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 conditions indicate that there is substantial doubt about the Company’s ability
to continue as a going concern within one year after the financial statement issuance date.
The Company is currently funding its operations
on a month-to-month basis. 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 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 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
The Company’s significant accounting
policies are disclosed in Note 2 – Summary of Significant Accounting Policies in the Company’s Annual Report on Form
10-K for the year ended December 31, 2017. Since the date of the Annual Report, there have been no material changes to the Company’s
significant accounting policies, except as disclosed below.
Concentrations of Credit Risk
The Company maintains cash with major
financial institutions. Cash held in U.S. bank institutions is currently insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000 at each institution. There was an aggregate uninsured cash balance of $
611,450
at December 31, 2017. There was no uninsured balance as of September 30, 2018.
Customer concentrations are as follows:
|
|
Revenues
|
|
|
Accounts Receivable
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
*
|
|
|
|
*
|
|
|
|
17
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer C
|
|
|
92
|
%
|
|
|
*
|
|
|
|
64
|
%
|
|
|
*
|
|
|
|
92
|
%
|
|
|
43
|
%
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
42
|
%
|
|
|
*
|
|
|
|
16
|
%
|
Customer E
|
|
|
*
|
|
|
|
76
|
%
|
|
|
*
|
|
|
|
44
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer F
|
|
|
*
|
|
|
|
24
|
%
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
|
|
*
|
|
Total
|
|
|
92
|
%
|
|
|
100
|
%
|
|
|
93
|
%
|
|
|
100
|
%
|
|
|
92
|
%
|
|
|
74
|
%
|
* Less than 10%
Deferred Offering Costs
Deferred offering costs, which primarily
consist of direct, incremental professional fees incurred in connection with a debt or equity financing, are capitalized as non-current
assets on the balance sheet. Once the financing closes, the Company reclassifies such costs as either discounts to notes payable
or as a reduction of proceeds received from equity transactions so that such costs are recorded as a reduction of additional paid-in
capital. If the completion of a contemplated financing was deemed to be no longer probable, the related deferred offering costs
would be charged to general and administrative expense in the condensed consolidated financial statements.
Revenue Recognition
On January 1,
2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates
may be required within the revenue recognition process than required under existing accounting principles generally accepted in
the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation.
The Company adopted ASC
606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment,
if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company's condensed
consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment was not required.
The Company recognizes
revenue primarily from the following different types of contracts:
|
·
|
Product sales
– Revenue is recognized at the point the customer obtains controls of the goods and the Company
satisfies its performance obligation, which is generally at the time it ships the product to the customer.
|
|
·
|
Contract services
– Revenue is recognized at the point in time that the Company satisfies
its performance obligation under the contract, which is generally at the time it delivers a report to the customer.
|
The following
table summarizes our revenue recognized in our condensed consolidated statements of operations:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
482,798
|
|
|
$
|
15,106
|
|
|
$
|
735,941
|
|
|
$
|
26,006
|
|
Contract services
|
|
|
-
|
|
|
|
-
|
|
|
|
145,988
|
|
|
|
-
|
|
Total revenue
|
|
$
|
482,798
|
|
|
$
|
15,106
|
|
|
$
|
881,929
|
|
|
$
|
26,006
|
|
As of September
30, 2018, the Company had $0 and $51,158 contract assets and contract liabilities, respectively, from contracts with customers.
The contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance
obligation under the contract. As of December 31, 2017, the Company did not have any contract assets or contract liabilities from
contracts with customers. During the three and nine months ended September 30, 2018, and 2017, $0 of revenue was recognized from
performance obligations satisfied (or partially satisfied) in previous periods.
Reclassifications
Certain prior
year balance sheet amounts have been reclassified for consistency with the current year presentation. These reclassifications had
no effect on the reported results of operations.
Net Loss Per Common Share
Basic net loss per common share is computed
by dividing net loss by the weighted average number of vested common shares outstanding during the period. The following weighted
average shares were excluded from basic weighted average common stock outstanding:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
-
|
|
|
|
596,241
|
|
|
|
90,812
|
|
|
|
782,051
|
|
Total
|
|
|
-
|
|
|
|
596,241
|
|
|
|
90,812
|
|
|
|
782,051
|
|
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:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
-
|
|
|
|
500,000
|
|
Total
|
|
|
-
|
|
|
|
500,000
|
|
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued ASU No.
2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09”).
ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective
basis in the annual and interim periods for fiscal years beginning after December 15, 2017 for share-based payment awards
modified on or after the adoption date. The Company adopted ASU 2017-09 effective January 1, 2018 and its adoption did not have
a material impact on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued Accounting
Standards Update (“ASU”) No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU
2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based
payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly
different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting
for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity
— Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December
15, 2018, and interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption
date of Topic 606, Revenue from Contracts with Customers. The Company early adopted ASU 2018-07 effective April 1, 2018. The adoption
of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09,
“Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to
certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10),
Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10),
Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives
and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments
in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating the impact
this guidance will have on its condensed consolidated financial statements.
