ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
Forward Looking Statements
This quarterly report on Form 10-Q and other reports (collectively, the “Filings”) filed by Integral Technologies, Inc. (“Integral” or the “Company”) from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Statements contained herein that are not historical facts are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. We caution investors that any forward-looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, our ability to compete in a highly competitive market, our access to sources of capital, and other risks and uncertainties described in our annual report on Form 10-K for the fiscal year ended June 30, 2017, as filed with the Securities and Exchange Commission on September 28, 2018, and available at
www.sec.gov
. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed here. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q, except as required by law.
Overview
Integral Technologies, Inc. ("Integral," the "Company" or "we") is, incorporated under the laws of the State of Nevada on February 12, 1996.
To date, we have expended resources on the research and development of several different types of technologies.
Integral focuses the majority of its resources on researching, developing and commercializing its ElectriPlast® technologies. The technology possesses a multitude of applications in a myriad of industries. These include the auto industry, the aerospace, consumer electronics, and commercial aviation industries, among others. One key factor that could drive demand for ElectriPlast is the need for light-weighting. Automotive and aerospace are leading the way to achieve reduced emissions and increased fuel economy. Light-weighting involves the substitution of lighter materials, often times using carbon-fiber based, for heavier (aluminum and other metals) materials.
On May 21, 2010, the Obama administration asked the EPA and NHTSA to jointly develop a national program that would “produce a new generation of clean vehicles,” to lower oil usage. The government mandated that auto manufacturers comply with CAFÉ (Corporate Average Fuel Economy) standards by the year 2025. To become more energy efficient, auto manufacturers are required to have their fleets achieving 54.5 MPG (miles per gallon) by then. According to a 2009 issue of
Car and Driver Magazine,
in 2009, car fleets averaged 32.5 CAFE MPG and trucks averaged 24.5 MPG. The Trump administration has indicated it will lessen the CAFE requirements, however it is unclear what changes will be made and its effect on the requirements set by the previous administration, but globally, the trend remains an increase in CAFE standards. More importantly, countries have begun to explore a zero emissions policy which would ban internal combustion engines in favor of zero emission power systems, such as battery electric vehicles.
We apply a significant portion of our resources to the protection of our intellectual property through patent filings. One source of income is derived from up-front licensing fees as is the case with our manufacturing license agreement for the use of our patents and proprietary “know-how” for the manufacture of the ElectriPlast® pellets by PolyOne Corporation (“PolyOne”), a global polymer company and Hanwha Advanced Materials Co., Ltd. (“Hanwha”) of Korea. In addition, Integral allocates resources to expand and protect the extensive intellectual property holdings surrounding its ElectriPlast® technology. Integral’s business strategy focuses on the leveraging of its intellectual property rights and our strength in product design and material innovation. Integral is focusing its business development and marketing efforts on securing licensing and/or joint development agreements in areas for which it currently hold patents covering specific materials, components, parts, applications or end-products incorporating conductive resins and ElectriPlast technology. Integral collaborates with suppliers, Tier1 vendors, OEM's and manufacturers of products who would benefit from the incorporation of any of the ElectriPlast® applications.
Our business model calls for the Company to generate revenue from license fees from the use of our patent portfolio and proprietary “know-how”, to generate revenue through the sale of ElectriPlast® material either through a royalty revenue stream or from direct sales of ElectriPlast®, and by providing technical services through our Detroit Tech Center to companies needing our expertise in applying ElectriPlast® in their applications. The Company’s management and engineering team has expertise and know-how in the ideas related to the use of the product.
Various examples of applications for ElectriPlast® where Integral holds patent protection are: batteries, antennas, electronics shielding, lighting/LED circuitry, motors, switch actuators, resistors, medical devices, thermal management, toys and cable connector bodies, among others. We have been working to introduce these new applications and the ElectriPlast® technology on a global scale.
In particular, our business model calls for collaborating with leading resin and fiber suppliers, manufacturers, and technology innovators to manufacture ElectriPlast®, and develop new product applications for ElectriPlast® . We anticipate that these relationships will lead to greater market penetration and adoption for our products. In view of these goals, we have recently formed relationships with BASF, Chang Rim Eng. Inc., Delphi Automotive PLC, Advanced Battery Concepts, The Ultimate Battery Co., LeddarTech, TheMix Plastics, Inc., PolyOne and Hanwha, and believe that we now have several key global relationships to help us expand our operations both domestically and internationally.
