|
Note 2
|
Going Concern and Management’s Plans
|
The Company has not
yet achieved profitability and expects to continue to incur cash outflows from operations. It is expected that its research and
development and general and administrative expenses will continue to increase and, as a result, the Company will eventually need
to generate significant product revenues to achieve profitability. These raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the financial statement issuance date.
The Company is
currently funding its operations on a month-to-month basis by means of private placements. Although the Company’s management
believes that it has access to capital resources, there are currently no commitments in place for new financing at this time and
there is no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. If the Company
is unable to obtain adequate funds on reasonable terms, it may be required to significantly curtail or discontinue operations or
obtain funds by entering into financing agreements on unattractive terms. The Company’s operating needs include the planned
costs to operate its business, including amounts required to fund working capital and capital expenditures.
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with 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.
|
Note 3
|
Summary of Significant Accounting Policies
|
Since the date
of the Annual Report on Form 10-K for the year ended December 31, 2018, there have been no material changes to the Company’s
significant accounting policies, except as disclosed in this note.
Concentrations
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 were no uninsured cash balances as of September 30, 2019 and December 31, 2018.
Customer concentrations are as follows:
|
|
Revenues
|
|
|
Accounts Receivable
|
|
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
As of
September 30,
|
|
|
As of
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Customer A
|
|
|
67
|
%
|
|
|
92
|
%
|
|
|
46
|
%
|
|
|
64
|
%
|
|
|
90
|
%
|
|
|
63
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
*
|
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
17
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer F
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
37
|
%
|
Total
|
|
|
82
|
%
|
|
|
92
|
%
|
|
|
71
|
%
|
|
|
93
|
%
|
|
|
90
|
%
|
|
|
100
|
%
|
* Less than 10%
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.
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 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 Nine Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Product sales
|
|
$
|
464,772
|
|
|
$
|
482,798
|
|
|
$
|
686,522
|
|
|
$
|
735,941
|
|
Contract services
|
|
|
61,950
|
|
|
|
-
|
|
|
|
91,462
|
|
|
|
145,988
|
|
Total revenue
|
|
$
|
526,722
|
|
|
$
|
482,798
|
|
|
$
|
777,984
|
|
|
$
|
881,929
|
|
As of September
30, 2019 and December 31, 2018, the Company did not have any contract assets or contract liabilities from contracts with customers.
The contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance
obligation under the contract. During the three and nine months ended September 30, 2019 and 2018, there was no revenue recognized
from performance obligations satisfied (or partially satisfied) in previous periods.
Net Loss Per Common Share
Basic net loss
per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the
period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive
common-equivalent shares outstanding during each period. Dilutive common-equivalent shares 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:
|
|
For the Three Months
Ended
|
|
|
For the Nine Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Series B Convertible Preferred Stock
|
|
|
724,350
|
|
|
|
-
|
|
|
|
724,350
|
|
|
|
-
|
|
Series C Convertible Preferred Stock
|
|
|
206,800
|
|
|
|
-
|
|
|
|
206,800
|
|
|
|
-
|
|
Options
|
|
|
400,000
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
-
|
|
Warrants
|
|
|
201,700
|
|
|
|
-
|
|
|
|
201,700
|
|
|
|
-
|
|
Total
|
|
|
1,532,850
|
|
|
|
-
|
|
|
|
1,532,850
|
|
|
|
-
|
|
Operating Leases
The Company leases
properties under operating leases. For leases in effect upon adoption of Accounting Standards Update (“ASU”) 2016-02,
“Leases (Topic 842)” at January 1, 2019 and for any leases commencing thereafter, the Company recognizes a liability
to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during
the lease term, the “right-of-use asset”. The lease liability is measured at the present value of the remaining lease
payments, discounted at the Company’s incremental borrowing rate. The right-of-use asset is measured at the amount of the
lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if
the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the
remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment
of the right-of-use asset.
The Company evaluated their operating
leases and elected to apply the short-term lease measurement and recognition exemption in which the right of use assets and lease
liabilities are not recognized for short-term leases.
