management solutions. There
were no such costs recorded in the three and six months ended June 30, 2018. ESLI is controlled by the Company’s CTO.
Note 7 Stockholders' Equity
Stock-Based Compensation
During the three and six months ended
June 30, 2018, the Company recognized stock-based compensation expense of $124,835 and $307,792, respectively, and during the
three and six months ended June 30, 2017, the Company recognized stock-based compensation expense of $212,147 and $224,158, respectively,
related to restricted common stock awards issued during 2014 which is included within general and administrative expenses on the
condensed consolidated statements of operations. As of June 30, 2018, there was no unrecognized stock-based compensation expense.
Note 8 Commitments and Contingencies
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.
Note 9 Subsequent Events
Private Placement
Subsequent to June 30, 2018, the Company
sold an aggregate of 278,788 shares of common stock to investors for aggregate gross and net cash proceeds of $184,000 and $159,000,
respectively. Of the $25,000 of cash offering costs withheld from the proceeds, $20,000 was included within deferred offering
costs on the condensed consolidated balance sheet as of June 30, 2018.
Note 10 Revision of Financial
Statements for the Quarter Ended March 31, 2018
During the course of preparing the quarterly
report on Form 10-Q for the quarter ended June 30, 2018, the Company identified certain errors related to cost of revenue not being
recorded in connection with a product sale to a customer, which resulted in the understatement of its net loss for the three months
ended March 31, 2018. The reason for the error was related to certain information not being provided to the Company’s accounting
staff as a result of the Company’s transition of certain accounting duties from its then-Interim Chief Financial Officer,
who left the Company in the first quarter of 2018.
The following tables reconcile the prior
period as reported balances to the as revised balances:
|
|
March
31, 2018
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
$
|
698,092
|
|
|
$
|
(27,957
|
)
|
|
$
|
670,135
|
|
Total Assets
|
|
$
|
735,964
|
|
|
$
|
(27,957
|
)
|
|
$
|
708,007
|
|
Total Current Liabilities
|
|
$
|
560,545
|
|
|
$
|
50,644
|
|
|
$
|
611,189
|
|
Total Liabilities
|
|
$
|
560,545
|
|
|
$
|
50,644
|
|
|
$
|
611,189
|
|
Total Stockholders' Equity
|
|
$
|
175,419
|
|
|
$
|
(78,601
|
)
|
|
$
|
96,818
|
|
|
|
|
|
|
|
For The
Three Months Ended
|
|
|
|
March
31, 2018
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
228,040
|
|
|
$
|
-
|
|
|
$
|
228,040
|
|
Cost of Revenue
|
|
$
|
49,346
|
|
|
$
|
100,601
|
|
|
$
|
149,947
|
|
Operating Expenses
|
|
$
|
925,924
|
|
|
$
|
(22,000
|
)
|
|
$
|
903,924
|
|
Loss From Operations
|
|
$
|
(747,230
|
)
|
|
$
|
(78,601
|
)
|
|
$
|
(825,831
|
)
|
Net Loss
|
|
$
|
(747,244
|
)
|
|
$
|
(78,601
|
)
|
|
$
|
(825,845
|
)
|
Net Loss Per Share - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
Weighted Average Number of
Common Shares Outstanding - Basic and Diluted
|
|
|
77,219,168
|
|
|
|
-
|
|
|
|
77,219,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The
Three Months Ended
|
|
|
|
March
31, 2018
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Statement of Cash
Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(747,244
|
)
|
|
$
|
(78,601
|
)
|
|
$
|
(825,845
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities
|
|
$
|
276,874
|
|
|
$
|
78,601
|
|
|
$
|
355,475
|
|
Net Cash Used In Operating Activities
|
|
$
|
(470,370
|
)
|
|
$
|
-
|
|
|
$
|
(470,370
|
)
|
In accordance with SEC Staff Accounting
Bulletin No 108, the Company has evaluated this error, based on an analysis of quantitative and qualitative factors, as to whether
it was material to the condensed consolidated statement of operations for the three months ended March 31, 2018 and if amendments
of previously filed financial statements with the SEC are required. The Company has determined that quantitatively and qualitatively,
the error has no material impact to the condensed consolidated statement of operations for the three months ended March 31, 2018
or other prior periods.
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 KT High-Tech Marketing, Inc. ("KT
High-Tech" and, including its subsidiary, KULR Technology Corporation (“KULR”), the “Company”)
as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 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, 2017 and for the year then ended, which are included in the Form 10-K filed with the
Securities and Exchange Commission (“SEC”) on April 17, 2018. 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 Report, in our other reports filed with the SEC, and other factors that we may not know.
Overview
The Company owns proprietary
carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutions that it believes are more effective
at conducting, dissipating and storing heat generated by an electronic system’s internal components (i.e. semiconductor,
integrated circuits “chips”) than traditional materials, such as copper and aluminum. KULR’s technologies can
be applied inside a wide array of electronic applications where heat is often a problem, such as mobile devices, cloud computing,
virtual reality platforms, satellites, internet of things, drones, and connected cars.