Since the previous 10-K filing, several actions were taken by the Company to better position the commercialization of ElectriPlast. The most notable event was the license agreement with PolyOne in February 20, 2018. The agreement is a 10-year, global exclusive license to manufacture, sell and distribute conductive pellets using the Company’s know-how and certain patents for automotive related EMI/RFI shielding applications. The agreement requires PolyOne to pay the Company an upfront fee and royalties from future sales during the term of the agreement. The agreement excludes the Company’s bipolar battery technology and the territory provided to Hanwha in an earlier agreement. The Company continues to emphasize the expansion of ElectriPlast's technical and engineering capabilities with other prospective customers and partners. The bipolar battery technology remains an important opportunity for the Company and the global vehicle electrification trend creates new opportunities that existing battery technologies are unable to meet. In 2015, the Company filed non-provisional patents associated with its bipolar battery technology and bipolar plate products. The Company believes the bipolar battery plate and associated power storage technology provides long-sought breakout weight savings and performance benefits for the lead-acid battery market. The Company intends to develop the power storage technology as an Integral Technologies business unit and will seek partners to fully develop batteries for consumer and industrial consumption. The world-wide market demand for lead-acid batteries was estimated to be $44.7B in 2014, and expected to grow to $58.6B by 2020 (a 5% CAGR). Contributing to this growth will be new battery requirements established by the United States Advanced Battery Consortium (“USABC”) for 12V and 48V batteries in support of new Start – Stop systems in micro hybrid vehicles and 48V systems in hybrid vehicles coming to market over the next decade. From 2025, vehicle electrification (Hybrid & Battery EV) is expected to grow from about 10% of total vehicles sold to completely replace internal combustion engine (ICE) technology by 2050. These trends are already having a significant impact in the automotive industry and the need for new battery technologies to support growing power demands.
The Company continues to advance its bipolar plate technology for the battery industry. A core component of the bipolar plate is the ElectriPlast pellet that enables the conductivity and moldability of the proprietary bipolar plate using a nonmetal plate. The Company is presently in discussions with several prospective investment partners in the US, UK and Asia regarding the sale of the battery plate technology and global manufacturing rights. Under the present discussions, the Company retains all rights to the ElectriPlast pellet and the prospective buyer of the bipolar technology is required to purchase pellets exclusively from the Company. The first prototype battery utilizing the ElectriPlast bipolar technology was produced in 2015. The battery was produced with the assistance of Advanced Battery Concepts (“ABC”). Based on the initial prototype and a series of discussion during the quarter, the Company announced on April 26, 2016 a Joint Technology Assessment Program with Advanced Battery Concepts, an industry leader in large format bi-polar battery design and manufacture. The Company continues its technical partnership with ABC and it remains a potential partner in commercializing the bipolar technology.
On June 26, 2017 the Company announced that it had been chosen by a global Tier 1 automotive supplier to provide its conductive plastic for an EMI shielding application in an automotive optical sensing system. The ElectriPlast part will be going into a global automotive platform in approximately two million vehicles with production expected to start in 2018 for a major United States auto manufacturer. The program is expected to run for five years upon commencement.
On June 21, 2017 the Company announced that its ElectriPlast material had been chosen by a leading European electric luxury SUV maker for use in a high voltage connector. This electric SUV made its European debut in late 2017. The order will run through 2024 and marks ElectriPlast's first European automotive commercial order, and the second ElectriPlast order for use in an electric vehicle platform during the reporting period. The application was co-developed with a North American automotive Tier 1.
In Asia, the Company is supporting Hanwha’s market development efforts targeting the automotive sector. The Company also is also working with Chang Rim Eng. Inc. (“Chang Rim”) as it continues its efforts to commercialize ElectriPlast® in South Korea. The Company announced on October 8, 2014 that Chang Rim had successfully completed its prototype phase for a motor casing targeting the domestic Asia automotive market. On August 20, 2015, the Company announced with Chang Rim the largest ElectriPlast order in the Company’s history. The Company continues to make progress in shielding in the electric vehicle market and is currently working with multiple Tier 1's in implementing their EMI shielding solutions for automotive applications. Two million electric vehicles were on the road globally in 2016 and that number is estimated to grow to 70 million by 2025.
In March 2015 the Company relocated its North American manufacturing from Jasper Rubber Products in Jasper, Indiana to the Nova Polymers facility in Evansville, Indiana to support its growing demand for ElectriPlast. In addition to relocating the line, additional capacity was added by dedicating existing Nova fixed assets to the ElectriPlast process that increased capacity by ten times. Nova was selected because they had the infrastructure to scale manufacturing capacity to meet the expected growth in customer volumes through 2020 and beyond. The recent licensing agreement with PolyOne accelerates and expands the Company’s ability to provide conductive plastic pellets to customers around the world. PolyOne is a fully integrated polymer manufacturing organization with major manufacturing plants located around the world. As a recognized global polymer supplier, PolyOne already meets the stringent manufacturing, quality control and financial requirements needed to be an automotive Tier 1 supplier, items which are essential since PolyOne will become the supplier for the Company’s existing projects with the automotive Tier 1’s, and all other future customers for ElectriPlast. With the Polyone licensing agreement, the Company plans to reduce its capabilities at the Nova facility.
The PolyOne license agreement not only enables PolyOne to manufacture conductive pellet using the Company’s proprietary know-how and patents, it also permits PolyOne to sell, market and distribute conductive pellets worldwide. The Company believes PolyOne’s much larger global sales force will be key in further accelerating the Company’s growth in the auto sector, while enabling the Company to focus on its key technical strengths, including applications development and a customer technical support.
Companies continue to incorporate ElectriPlast in their on-going product development evaluations. One of the Company’s customers, LeddarTech raised over $100 million during the period. A LeddarTech product includes ElectriPlast material to produce lens barrels in its latest release of its LeddarOne Sensing Module, a compact and low-cost lidar that provides valuable presence detection and distance measurement capabilities to a wide range of finished products, including systems for autonomous driving vehicles. A key reason for LeddarTech using ElectriPlast is due to the superior qualities of ElectriPlast in the key areas of weight-reduction, cost, and robustness in the demanding environments where LeddarTech products are used.