In July 2018, the FASB issued Accounting
Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases,” (“ASU 2018-10”). The amendments
in ASU 2018-10 are to address stakeholders’ questions about how to apply certain aspects of the new guidance in ASC 842.
The clarifications address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of
lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate
and certain transition adjustments. The amendments in ASC Topic 842 are effective for public business entities for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently in the process of evaluating
its lease assets and lease liabilities to be recorded as of January 1, 2019. The Company continues to evaluate other provisions
of the updated guidance and expects to complete its analysis by December 31, 2018.
In July 2018, the FASB issued Accounting
Standards Update No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”). The amendments
in ASU 2018-11 related to transition relief on comparative reporting at adoption affect all entities with lease contracts that
choose the additional transition method and separating components of a contract affect only lessors whose lease contracts qualify
for the practical expedient. The amendments in ASC Topic 842 are effective for public business entities for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. The Company is currently in the process of evaluating its
lease assets and lease liabilities to be recorded as of January 1, 2019. The Company continues to evaluate other provisions of
the updated guidance and expects to complete its analysis by December 31, 2018.
In August 2018, the FASB issued Accounting
Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair
value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments
on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level
3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the
most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively
to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.
Note 4 Prepaid Expenses
As of September 30, 2018 and December 31,
2017, prepaid expenses consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Business development services
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Research and development services
|
|
|
27,616
|
|
|
|
25,000
|
|
Professional fees
|
|
|
16,991
|
|
|
|
10,000
|
|
Filing fees
|
|
|
12,500
|
|
|
|
-
|
|
Insurance
|
|
|
9,750
|
|
|
|
-
|
|
Other
|
|
|
15,876
|
|
|
|
31,466
|
|
Total prepaid expenses
|
|
$
|
82,733
|
|
|
$
|
106,466
|
|
Note 5 Accrued Expenses and Other Current Liabilities
As of September 30, 2018 and December 31,
2017, accrued expenses and other current liabilities consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Accrued legal and professional fees
|
|
$
|
100,379
|
|
|
$
|
71,241
|
|
Accrued payroll and vacation
|
|
|
80,776
|
|
|
|
69,425
|
|
Payroll and income tax payable
|
|
|
107,601
|
|
|
|
14,223
|
|
Accrued research and development expenses
|
|
|
41,819
|
|
|
|
14,611
|
|
Credit card payable
|
|
|
6,266
|
|
|
|
110
|
|
Accrued issuable equity
|
|
|
77,289
|
|
|
|
1,104
|
|
Other
|
|
|
77,139
|
|
|
|
26,999
|
|
Total accrued expenses and other current liabilities
|
|
$
|
491,269
|
|
|
$
|
197,713
|
|
The Company has agreed to issue an aggregate
of 117,104 shares of common stock for legal and consulting fees. See Note 7 – Stockholders’ Equity – Stock-Based
Compensation for details of related expense recognized. As of September 30, 2018, the shares had not been issued and, as a result,
$77,289 of accrued issuable equity is included within accrued expenses and other current liabilities.
Note 6 Related Party Transactions
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities
– related parties consist of: (i) a liability of $142,269 and $254,344 as of September 30, 2018 and December 31, 2017, respectively,
to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer
(“CTO”), in connection with consulting services provided to the Company associated with the development of the Company’s
CFV thermal management solutions; and (ii) a liability of $61,647 and $28,253 as of September 30, 2018 and December 31, 2017, respectively,
to the Company’s Chief Executive Officer (“CEO”) in connection with Company-related travel and entertainment
expenses incurred by the CEO.
Consulting Agreements
During the three and nine months ended
September 30, 2017, the Company recorded aggregate expense of $0 and $65,000 (of which, $32,500 and $32,500 was included within
research and development expenses and selling, general and administrative expenses, respectively), respectively, related to consulting
agreements with its CEO and CTO, which were terminated in connection with the closing of the Share Exchange Agreement on June 19,
2017.
During the three and nine months ended
September 30, 2017, the Company recorded research and development expense of $38,767 and $407,324, respectively, related to consulting
services provided to the Company by ESLI associated with the development of the Company’s CFV thermal management solutions.
There were no such costs recorded in the three and nine months ended September 30, 2018. ESLI is controlled by the Company’s
CTO.
Note 7 Stockholders' Equity
Private Placement of Common Stock
During the three months ended September
30, 2018, the Company sold an aggregate of 581,819 shares of common stock at $0.66 per share to accredited investors for aggregate
gross and net proceeds of $384,000 and $352,400, respectively. Of the $31,600 of issuance costs, $25,000 were cash costs and $6,600
were non-cash costs.
Stock-Based Compensation
During the three and nine months ended
September 30, 2018, the Company recognized stock-based compensation expense of $94,864 and $402,656, respectively, and during the
three and nine months ended September 30, 2017, the Company recognized stock-based compensation expense of $187,023 and $411,181,
respectively, related to restricted common stock awards which is included within general and administrative expenses on the condensed
consolidated statements of operations. As of September 30, 2018, there was no unrecognized stock-based compensation expense.