Recently Issued Accounting Pronouncements
In July 2019, the FASB issued ASU 2019-07,
“Codification Updates to SEC Sections — Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532,
Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous
Updates (SEC Update)” (“ASU 2019-07”). ASU 2019-07 aligns the guidance in various SEC sections of the Codification
with the requirements of certain SEC final rules. ASU 2019-07 is effective immediately. The adoption of ASU 2019-07 did not have
a material impact on the Company’s unaudited condensed consolidated financial statements.
|
Note 4
|
Accrued Expenses and Other Current Liabilities
|
As of September 30, 2019 and December 31,
2018, accrued expenses and other current liabilities consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
Payroll and vacation
|
|
$
|
459,259
|
|
|
$
|
252,043
|
|
Legal and professional fees
|
|
|
45,500
|
|
|
|
47,502
|
|
Travel expenses
|
|
|
20,812
|
|
|
|
48,248
|
|
Payroll and income tax payable
|
|
|
7,818
|
|
|
|
12,678
|
|
Research and development expenses
|
|
|
-
|
|
|
|
2,850
|
|
Credit card payable
|
|
|
4,835
|
|
|
|
4,586
|
|
Accrued issuable equity
|
|
|
-
|
|
|
|
3,960
|
|
Rent
|
|
|
176
|
|
|
|
176
|
|
Other
|
|
|
9,153
|
|
|
|
2,287
|
|
Total accrued expenses and other current liabilities
|
|
$
|
547,553
|
|
|
$
|
374,330
|
|
|
Note 5
|
Related Party Transactions
|
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities
– related parties consist of a liability of $18,919 and $83,919 as of September 30, 2019 and December 31, 2018, 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.
On September 30, 2019, ESLI agreed to forgive
$35,000 of previously accrued consulting fees. As a result, the Company accounted for the forgiveness as a capital contribution
by reducing accrued expenses and other current liabilities by $35,000 with a corresponding credit to additional paid-in capital.
|
Note 6
|
Stockholders' Deficiency
|
Common Stock
During the nine months ended September
30, 2019, the Company sold an aggregate of 1,361,059 shares of common stock at $0.66 per share to accredited investors for aggregate
cash proceeds of $898,300.
Series B Convertible Preferred Stock
During the nine months ended September
30, 2019, holders of Series B Convertible Preferred Stock elected to convert an aggregate of 16,371 shares of Series B Convertible
Preferred Stock into an aggregate of 818,550 shares of common stock.
Series C Convertible Preferred Stock
On August 19, 2019, the Company filed with
the Secretary of State of the State of Delaware the Certificate of Designation of Series C Convertible Preferred Stock (the “Certificate
of Designation”), which became effective upon filing. Pursuant to the Certificate of Designation, the Company designated
400 shares as Series C Convertible Preferred Stock out of the authorized and unissued preferred stock of the Company, par value
$0.0001 per share.
Series C Convertible Preferred Stock is
senior in liquidation preference to the Company’s common stock for an amount equal to the stated value per share of $10,000
(“Stated Value”). Holders of shares of Series C Convertible Preferred Stock shall vote on an as-if-converted-to-common-stock
basis with the common stock. Holders of shares of Series C Convertible Preferred Stock are entitled to receive dividends when,
as and if declared by the Board of Directors, at an annual rate of twelve percent (12%) beginning one year after each share’s
issuance. The Company may elect to redeem all or part of each share of Series C Convertible Preferred Stock for the Stated Value.
Each share of Series
C Convertible Preferred Stock, if converted within 180 days of such share’s initial issuance, is convertible into a number
of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C
Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) $1.00 per share. Each share of Series C
Convertible Preferred Stock, if converted on or after the 181st day of its initial issuance, is convertible into a number of shares
of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible
Preferred Stock being converted and any accrued dividends thereon and (ii) 75% of the average of the trading prices five days
prior to conversion but in no case less than $0.90 per share. In addition, all outstanding shares of Series C Convertible Preferred
Stock may be automatically converted upon the occurrence of a qualified offering of at least $5 million of gross proceeds (“Qualified
Offering”) or an approved listing of common stock on a national stock exchange (“Uplisting”). In the event of
a Qualified Offering, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common
stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred
Stock being converted and any accrued dividends thereon and (ii) 85% of the price of the securities sold in the Qualified Offering.