In December 2017, the Company met with several prospective European investor partners in Europe regarding the feasibility of establishing a bipolar battery R&D facility and manufacturing plant in the UK. Companies and organizations included a global chemical company, a luxury car manufacturer, a leading UK university specializing in advance battery development and manufacturing processes for industry, and representatives from a local government that were supportive of providing infrastructure and tax incentives for establishing a battery plant in their district. The Company continues these discussions.
In April 2017, ElectriPlast presented its bipolar plate technology for lead acid batteries to a leading lead acid battery manufacturer in Asia. ElectriPlast’s Vice President of Engineering presented the advanced lead acid battery technology and its numerous benefits, including performance, reduced size and weight compared to existing lead-acid batteries. The Asian battery company requested to purchase several bipolar batteries for their internal testing. During its next prototype production, the Company will produce a sufficient number of batteries to provide to the Asian battery company.
In January 2016, the Company and a Tier 1 partner reached a technical milestone when its wire shielding application currently under development obtained the highest shielding effectiveness to date. The Company believes the level of shielding effectiveness validates the commercial viability of the technology. The companies have completed subsequent trials and continue to work towards commercialization for an effective alternative in replacing the more-costly metal, braided shielding.
The Company entered into a term sheet dated April 19, 2015 with a low conductive plastics compounder (the “Compounder”) for the purpose of acquiring all the assets of the Compounder, with the Compounder remaining a separate entity. The Compounder is a niche supplier of low conductive plastics with an international customer base. The Company’s strategic interest in the Compounder is its equipment and expertise in low conductive material compounding, as well as its customer base. The term sheet contemplated that upon the closing, all sales and marketing would be performed by the Company, and the Compounder would become the sole manufacturer for the Company. In October 2015, the founder and majority shareholder of the Compounder died from an accident before the transaction could be completed. Following the founder’s death, the Company made product for the Compounder through a combination of using former employees of the Compounder as well as the Company’s own staff. The Company has since stopped making material for the Compounder and is exploring other manufacturing options regarding the manufacture of low conductive materials, including exiting this low margin, capital intensive business.
TECHNOLOGIES
ElectriPlast®
We have researched and developed an innovative, electrically and thermally conductive resin-based material called “ElectriPlast®.” The ElectriPlast® polymer is a compounded formulation of resin-based materials that are conductively loaded, or doped, with a proprietary-controlled, balanced concentration of micron conductive materials, and then pelletized using our patented manufacturing process. The conductive loading or doping within this pellet is then homogenized using conventional molding techniques and conventional molding equipment. The end result is a product that can be molded into any of the infinite shapes and sizes associated with plastics, is non-corrosive, and can serve as an electrically conductive alternative material to metal.
ElectriPlast® is a patented non-corrosive, durable, conductive plastic pellet that replaces the metallic component currently used for shielding and conductive devices, thus creating applications never before possible and with a 40-60% weight reduction. ElectriPlast's® intellectual property rights and 55 issued patents, of which 51 of those patents not yet expired, and 10 pending applications cover both the material and its applications.
Various examples of applications for ElectriPlast® include antennas, EMI shielding, lighting circuitry, switch actuators, resistors, batteries, medical devices, thermal management and cable connector bodies, among many others. We have been working to introduce these new applications and the ElectriPlast® technology on a global scale.
The ElectriPlast® intellectual property (IP) portfolio is the centerpiece of Integral’s strategy to aggressively develop, protect, and market its innovations. Integral’s patent holdings encompass a broad range of ElectriPlast®
developments which extend beyond the core technology to include key applications, and manufacturing processes
ElectriPlast® can be fabricated into virtually any shape or dimension using low-cost capital investment equipment, such as injection molding and extrusion versus high cost stamping methods. Its design flexibility, shorter development cycle and speed of manufacturing create a valuable market edge for customers.
PolyOne Corporation is Integral’s global manufacturing partner of its proprietary ElectriPlast® product line (www.polyone.com). Prior to the recent license agreement with PolyOne, Jasper Rubber Products, Inc. and Nova Polymers were its US manufacturing partners (“Jasper”) (www.jasperrubber.com), and Hanwha remains the Korean manufacture
PolyOne is a leading provider of specialized polymer materials, services, and solutions with operations in specialty polymer formulations, color and additive systems, polymer distribution and specialty vinyl resins. They are also a highly specialized developer and manufacturer of performance-enhancing additives, liquid coolants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, PolyOne has employees at manufacturing sites and distribution facilities in North America, South America, Europe and Asia. They provide value to customers through their ability to link their knowledge of polymers and formulation technology with their manufacturing and supply chain capabilities to provide value-added solutions to designers, assemblers, and processors of plastics (their customers). They operate in four reportable segments: (1) Global Specialty Engineered Materials; (2) Global Color, Additives and Inks; (3) Performance Products and Solutions; and (4) PolyOne Distribution.