Three key vectors have
driven advancements in semiconductors and electronics systems – performance, power, and size. These vectors, however, often
counteract one another. 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. Electronic
system components must operate within a specific temperature range on both the high and low end to operate properly. KULR resolves
many of the tradeoffs associated with other thermal management materials. KULR’s products improve heat storage and dissipation,
rigidity problems and durability. Its products are lightweight and reduce manufacturing complexity associated with traditional
thermal management materials.
In addition to thermal
management of electronic systems, KULR has developed, in partnership with National Aeronautics and Space Administration (“NASA”)
Johnson Space Center (“NASA JSC”), a highly effective, lightweight and passive thermal protection technology, Thermal
Runaway Shield (“TRS”) for lithium-ion batteries. KULR’s lithium-ion battery (“Li-B”) TRS product
prevents a potentially dangerous combustible condition known as thermal runaway propagation from occurring in neighboring Li-B
cells by acting as a shield or barrier in between individual Li-B cells in a battery pack. Although rare, incidents of thermal
runaway propagation occurring spontaneously in Li-B cargo shipments and inside electronics, including hoverboards, smartphones,
and electric vehicles, are a cause of public concern.
During the second quarter
of 2018, we generated business from our existing aerospace and automotive customer-base by providing contract services and thermal
solution products. We continue to make progress with establishing the production of Internal Short Circuit (“ISC”)
devices which were licensed from NASA and National Renewable Energy Laboratory (“NREL”) in the first quarter of 2018.
Although no assurances can be made, we expect to generate revenue from the sale of ISC devices in the second half of 2018. In addition,
we expect some of our current design engagements with potential customers in aerospace, defense and battery storage products to
reach early production in the second half of 2018 and into 2019. However, no assurances can be made that such design engagements
will result in production agreements or purchase orders.
We have not yet achieved
profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and
general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant
product revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue
as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds
to support our business operations, although there can be no assurance we will be successful in raising additional funds in the future.
Recent Developments
In May 2018, the Company
was assigned a trading symbol, “KUTG”, for quotation on the OTC Markets.
In July 2018, we sold
an aggregate of 278,788 shares of common stock to investors for aggregate gross and net proceeds of $184,000 and $159,000, respectively.
Results of Operations
Three and Six Months Ended June 30,
2018 Compared With Three and Six Months Ended June 30, 2017
The closing of the
Share Exchange Agreement with KULR on June 19, 2017 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
condensed consolidated statements of operations herein reflect the historical results of KULR 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 KT High-Tech prior to the completion of the reverse recapitalization.
Revenues
Our revenues consisted
of the following types:
|
|
For the
Three Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
134,791
|
|
|
$
|
10,900
|
|
|
$
|
253,143
|
|
|
$
|
10,900
|
|
Contract services
|
|
|
36,300
|
|
|
|
-
|
|
|
|
145,988
|
|
|
|
-
|
|
Total revenue
|
|
$
|
171,091
|
|
|
$
|
10,900
|
|
|
$
|
399,131
|
|
|
$
|
10,900
|
|
For the three months
ended June 30, 2018 and 2017, we generated $171,091 and $10,900 of revenues, an increase of $160,191, or 1,470%. Our revenues
during the three months ended June 30, 2018 primarily consisted of sales of our component product, CFV thermal management solution,
which carries a higher margin, as well as certain research and development contract services. Our revenues during the three months
ended June 30, 2017 consisted of sales of our Phase Change Material (“PCM”) heat sink. The increase was primarily
due to an increase in the volume of product sales, as well as the addition of our contract services revenue.
For the six months
ended June 30, 2018 and 2017, we generated $399,131 and $10,900 of revenues, an increase of $388,231, or 3,562%. Our revenues during
the six months ended June 30, 2018 consisted of sales of our component product, CFV thermal management solution, which carries
a higher margin, sales of an Original Equipment Manufacturer (“OEM”) product, which carries a lower margin, as well
as certain research and development contract services. Our revenues during the six months ended June 30, 2017 consisted of sales
of our Phase Change Material (“PCM”) heat sink. The increase was primarily due to an increase in the volume of product
sales, as well as the addition of our contract services revenue.
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.
For the three months
ended June 30, 2018 and 2017, cost of revenues was $33,470 and $56,195, respectively, a decrease of $22,725, or 40%. The decrease
was primarily due to increased costs in 2017 to produce the PCM heat sinks, as well as due to the fact that our 2018 sales were
of higher margin products.
For the six months
ended June 30, 2018 and 2017, cost of revenues was $183,417 and $56,195, respectively, an increase of $127,222, or 226%. The increase
was primarily due to costs of sales of our lower margin, higher cost OEM product as well as increased labor costs.