In the event of an Uplisting, each share of Series C Convertible Preferred Stock would be converted into a number of shares of
common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible
Preferred Stock being converted and any accrued dividends thereon and (ii) if converted within 180 days of such share’s
initial issuance, $1.00 per share, and if converted on or after the 181st day of its initial issuance, 75% of the average of the
trading prices five days prior to conversion but in no case less than $0.90 per share.
During the three
months ended September 30, 2019, the Company sold to certain investors an aggregate of 20.68 shares of Series C Convertible
Preferred Stock and two-year immediately vested warrants to purchase an aggregate of 51,700 shares of the Company’s
common stock at an exercise price of $1.50 per share for aggregate gross proceeds of $186,000, less cash issuance costs of
$47,000, for aggregate net proceeds of $139,000. The warrants, which were determined to be classified within
stockholders’ deficiency, had an aggregate issuance date fair value of $10,779. The Company has computed the fair value
of warrants using the Black-Scholes pricing model with the following assumptions: risk free interest rate – 1.53% -
1.74%; expected term – 2 years, expected volatility – 97%, expected dividends – 0%.
The Series C Convertible Preferred Stock
is redeemable at the Company’s option, therefore it has been classified within stockholders’ deficiency on the condensed
consolidated balance sheet. An overall analysis of its features performed by the Company determined that the Series C Convertible
Preferred Stock was more akin to equity. As a result, while the embedded conversion option (“ECO”) contained certain
anti-dilution price protection mechanisms, since the ECO was clearly and closely related to the equity host, it was not required
to be bifurcated and accounted for as a derivative liability under ASC 815. The Company determined that the Series C Convertible
Preferred Stock did not contain a beneficial conversion feature, since the conversion price exceeded the estimated fair value of
the Company’s common stock as of the commitment date, except upon a conversion in the event of a Qualified Offering, which
was determined to be a contingent beneficial conversion feature, which will be measured when the contingency is resolved and, if
determined to be beneficial at such time, will be recognized.
Stock-Based Compensation
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), respectively, and during the three and nine months ended September
30, 2018, the Company recognized stock-based compensation expense of $94,864 and $402,656,
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. As of September 30, 2019,
there was $152,794 of unrecognized stock-based compensation expense that will be recognized
over the weighted average remaining vesting period of 1.98 years.
The Company has
two operating leases for real estate which have remaining terms that are less than one year. The Company elected not to recognize
short-term leases on the balance sheet and all costs were recognized as selling, general and administrative expenses on the condensed
consolidated statements of operations. For the three and nine months ended September 30, 2019, operating lease expense was $41,281
and $121,769, respectively. For the three and nine months ended September 30, 2018, operating lease expense was $40,373 and $87,039,
respectively. As of September 30, 2019, the Company does not have any financing leases.
|
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. For the three and nine
months ended September 30, 2019, the Company recorded royalties of $450 and $1,140, respectively, that were included within cost
of revenues. There were no royalties earned during the three and nine months ended September 30, 2018.
Securities Purchase Agreement
On April 2, 2019, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with the stockholders (the “Sellers”) holding
100% of the ownership interest in TECHTOM Co., Ltd. (“TECHTOM”), a Japanese limited liability company, pursuant to
which the Company agreed to purchase from the Sellers, subject to the satisfaction of certain closing conditions, all ownership
interests in TECHTOM and any and all claims, notes and other liabilities owed by TECHTOM to the Sellers (the “Acquisition”).
On July 5, 2019, the Company entered into
a Rescission and Termination Agreement (the “Termination Agreement”) with the Sellers (each Seller, individually, and
the Company, a “Party” or collectively, the “Parties”) holding 100% of the ownership interest in TECHTOM
to terminate the Purchase Agreement.