Jasper, founded in 1949, is a leader in innovative rubber and plastics development. It manufactures a full range of products for customers in the major appliance, oil filter, and automotive industries, a number of which are Fortune 500 companies.
Hanwha Advanced Materials is part of the Hanwha Group of Companies that collectively form one of the largest conglomerates in South Korea. Headquartered in Seoul, Hanwha Group of Companies’ businesses include chemicals, munitions, plastics and similar materials for aerospace, automotive and consumer goods industries, as well as solar, pharmaceuticals, financial services, renewable energy, manufacturing and construction. Hanwha Group is on Forbes’ list of Top Global Companies.
On January 27, 2015 the Company and Hanwha Advanced Materials Co., Ltd. (“Hanwha”), formerly known as Hanwha L&C, amended that certain license agreement between the parties dated June 19, 2013, (the “License Agreement”) due to the sale of certain non-automotive related assets by Hanwha, including its former name Hanwha L&C, to a third party. This amendment is effective as of July 1, 2014 and no other provisions of the License Agreement were modified.
Patents/Trademarks on Technologies
Our intellectual property portfolio consists of over fourteen years of accumulated research and design knowledge and trade secrets. We have sought United States (“US”) patent protection for many of our ideas related to our ElectriPlast
®
technologies. Currently, we have filed 117 non-provisional US patent applications, 55 of which have been issued as patents, with 51 of those issued patents not yet expired. No assurances can be given that all patent applications will be approved; however, to the extent that patents are not granted, we will continue to attempt to commercialize these technologies without the protection of patents. As patents are issued, we will have the exclusive right to use and license the design(s) described in each issued patent for the life of the patent in the US.
Of the 117 non-provisional applications filed that have not issued as patents, 9 are currently pending, and 53 are no longer pending. Integral continues to pursue intellectual property protection through its patent and trademark portfolio while constantly evaluating its filings to judiciously apply resources to our most critical technologies. Integral has filed 12 Canadian patent applications, 2 of which have issued, with 10 no longer being active. Integral has filed an International patent application, which published on September 25, 2014, claiming features of the Company’s capsule. The Company filed national stage applications based on this PCT on September 15, 2015 in Canada, Mexico, Brazil, China, Japan, South Korea, Europe, Malaysia, Saudi Arabia, India, Thailand, Philippines, Singapore and Australia. On August 10, 2015, the Company also filed new US and PCT patent applications for a Bipolar Plate and Method of Making and Using Same with a US publication date of November 3, 2016 and a PCT publication date of November 10, 2016.
Integral has a registered US trademark for ELECTRIPLAST
®
, a registered US trademark for INTEGRAL (with design)
®
, and a registered US trademark application for WHERE LIGHTWEIGHTING STARTS
TM
. In addition, Integral has a registered mark for ELECTRIPLAST
®
in China, Japan, Korea, Europe
and
Taiwan. In addition, Integral has a registered mark for WHERE LIGHTWEIGHTING STARTS
®
in Europe, Japan and Korea. These applications and registrations establish rights for the use of these marks in commerce.
Product Manufacturing and Distribution
Our manufacturing licensees PolyOne and Hanwha are currently operating at limited manufacturing capacity in producing the compounded product catalog and ElectriPlast pellets for domestic and international customers. As demand continues to grow these manufacturers have the resources and ability to scale to meet any new production requirements. As we grow, especially outside the automotive sector, we would consider expanding our licensing agreements with our existing partners and/or enter into additional licensing agreements with new manufacturing partners. We may also consider acquiring existing assets or an operating company to help meet new demand is specialized, niche markets. We maintain our relationship with Nova Polymers to manufacture ElectriPlast® in the event product cannot be supplied by PolyOne and Hanwha.
Our previous work with Jasper and Nova has enabled us to advance our manufacturing and molding process of ElectriPlast® and allows us to transfer these know-how advances to PolyOne under the license agreement. Our expertise and past experiences with our conductive pellet will greatly enhance the relationship with PolyOne, who possesses industry leading manufacturing and logistics services, but is limited in the know-how, manufacture and the development of applications using conductive materials. Within the past four years, we relocated our existing manufacturing facility from the Jasper Rubber Products plant to Nova Polymers in early 2015. In addition to relocating the line, additional capacity was added by dedicating existing Nova fixed assets to the ElectriPlast process which increased capacity by ten times. The move to Nova made strategic sense at the time because of the added infrastructure they provided that was needed for scaling manufacturing capacity to meet the expected growth in customer volumes. During the past fiscal year, the Company was awarded several large projects that required even greater manufacturing scalability that only a company of PolyOne’s size, resources and global presence could provide.
In June 2013, we signed a 10-year agreement with Hanwha that grants Hanwha an exclusive right to sell, distribute and manufacture ElectriPlast® in South Korea. Additionally, Hanwha has acquired non-exclusive sales and distribution rights to ElectriPlast® in Japan, Taiwan and China. Hanwha is part of the Hanwha Group of companies that collectively form one of the largest conglomerates in South Korea and is a global supplier in both automotive and consumer goods materials. PolyOne is aware of the existing license agreement with Hanwha and our agreement with PolyOne does not affect the Hanwha agreement.