Research and Development
Research and development
(“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution. R&D
expenses are expensed as they are incurred.
For the three months
ended June 30, 2018, R&D expenses increased by $82,558, or 227%, to $119,006 from $36,448 for the three months ended June 30,
2017. The increase is primarily attributable to an increase in salaries and other benefits due to a headcount increase of 9 employees.
For the six months
ended June 30, 2018, R&D expenses increased by $189,062, or 381%, to $238,690 from $49,628 for the six months ended June 30,
2017. The increase is primarily attributable to an increase in salaries and other benefits due to a headcount increase of 9 employees.
We expect that our
R&D expenses will continue to increase.
Research and Development – Related
Parties
R&D – related
parties include expenses associated with the development of our CFV thermal management solutions provided by Energy Science Laboratories,
Inc. (“ESLI”), a R&D company owned by our Chief Technology Officer (“CTO”), as well as services provided
by our CTO. R&D – related parties expenses are expensed as they are incurred.
For the three months
ended June 30, 2018, R&D – related parties decreased by $269,942, or 100%, to $0 from $269,942 for the three months
ended June 30, 2017. The decrease is due to the elimination of R&D services provided by ESLI during the current period, which
resulted from the Company hiring its own research and development staff in June 2017.
For the six months
ended June 30, 2018, R&D – related parties decreased by $401,057, or 100%, to $0 from $401,057 for the six months ended
June 30, 2017. The decrease is due to the elimination of R&D services provided by ESLI during the current period, which resulted
from the Company hiring its own research and development staff in June 2017.
Selling, General and Administrative
Selling, general and
administrative expenses consist primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based
compensation, marketing, travel, rent and office expenses.
For the three months
ended June 30, 2018, selling, general and administrative expenses increased by $330,600, or 99%, to $663,018 from $332,418 for
the three months ended June 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately $164,000
from the hiring of new employees in the third quarter of 2017, professional fees of approximately $184,000 resulting from the compliance
and reporting costs of being a public company as well as due to entering into new consulting agreements, partially offset by decreased
non-cash stock-based compensation expense of approximately $99,000.
For the six months
ended June 30, 2018, selling, general and administrative expenses increased by $1,032,896, or 249%, to $1,447,258 from $414,362 for
the six months ended June 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately $311,000
from the hiring of new employees in the third quarter of 2017, increased professional fees of approximately $446,000 resulting
from the compliance and reporting costs of being a public company as well as due to entering into new consulting agreements, increased
travel expenses of approximately $74,000, increased rent expenses of approximately $46,000 due to entering into a new lease agreement
as well as increased non-cash stock-based compensation expense of approximately $84,000.
Liquidity and Capital Resources
For the six months
ended June 30, 2018 and 2017, cash (used in) provided by operating activities was $(779,380) and $281,756, respectively. Our cash
used in operations for the six months ended June 30, 2018 was primarily attributable to our net loss of $1,470,467, adjusted for
non-cash expenses in the aggregate amount of $316,316, partially offset by $374,771 of net cash provided by changes in the levels
of operating assets and liabilities. Our cash provided by operations for the six months ended June 30, 2017 was primarily attributable
to our net loss of $918,598, adjusted for net non-cash expense in the aggregate amount of $225,040, partially offset by $975,314
of net cash provided by changes in the levels of operating assets and liabilities.
For the six months
ended June 30, 2018 and 2017, cash (used in) provided by investing activities was
$(8,350)
and $1,922,216, respectively. Cash used in investing activities during the six months ended June 30, 2018 was due to purchases
of equipment. Cash provided by investing activities during the six months ended June 30, 2017 resulted from $1,859,261 of cash
acquired in connection with the Share Exchange as well as $85,000 of proceeds received from the collection of our note receivable
to our CEO, partially offset by $22,045 of purchases of property and equipment.
There were no cash
flows from financing activities for the six months ended June 30, 2018 and 2017.
In July 2018, we sold
an aggregate of 278,788 shares of common stock to investors for aggregate gross and net proceeds of $184,000 and $159,000, respectively.
We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our
research and development and general and administrative expenses will continue to increase and, as a result, we will eventually
need to generate significant product revenues and/or raise additional capital to fund our operations. These conditions indicate
that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement
issuance date.
Based upon our forecast
for continued operating losses, we expect that the cash we currently have available will fund our operations into the fourth quarter
of 2018 while we continue to apply efforts to raise additional capital. Thereafter, we will require external funding to sustain
operations and to follow through on the execution of our business plan. Although management believes that we have access to capital
resources, there are currently no commitments in place for new financing at this time and 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.
Our 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 condensed consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The 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.
Recently Adopted Accounting Pronouncements
For a description of
recently adopted accounting pronouncements, including adoption dates and estimated effects, if any, on our condensed consolidated
financial statements, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report
on Form 10-Q.