Pursuant to the Termination Agreement,
each of the Parties mutually agreed (i) to rescind and terminate the Purchase Agreement, relieving each Party of their respective
duties and obligations arising under the Purchase Agreement; and (ii) to a general release of all other respective Parties from
all claims arising out of the Purchase Agreement or the Termination Agreement. Each Party is responsible for all costs and expenses
incurred by such Party in connection with the Purchase Agreement or the Termination 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. ("KULR" and, including
its subsidiary, KULR Technology Corporation (“KULR”), the “Company”) as of September 30, 2019 and for the
three and nine months ended September 30, 2019 and 2018 should be read in conjunction with our financial statements and the notes
to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should
be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2018 and
for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”)
on March 29, 2019. 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
KULR
Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance
thermal management technologies for electronics, batteries, and other components across an array of applications. Currently, we
are focused on targeting the following applications: electric vehicles and autonomous driving systems (collectively referred to
herein as “E-Mobility”); artificial intelligence and Cloud computing; energy storage; and 5G communication technologies.
Our proprietary core technology is a carbon fiber material, with roots in aerospace and defense, that provides what we believe
to be superior thermal conductivity and heat dissipation in an ultra-lightweight and pliable material. By leveraging our proprietary
cooling solutions that have been developed through longstanding partnerships with NASA, the Jet Propulsion Lab and others, our
products and services make E-Mobility battery powered products safer and more stable.
Our
management believes that the E-Mobility industry has created and will create significant new opportunities for the application
of our technology and know-how. We believe these new opportunities will be further driven by certain changing preferences that
we’ve observed in younger generations that must increasingly cope with higher population density, global warming, and the
rapidly evolving communications and computing needs of their personal devices and the surrounding infrastructure. As a result,
we predict that the younger generations will increasingly prefer to attend meetings by video conference; rent a car, bike, or scooter,
or call an app-based car service instead of owning a vehicle; and leverage the Cloud to perform tasks traditionally done in person,
such as shopping for lunch, clothes, electronics and other consumer goods that also leverages an expanding E-Mobility delivery
network.
In
addition to evolving demands led by consumer-preferences, we have observed trending manufacturer-led opportunities in industries
that have become increasingly more reliant on the Cloud, on portability and on high-demand processing power. For example, car manufacturers
are increasingly providing options that take over the responsibility for driving, diagnosing its own service requirements and analyzing
on-board systems data and efficiency. The communications and entertainment industries are leveraging increasingly more powerful
and portable devices to deliver live and high-definition content and experiences. These innovations will require high bandwidth
communication devices that can handle the power drain and computational requirements to keep up with the sophisticated security
and software tools that will power these advanced product offerings. As a result of these manufacturer and consumer trends, we
believe that the new generations of high-powered, small form-factor semiconductors are out-pacing the ability to control unwanted
heat generation in lithium ion batteries.
The above-described
advances in micro technology, portable power, and compact energy efficient devices linked to an ever-widening Internet of Things
(“IoT”) via the Cloud are driving opportunities that forms the focus of the Company’s business development plan. We
believe that our core technology and historical development focus on improving lithium-ion battery performance and safety, positions
us in a competitively advantageous position to enhance key components to the evolving mobile applications for a wide range of consumer
products and IoT. We have found that as chip performance increases, power consumption increases, and more heat is generated
as a byproduct. When chip size reduces, there is an increased potential for a hot spot on the chip, which can degrade system performance,
or even cause spontaneous combustion. However, electronic system components must operate within a specific temperature range on
both the high and low end to operate properly. After strenuous testing, we believe we have developed heat management solutions
that significantly improve upon traditional heat storage and dissipation solutions and improve upon their rigidity and durability.
We also believe that the traditional solutions are not equipped to handle the evolving marketplace. However, through a combination
of custom design services and provision of proprietary hardware solutions, our products reduce manufacturing complexity and provide
a lighter weight solution than traditional thermal management materials and, we believe, can meet the heat management demands of
components and batteries being designed into the newest mobile technologies and applications.
Our
management’s growth strategy has put particular focus on targeting E-Mobility applications for its core technology. We
believe we are well-positioned to provide a broad range of E-mobility solutions, and intend to expand our business through
internal growth and acquisition. In the case of acquisitions, we seek to acquire businesses in related markets that are
synergistic to our existing operations, technologies, and management experience. This focus will highlight markets in which
we can: (1) integrate our existing technology into the acquiree’s product offerings or simultaneously offer our
products and services through the acquiree’s customer base and channels; (2) gain a leading market position and provide
vertically integrated services where we can secure economies of scale, premium market positioning, and operational synergies;
and/or (3) establish a leading position in selected markets and channels of the acquiree through a joint broad-based,
hi-tech, E-Mobility branding campaign. We have developed an acquisition discipline based on a set of financial, market and
management criteria to evaluate opportunities. To date, we have evaluated two acquisition opportunities under such criteria
and, together with the management of the potential target, determined that the anticipated synergies would not be realized in
the anticipated timetable. If we were to successfully close an acquisition, we would seek to integrate it while minimizing
disruption to our existing operations and those of the acquired business, while exploiting the technical and managerial
synergies from integration.