As an engineered raw material, our technologies will not be sold directly to the general public, but rather to businesses and manufacturers of certain products who will incorporate our technologies as components in the design of their end-products. In addition to our current relationships, we are also exploring other opportunities for potential global partnerships in non-automotive industries, as well as other industries, including consumer electronics, cable and wire, and telecommunications.
Barriers to Entry into Market Segment
We have been working to introduce the ElectriPlast® technology as an alternative to metal for use as an electrically conductive material. Although gaining rapidly, little industry knowledge exists today regarding the science and use of conductive resins as an alternative material or how to apply the material to specific
applications. As with any new
technology, a prospective client must first become educated on the uses of the material, then investigate, test, trial and accept that the alternative material is an adequate, to superior cost-effective replacement option. Until there is greater knowledge and broader acceptance of ElectriPlast as a viable metal replacement technology, we will continue to experience prolonged selling cycles.
SUMMARY OF AGREEMENTS
Our business model calls for collaborating with leading technology innovators to develop new product applications for ElectriPlast® and to license our intellectual property for its manufacture and commercialization across many industries. Below is a summary of each of our commercial agreements concerning our ElectriPlast® technology (Please note that we have not yet received significant revenues from these agreements unless otherwise noted)
Patent License Agreement with Heatron, Inc.
In March 2006, we entered into a Patent License Agreement with Heatron, Inc. (“Heatron”), pursuant to which we granted to Heatron the rights to use our ElectriPlast® technology for specific applications in the heating and LED lighting markets. Heatron, founded in 1977 and based in Leavenworth, Kansas, is an industry leader in heating element and thermal management designs and solutions.
We granted to Heatron a non-exclusive, non-sublicensable, non-assignable, worldwide license; however, Heatron’s rights were exclusive for the initial two years. The agreement will terminate upon the expiration of the last patent licensed under the agreement, or earlier under certain other circumstances.
Any revenue to be generated by us under the agreement will be from future sales of products manufactured by Heatron containing the ElectriPlast® technology.
Joint Technology Assessment Program Agreement with Advanced Battery
Concepts
In April 2016, the Company executed a Joint Technology Assessment Program(JTAP) with Advanced Battery Concepts, an industry leader in large format bi-polar battery design and manufacture. The JTAP calls for jointly assessing and implementing the ElectriPlast bi-polar battery plates for use in lead acid bi-polar batteries. The JTAP has successfully produced over 100 plates that will be used for the manufacture of lead acid bi-polar batteries.
Global Reseller and Marketing Agreement
The Company signed a global Reseller and Marketing Agreement with a leading nickel-plating carbon fiber manufacturer dated March 1, 2016. The agreement provides exclusivity for certain major customer(s) with a provision for expanding the exclusivity rights to the Company. Nickel-plated carbon fiber is a key conductive material in the making of ElectriPlast® and the Company will pursue other opportunities that strengthens its relationship with key suppliers. To date, the reseller agreement has generated low quantity sales, primarily in South Korea.
Patent License Agreement with Jasper Rubber Products, Inc.
In August 2006, we entered into a Patent License Agreement with Jasper, pursuant to which we granted to Jasper the rights to use our ElectriPlast® technology for specific applications within its customer base. Jasper, founded in 1949, and based in Jasper, Indiana, is an industry leader in innovative rubber and plastics development. Jasper manufactures a full range of molded, extruded, lathe-cut rubber and thermoplastic products for customers in the major appliance, oil filter, and automotive industries, a number of which are Fortune 500 companies.
We granted to Jasper a non-exclusive, non-sublicensable, non-assignable, worldwide license. The agreement will terminate upon the expiration of the last patent licensed under the agreement, or earlier under certain circumstances.
Any revenue to be generated by us under the agreement will be from future sales of products manufactured by Jasper containing the ElectriPlast® technology.
Manufacturing Agreement with Jasper Rubber Products, Inc.
In November 2006, we entered into a Manufacturing Agreement with Jasper, pursuant to which Jasper manufactures resin-based conductive, moldable capsules incorporating our ElectriPlast® technology. The primary term of the agreement is five years, subject to automatic renewal or termination under certain conditions. Jasper agreed that during the term of the agreement and for a period of 12 months after its expiration or termination for any reason, Jasper will not directly or indirectly compete with us or our ElectriPlast® technology.
In July 2007, we entered into Amendment One to the Manufacturing Agreement (“Amendment One”) with Jasper. The primary purposes of Amendment One were 1) to replace in its entirety Section 4 of the Manufacturing Agreement concerning “Pricing, Invoicing and Payment”, and 2) to authorize Jasper to sell, on our behalf, products incorporating our ElectriPlast® technology. As revised by Amendment One, Section 4 of the Manufacturing Agreement now reflects more definitive information concerning definitions and calculations of “hourly payment”, “sales royalties”, “gross margin”, “manufacturing costs” and “payment terms”. These revisions were mutually agreed upon following several months of production test-runs and cost evaluations.
Patent License Agreement with ADAC Plastics, Inc. d/b/a ADAC Automotive.
In November 2006, we entered into a Patent License Agreement with ADAC Plastics, Inc. d/b/a ADAC Automotive (“ADAC”), pursuant to which we granted to ADAC the rights to use our ElectriPlast® technology for use in car antennas, cup holder heating elements, driver’s seat heating elements and light-emitting diode (LED) packs manufactured and sold by specified customers of ADAC. ADAC is a full-service automotive supplier dedicated to the production of door handles and components, cowl vent grilles, exterior trim, and marker lighting. Founded in 1975 as ADAC Plastics, Inc., the Grand Rapids, Michigan-based company operates facilities in North America and the United Kingdom.
We granted to ADAC a non-exclusive, non-sublicensable, non-assignable, worldwide license. The agreement will terminate upon the expiration of the last patent licensed under the agreement, or earlier under certain circumstances.
Any revenue to be generated by us under the agreement will be from future sales of products manufactured by ADAC containing the ElectriPlast® technology. We have not yet derived revenues from this agreement.
Patent License Agreement with Esprit Solutions Limited
In December 2006, we entered into a Patent License Agreement with Esprit Solutions Limited (“Esprit”), pursuant to which we granted to Esprit the rights to use our ElectriPlast® technology for the manufacture and sale of products to Esprit’s customer base in the Aerospace/Defense Interconnection and Protective Components Industry. Esprit, based in the United Kingdom, specializes in high performance protective systems within the Aerospace and Defense markets.
We granted to Esprit a non-exclusive, non-sublicensable, non-assignable, worldwide license. The agreement will terminate upon the expiration of the last patent licensed under the agreement, or earlier under certain circumstances.
Any revenue to be generated by us under the agreement will be from raw materials fees.
Patent License Agreement with Knowles Electronics, LLC
In January 2007, we entered into a Patent License Agreement with Knowles Electronics, LLC (“Knowles”), pursuant to which we granted to Knowles the rights to use our proprietary ElectriPlast® technology for the manufacture and sale of electromagnetic field (EMF) protected molded components. Knowles is the world's leading provider of microphones and receivers to the hearing health industry. They are credited with the miniaturization of the acoustic transducer, which has enabled the design and manufacture of smaller hearing aids.
We granted to Knowles a non-exclusive, non-sub-licensable, non-assignable, worldwide license. The agreement will terminate upon the expiration of the last patent licensed under the agreement, or earlier under certain circumstances.
Any revenue to be generated by us under the agreement will be from raw materials fees.
Co-Development Agreement with Delphi Automotive PLC
In June of 2013, we entered into a co-development agreement with Delphi Automotive PLC to jointly develop wire and cable insulation applications using ElectriPlast® conductive resin technology. Integral and Delphi will focus their joint development efforts on replacing the copper braiding in wire and cable applications with the lighter and more cost-effective plastic hybrid material ElectriPlast®. The resulting applications are expected to be lighter, less costly to manufacture and substantially easier to install. Delphi Automotive PLC is a leading global supplier of electronics and technologies for automotive, commercial vehicle and other market segments. Operating major technical centers, manufacturing sites and customer support facilities in 32 countries, Delphi delivers real-world innovations that make products smarter and safer as well as more powerful and efficient. The agreement is still ongoing and significant progress has been made in the development of the wire. More development is needed to achieve commercial viability. Upon commercialization, the agreement contemplates the creation of a licensing agreement.
Letter of Intent with BASF
In June of 2013, we signed a Letter of Intent ("LOI") with chemical leader BASF USA Corporation to jointly explore the North American market for ElectriPlast's patented line of conductive thermoplastics. Along with
BASF, we will
approach key OEMs and Tier 1 manufacturers with opportunities for conductive thermoplastics as a lightweight material alternative to metals. As the world's leading chemical company, BASF’s portfolio ranges from chemicals, plastics, performance products and crop protection products to oil and gas. The LOI has expired, but the two companies continue to collaborate.
Patent License Agreement with Hanwha
On June 21, 2013, we entered into a 10-year license agreement with Hanwha, a global high-tech materials maker based in South Korea. The agreement granted Hanwha an exclusive, non-transferrable, non-sub licensable, license to manufacture, sell and distribute Integral's line of conductive plastics, ElectriPlast®, in South Korea, as well as a non-exclusive, non-transferable, non-sub licensable right to sell and distribute ElectriPlast® for Japan, Taiwan and China markets. The Company may terminate Hanwha's rights in Japan and Taiwan, with certain considerations provided to Hanwha, if it desires to enter into an exclusive agreement with a third party for those territories. There was a one-time license fee and it requires an ongoing royalty fee for the life of the agreement.
See item 7 for amount of revenue recognized during the years ended June 30, 2017 and 2016.
Patent License Agreement with PolyOne
On February 20, 2018, we entered into a 10-year license agreement with PolyOne, a leading provider of specialized polymer materials, services, and solutions. Headquartered in Avon Lake, Ohio, PolyOne has operations in North America, South America, Europe and Asia. The agreement granted PolyOne is an exclusive license to manufacture, sell and distribute conductive plastic worldwide using the Company’s manufacturing know-how and certain patents, for the automotive industry. There was a one-time upfront license fee and an ongoing royalty fee that decreases in three-year increments.