We have not yet achieved
profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and
general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant
product revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue
as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds
to support our business operations, although there can be no assurance that we will be successful in raising additional funds in
the future. Furthermore, as described below, we remain focused on growing our operations in order to limit cash outflows and eventually
achieve profitability, although no assurances can be made that we will achieve such goals.
Recent Developments
Series C Convertible Preferred Stock
During the three months
ended September 30, 2019, the Company sold to certain investors an aggregate of 20.68 shares of Series C Convertible Preferred
Stock and two-year immediately vested warrants to purchase an aggregate of 51,700 shares of the Company’s common stock at
an exercise price of $1.50 per share for aggregate gross proceeds of $186,000, less cash issuance costs of $47,000, for aggregate
net proceeds of $139,000. The warrants, which were determined to be classified within stockholders’ deficiency, had an aggregate
issuance date fair value of $10,779.
On August 19, 2019,
the Company filed with the Secretary of State of the State of Delaware the Certificate of Designation of Series C Convertible Preferred
Stock (the “Certificate of Designation”), which became effective upon filing. Pursuant to the Certificate of Designation, the
Company designated 400 shares as Series C Convertible Preferred Stock out of the authorized and unissued preferred stock of the
Company, par value $0.0001 per share.
Series C Convertible
Preferred Stock is senior in liquidation preference to the Company’s common stock for an amount equal to the stated value
per share of $10,000 (“Stated Value”). Holders of shares of Series C Convertible Preferred Stock shall vote on an as-if-converted-to-common-stock
basis with the common stock. Holders of shares of Series C Convertible Preferred Stock are entitled to receive dividends when,
as and if declared by the Board of Directors, at an annual rate of twelve percent (12%) beginning one year after each share’s
issuance. The Company may elect to redeem all or part of each share of Series C Convertible Preferred Stock for the Stated Value.
Each share of Series
C Convertible Preferred Stock, if converted within 180 days of such share’s initial issuance, is convertible into a number
of shares of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C
Convertible Preferred Stock being converted and any accrued dividends thereon and (ii) $1.00 per share. Each share of Series C
Convertible Preferred Stock, if converted on or after the 181st day of its initial issuance, is convertible into a number of shares
of common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible
Preferred Stock being converted and any accrued dividends thereon and (ii) 75% of the average of the trading prices five days
prior to conversion but in no case less than $0.90 per share. In addition, all outstanding shares of Series C Convertible Preferred
Stock may be automatically converted upon the occurrence of a qualified offering of at least $5 million of gross proceeds (“Qualified
Offering”) or an approved listing of common stock on a national stock exchange (“Uplisting”). In the event of
a Qualified Offering, each share of Series C Convertible Preferred Stock would be converted into a number of shares of common
stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible Preferred
Stock being converted and any accrued dividends thereon and (ii) 85% of the price of the securities sold in the Qualified Offering.
In the event of an Uplisting, each share of Series C Convertible Preferred Stock would be converted into a number of shares of
common stock equal to the product determined by dividing (i) the Stated Value of the number of shares of Series C Convertible
Preferred Stock being converted and any accrued dividends thereon and (ii) if converted within 180 days of such share’s
initial issuance, $1.00 per share, and if converted on or after the 181st day of its initial issuance, 75% of the average of the
trading prices five days prior to conversion but in no case less than $0.90 per share.
Customer Engagements
During the current fiscal year, we have successfully added to our list of active customers and continue to expand
our relationships with prospective customers. Typically, a new customer engagement starts out with initial service projects
that include the analysis of customer heat management challenges, evaluation of potential solutions and designs, and
selection of solutions that may be addressed by our existing product or that require new designs and features, leading to new
general or custom products. The process of designing next generation products for prospective customers is lengthy. However,
we believe we have made significant progress working with existing and prospective customers on developing product solutions.