Financial Condition
The Company has not generated significant revenue since inception. Although the Company has begun to receive some revenue from the sale of material for commercial applications, the Company is devoting substantially all its efforts to developing the business. From inception on February 12, 1996 through March 31, 2018, we have accrued an accumulated deficit of approximately $66 million.
As of March 31, 2018, our assets were $598,235, consisting of cash of $380,196, prepaid expense of $5,000, deferred debt discount of $148,362 and property and equipment of $64,677.
As of March 31, 2018, current liabilities of $4,877,088 consisting of accounts payable and accruals of $2,020,742, related party payables of $345,925, loans payable of $390,981, deferred revenues of $50,000, convertible debentures of $601,581, derivative liabilities of $1,011,857. Non-current liabilities consist of deferred revenues of $233,333.
As of March 31, 2018, total stockholders' deficit was $4,512,186.
Results of
o
perations of the
nine
m
onths
e
nded
March 31, 2018
,
c
ompared to the
nine
months ended
March 31, 2017
Our net loss for the nine months ended March 31, 2018, was $2,603,234 compared to a net loss of $2,652,898 for the nine months ended March 31, 2017, representing a decrease of $49,664. Significant changes for the nine months ended March 31, 2018, compared to the corresponding period of the prior period have been described as follows:
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Total revenues increased by $1,011,381 to $1,086,468 for the nine months ended March 31, 2018. The increase is a result of increased sales from the Company’s conductive line of ElectriPlast and one-time completion of a license agreement of the Company’s technology for total value of $1,000,000.
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Operating expense for the nine months ended March 31, 2018, were $1,566,245 compared to operating expense of $2,200,994 for the nine months ended March 31, 2017, representing a decrease of $634,749. Significant changes for the nine months ended March 31, 2018, compared to the corresponding period of the prior fiscal year have been described as follows:
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Consulting fees increased by $354,217 to $1,000,500 for the nine months ended March 31, 2018. The increase is primarily a result of the company switching from the use of employees to consultants;
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Professional fees decreased by $173,453 to $89,088 for the nine months ended March 31, 2018. The decrease is due to implementing cost saving strategies and reduction in the use of external professionals and a reduction in audit fees;
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Salaries and benefits decreased by $641,795 to $175,730 for the nine months ended March 31, 2018. The decrease is primarily a result of the Company switching from the use of full-time employees to part-time consultants; and
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Non-cash, Stock based compensation charges for the vesting of restricted shares were $nil compared to $111,165 in the corresponding period of the prior fiscal year. The increase is due to no stock awards issued or vested in the current period;
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Significant changes for other income and expenses for the nine months ended March 31, 2018, compared to the nine months ended March 31, 2017, have been described as follows:
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Interest Expense increased by $669,631. Interest expense of $1,204,452 primarily includes non-cash amortization of convertible debt of $1,053,582 (2016 - $433,945), non-cash amortization of deferred debt discount of $53,070 (2016 - $nil), interest accrual on debt of $96,352 (2016 - $98,799) and finance charges of $1,448 and overall is a result of an increase in debt financing activities in the current year;
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Fair value loss on derivative financial liabilities increased by $1,142,290. Fair value loss on derivative financial liabilities is non-cash fair value measurement calculated using the Black-Sholes option pricing model and a binomial lattice model where appropriate and was higher for the nine months ended March 31, 2018, due to an increase in convertible debt financing activities;
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Gain on extinguishment of debt increased by $118,542. Gain on extinguishment of debt is a non-cash measurement and arises due to the difference between the carrying value of the debt (after a final mark to the embedded derivative’s fair value) and the shares issued to settle the debt measured at their then-current fair value. This difference was higher compared to the prior year as a result of an increase in the amount of convertible debt settled;
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Fair value loss on warrant liability increased by $310,702 due to an increase in the fair value of warrant derivatives in the nine months ended March 31, 2018. Fair value loss on warrant liability is a non-cash fair value measurement calculated using the Black-Sholes option pricing model.
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The Company recognized a one-time gain on extinguishment of liabilities of $408,009 with related parties during the year pursuant to debt forgiveness agreements. There were no such transactions in the comparative period of the prior fiscal year.
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Results of operations of the three months ended
March 31, 2018
, compared to the three months ended
March 31, 201
7
Our net loss for the three months ended March 31, 2018, was $681,134 compared to a net loss of $1,190,946 for the three months ended March 31, 2017, representing a decrease of $509,812. Significant changes for the three months ended March 31, 2017, compared to the corresponding period of the prior period have been described as follows:
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Total revenues increased by $988,074 to $1,012,075 for the three months ended March 31, 2018. The increase is a result of a one-time completion of a license agreement of the Company’s technology for total value of $1,000,000.
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Operating expense for the three months ended March 31, 2018, were $533,413 compared to operating expense of $750,335 for the three months ended March 31, 2017, representing a decrease of $216,922. Significant changes for the three months ended March 31, 2017, compared to the corresponding period of the prior fiscal year have been described as follows:
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Consulting fees increased by $184,780 to $333,500 for the three months ended March 31, 2018. The increase is primarily a result of the company switching from the use of employees to consultants;
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Professional fees decreased by $114,559 to $6,194 for the three months ended March 31, 2018. The decrease is due to implementing cost saving strategies and reduction in the use of external professionals and a reduction in audit fees;
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Salaries and benefits decreased by $201,874 to $70,634 for the three months ended March 31, 2018. The decrease is primarily a result of the Company switching from the use of full-time employees to part-time consultants; and
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Non-cash, Stock based compensation charges for the vesting of restricted shares were $nil compared to $44,896 in the corresponding period of the prior fiscal year. The increase is due to no stock awards issued or vested in the current period;
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Significant changes for other income and expenses for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, have been described as follows:
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Interest Expense decreased by $147,124. Interest expense of $286,677 primarily includes non-cash amortization of convertible debt of $238,760 (2017 - $396,778), non-cash amortization of deferred debt discount of $17,432 (2017 - $nil), interest accrual on debt of $29,994 (2017 - $nil) and finance charges of $491 and overall is a result of a majority of the convertible debt being completely amortized during the nine months ended March 31, 2018, 2017;
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Fair value loss on derivative financial liabilities increased by $608,201. Fair value loss on derivative financial liabilities is non-cash fair value measurement calculated using the Black-Sholes option pricing model and a binomial lattice model where appropriate and was higher for the three months ended March 31, 2018, due to an increase in convertible debt financing activities;
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Gain on extinguishment of debt decreased by $165,985. Gain on extinguishment of debt is a non-cash measurement and arises due to the difference between the carrying value of the debt (after a final mark to the embedded derivative’s fair value) and the shares issued to settle the debt measured at their then-current fair value. This difference was lower compared to the prior year as a result of a higher value of losses on extinguishment of convertible debt settled;
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Fair value loss on warrant liability increased by $98,993 a due to an increase in the fair value of warrant derivatives in the three months ended March 31, 2018. Fair value loss on warrant liability is a non-cash fair value measurement calculated using the Black-Sholes option pricing model.
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The Company recognized a one-time gain on extinguishment of liabilities of $408,009 with related parties during the year pursuant to debt forgiveness agreements. There were no such transactions in the comparative period of the prior fiscal year.
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Critical Accounting Policies and Estimates
Stock based-compensation:
The Company accounts for stock-based compensation expense associated with stock options and other forms of equity compensation by estimating the fair value of share-based payment awards on the date of grant using a Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statement of operations. The Company uses the straight-line single-option method to recognize the value of stock-based compensation expense for all share-based payment awards. Stock-based compensation expense recognized in the statement of operations is reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Revenue recognition
During the fiscal year ended June 30, 2013, the Company signed a ten-year license agreement with Hanwha Advanced Materials Co., Ltd., (“Hanwa”), of South Korea. For license agreements that the Company enters into, revenue is recognized when all four of the following criteria are met: (i) a contract is executed, (ii) the contract price is fixed and determinable, (iii) delivery of the service or products has occurred, and (iv) collectability of the contract amounts is reasonably assured. The upfront license fees have been recorded over the term of the license agreement.
The Company’s license agreements can provide for upfront license fees, maintenance payments, and/or substantive milestone payments. In accordance with revenue recognition guidance, the Company identifies all of the deliverables at the inception of the agreement. License fees which are nonrefundable fees will be evaluated for standalone value to the licensor and may be recognized upon delivery pursuant to terms of the agreement. Upfront nonrefundable fees associated with license and development agreements where the Company has continuing involvement that does not meet the requirement of a separate deliverable are recorded as deferred revenue and recognized over the estimated service period. The Company may also enter into agreements to provide engineering services. The Company recognizes revenue from engineering services as the service has been performed and amounts are reasonably assured of collection.
Liquidity and Capital Resources
As of March 31, 2018, the Company had $380,196 in cash on hand, and we estimate that we will continue to require $2.0 to $3.0 million annually of additional financing to fund our ongoing operating and capital expenditures in order to carry out our business plan and to continue to operate during our fiscal year ending June 30, 2018. The Company has historically funded this requirement through a combination of debt and equity proceeds. Until such time as the Company launches material product-based manufacturing operations, we believe our funding need will remain approximately $2M annually, and we will disclose promptly any changes to that estimate.
Based on our current cash and cash equivalents levels and expected cash flow from operations, we believe our current cash position is not sufficient to fund our cash requirements during the next twelve months, including operations and capital expenditures. We intend to license our proprietary technology and services or obtain equity and/or debt financing to support our current and proposed operations and capital expenditures. There can be no assurance, however, that any such opportunities may arise, or that any such acquisitions may be consummated. Additional financing may not be available on satisfactory terms when required. In addition, the trading price of our common stock and a downturn in the equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. We currently have no firm commitments for any additional capital. There is no guarantee that we will be successful in raising the funds required. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
The Company’s cash usage since inception in 1996 has been funded primarily from proceeds from the issuance of common stock, revenues, license fees and debt arrangements.
We are currently in limited manufacturing operations. As demand continues to grow and our need to increase capacity, reduce manufacturing costs and to improve margins, we would consider directly entering into the manufacturing business, including the possibility of acquiring existing assets or an operating company to help us accelerate this process, however this will only be possible through additional capital.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of March 31, 2018.