Once customer solutions are identified and developed, we would expect the customer to submit product purchase
orders. Although no assurances can be made that such purchase orders would be placed, such orders could not only lead to
higher-volume production sales but could (i) generate significantly higher gross margins as compared to the earlier
engagement stage service projects, and (ii) provide greater prospects for scaling.
Active Development
Projects
As we continue to advance our new customer engagements and submit our solutions against competitor
solutions in various independent and customer testing, we believe our carbon-fiber based electronics and battery cooling technologies
are superior to traditionally used heat sinks (such as aluminum and copper heat sinks) and thermal interface materials (such
as thermal gels and pads). We believe that our solutions are not only generally more thermally conductive, but also lighter
in weight and in many cases offer product design flexibility. For instance, our HYDRA TRS products have been independently
tested to show that they have outperformed our competitors’ solutions in preventing cell-to-cell thermal
runaway propagation and requiring higher trigger temperatures at which the thermal runaway event occurs. Our TRS battery storage
bags were selected by the U.S. government’s NASA to transport and store laptop batteries aboard the International
Space Station. Additionally, we are currently working with top tier companies in the medical device, electric aircraft, and
global automaker industries on designing safer, more effective battery heat sink solutions. No assurances can be made, however,
that any of our active development projects will result in continued or future sales revenues.
Results of Operations
Three and Nine Months Ended September
30, 2019 Compared With Three and Nine Months Ended September 30, 2018
Revenues
Our revenues consisted
of the following types:
|
|
For the Three Months
Ended
|
|
|
For the Nine Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Product sales
|
|
$
|
464,772
|
|
|
$
|
482,798
|
|
|
$
|
686,522
|
|
|
$
|
735,941
|
|
Contract services
|
|
|
61,950
|
|
|
|
-
|
|
|
|
91,462
|
|
|
|
145,988
|
|
Total revenue
|
|
$
|
526,722
|
|
|
$
|
482,798
|
|
|
$
|
777,984
|
|
|
$
|
881,929
|
|
For the three
months ended September 30, 2019 and 2018, we generated $526,722 and $482,798 of revenues, an increase of $43,924, or 9%. The increase
was primarily due to contract services provided during the 2019 period.
Our revenues during
the three months ended September 30, 2019 primarily consisted of sales of our component product, Carbon Fiber Velvet (“CFV”)
thermal management solution, Internal Short Circuit (“ISC”) battery cell products, as well as certain research and
development contract and onsite engineering services. Our revenues during the three months ended September 30, 2018 consisted of
sales of our component product and CFV thermal management solution.
Our revenue for the
three months ended September 30, 2019 and 2018 was generated from 11 and 6 different customers, respectively.
For the nine months
ended September 30, 2019 and 2018, we generated $777,984 and $881,929 of revenues, a decrease of $103,946, or 12%. The decrease was primarily due to the lumpy nature of conversion of project-based services into orders of products during
the 2019 period.
Our revenues during
the nine months ended September 30, 2019 consisted of our component product, CFV thermal management solution, ISC battery cell
products as well as certain research and development contract and onsite engineering services. Our revenues during the nine months
ended September 30, 2018 consisted of sales of our component product, CFV thermal management solution, sales of an Original Equipment
Manufacturer (“OEM”) product as well as certain research and development contract services.
Our revenue for the
nine months ended September 30, 2019 and 2018 was generated from 21 and 11 different customers, respectively.
Cost of Revenues
Cost
of revenues consists of the cost of our products as well as labor expenses directly related to product sales or research contract
services.
Generally,
we earn greater margins on revenue from products compared to revenue from services, so product mix plays an important part in our
reported average margins for any period. Also, we are introducing new products in the early stages of our development cycle and
the margins earned can vary significantly between period, customers and products due to the learning process, customer negotiating
strengths, and product mix.
Our
customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract
evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase
commitment. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and
billing can be lengthy, unpredictable and lumpy, which can influence the timing, consistency and reporting of sales growth.
For the three months
ended September 30, 2019 and 2018, cost of revenues was $109,051 and $75,384, respectively, an increase of $33,667, or 45%. The
increase was primarily due to the manufacturing of ISC battery cells related to the sales during the three months ended September
30, 2019. The gross margin percentage was 79% and 84% for the three months ended September 30, 2019 and 2018, respectively. The
decrease in margins during the 2019 period was primarily due to a reduction in sales of higher margin products as compared to the
2018 period as well as a result of a difference in product mix in the 2019 period as compared to the 2018 period.
For the nine months
ended September 30, 2019 and 2018, cost of revenues was $199,118 and $258,801, respectively, a decrease of $59,683, or 23%. The
decrease was primarily due to an increased volume of contracts in the 2018 period, which required additional labor and materials.
The gross margin percentage was 74% and 71% for the nine months ended September 30, 2019 and 2018, respectively. The increase during
the 2019 period resulted primarily from a more favorable product mix being sold as compared to the 2018 period.
Research and Development
Research and development
(“R&D”) include expenses incurred in connection with the R&D of our CFV thermal management solution and ISC
cells. R&D expenses are expensed as they are incurred.
For the three months
ended September 30, 2019, R&D expenses decreased by $23,224, or 14%, to $137,970 from $161,194 for the three months ended September
30, 2018, related to a reduction of R&D supplies in the 2019 period. Having completed our early R&D foundation work, we
reallocated certain resources from R&D to production which resulted in lower R&D spending in 2019 than in the prior year.
For the nine months
ended September 30, 2019, R&D expenses decreased by $34,175, or 9%, to $365,709 from $399,884 for the nine months ended September
30, 2018, related to a reduction of R&D supplies in the 2019 period.
We expect that our
R&D expenses will increase as we receive further performance feedback from current customers and identify new target features
and product opportunities.
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 September 30, 2019, selling, general and administrative expenses increased by $85,605, or 19%, to $546,982 from $461,377 for
the three months ended September 30, 2018. The increase is primarily due to increases in the 2019 period of approximately $76,000
of professional fees incurred in connection with our Form S-3 filing as well as new consulting agreements initiated in 2019 and
$9,000 of non-cash stock-based compensation expense.
For the nine months
ended September 30, 2019, selling, general and administrative expenses decreased by $241,900, or 13%, to $1,666,735 from $1,908,635 for
the nine months ended September 30, 2018. The decrease is primarily due to decreases in the 2019 period of approximately $66,000
of payroll and benefit expenses, $251,000 of non-cash stock-based compensation expense, partially offset by increases in the 2019
period of approximately $35,000 of rent expense and $46,000 of professional fees.
Liquidity and Capital Resources
For the nine months
ended September 30, 2019 and 2018, cash used in operating activities was $1,206,135 and $1,064,953, respectively. 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 $237,325, partially offset by $11,183 of net cash provided by changes in the levels
of operating assets and liabilities. Our cash used in operations for the nine months ended
September 30, 2018 was primarily attributable to our net loss of $1,661,718, adjusted for non-cash expenses in the aggregate amount
of $390,305, partially offset by $206,478 of net cash provided by changes in the levels of operating assets and liabilities.
For the nine months
ended September 30, 2019 and 2018, cash used in investing activities was $0 and $15,476, respectively. Cash used in investing activities
during the nine months ended September 30, 2018 was due to purchases of property and equipment.
For the nine months
ended September 30, 2019, and 2018, cash provided by financing activities was $1,052,300 and $359,000, respectively. Cash provided
by financing activities during the nine months ended September 30, 2019 was due to $898,300 of proceeds from sale of common stock
and $169,000 of proceeds from the sale of Series C Convertible Preferred stock and warrants, partially offset by the payment of
$15,000 of offering costs. Cash provided by financing activities during the nine months ended September 30, 2018 was due to the
sale of common stock in our private placement.
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.
We are currently funding
our operations on a month-to-month basis. Although our management believes that we have access to capital resources, there are
currently no commitments in place for new financing at this time 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 unaudited condensed
consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with
accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation
as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable
or settlement values. The unaudited condensed consolidated financial statements do not include any adjustment that might result
from the outcome of this uncertainty.
Off 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.