Equity Incentive Plan
On August 15 and November 5, 2018, the
Board of Directors and a majority of the Company’s shareholders, respectively, approved the 2018 KULR Technology Group
Equity Incentive Plan (the “2018 Plan”). Under the 2018 Plan, 15,000,000 shares of common stock of the Company are
authorized for issuance. The 2018 Plan provides for the issuance of incentive stock options, non-statutory stock options, rights
to purchase common stock, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants
of the Company and its affiliates. The 2018 Plan requires the exercise price of stock options to be not less than the fair value
of the Company’s common stock on the date of grant.
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, and (ii) royalties ranging from 1.5% to 3.75% on the net sales price of the licensed products, as defined in the
agreement, with minimum annual royalty payments ranging from $0 to $7,500. In addition, the Company shall use commercially reasonable
efforts to bring the licensed products to market through a commercialization program that requires that certain milestones be met,
as specified in the agreement. As of the date of filing, there had been no sales of the licensed products, such that no royalties
had been earned.
Note 9 Subsequent Events
Shareholder Consent
On November 5, 2018, the Company received
a written consent of the stockholders representing 78.4% of the issued and outstanding securities of the Company entitled to vote
on matters of the stockholders to take the following actions: (i) to amend the Company’s certificate of incorporation with
the Delaware Secretary of State increasing the number of authorized shares of the Company’s common stock from 100,000,000
shares to 500,000,000 shares; (ii) to approve, ratify and adopt the Company’s 2018 Equity Incentive Plan, pursuant to which
the Company may award up to 15,000,000 shares of the Company’s common stock to employees, nonemployee officers and directors
and consultants for the purpose of, among other things, motivating such persons to put forth their maximum efforts for the Company’s
growth, profitability and success; and (iii) to approve and authorize, as a measure to protect the progress of the Company by vesting
voting control of the Company in its Chief Executive Officer, Michael Mo, the issuance of 1,000,000 shares of the Company’s
Series A Voting Preferred Stock to Mr. Mo.
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. ("KUTG") and its wholly-owned
subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”)
as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 should be read in conjunction with
our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form
10-Q. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related
disclosures as of December 31, 2017 and for the year then ended, which are included in the Form 10-K filed with the Securities
and Exchange Commission (“SEC”) on April 17, 2018. References in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer
to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements
that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties
and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,”
and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors”
elsewhere in this Report, in our other reports filed with the SEC, and other factors that we may not know.
Overview
The Company owns proprietary
carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutions that it believes are more effective
at conducting, dissipating and storing heat generated by an electronic system’s internal components (i.e. semiconductor,
integrated circuits “chips”) than traditional materials, such as copper and aluminum. KULR’s technologies can
be applied inside a wide array of electronic applications where heat is often a problem, such as mobile devices, cloud computing,
virtual reality platforms, satellites, internet of things, drones, and connected cars.
Three key vectors have
driven advancements in semiconductors and electronics systems – performance, power, and size. These vectors, however, often
counteract one another. As chip performance increases, power consumption increases, and more heat is generated as a byproduct.
When chip size reduces, there is an increased potential for a hot spot on the chip, which can degrade system performance. Electronic
system components must operate within a specific temperature range on both the high and low end to operate properly. KULR resolves
many of the tradeoffs associated with other thermal management materials. KULR’s products improve heat storage and dissipation,
rigidity problems and durability. Its products are lightweight and reduce manufacturing complexity associated with traditional
thermal management materials.
In addition to thermal
management of electronic systems, KULR has developed, in partnership with National Aeronautics and Space Administration (“NASA”)
Johnson Space Center (“NASA JSC”), a highly effective, lightweight and passive thermal protection technology, Thermal
Runaway Shield (“TRS”) for lithium-ion batteries. KULR’s lithium-ion battery (“Li-B”) TRS product
prevents a potentially dangerous combustible condition known as thermal runaway propagation from occurring in neighboring Li-B
cells by acting as a shield or barrier in between individual Li-B cells in a battery pack. Although rare, incidents of thermal
runaway propagation occurring spontaneously in Li-B cargo shipments and inside electronics, including hoverboards, smartphones,
and electric vehicles, are a cause of public concern.
We have not yet achieved
profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and
general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant
product revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue
as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds
to support our business operations, although there can be no assurance we will be successful in raising additional funds in the
future.
Recent Developments
In May 2018, we were
assigned a trading symbol, “KUTG”, for quotation on the OTC Markets. In August 2018, we were up-listed to the OTCQB.
During the three months
ended September 30, 2018, we sold an aggregate of 581,819 shares of common stock at $0.66 per share to accredited investors for
aggregate gross and net proceeds of $384,000 and $352,400, respectively.
On August 15, 2018,
the Board of Directors approved the 2018 KULR Technology Group Equity Incentive Plan (the “2018 Plan”), subject to
approval from a majority of our shareholders. Under the 2018 Plan, 15,000,000 shares of common stock are authorized for issuance.
The 2018 Plan provides for the issuance of incentive stock options, non-statutory stock options, rights to purchase common stock,
stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants of the Company and
its affiliates. The 2018 Plan requires the exercise price of stock options to be not less than the fair value of our common stock
on the date of grant.
Results of Operations
Three and Nine Months Ended September
30, 2018 Compared With Three and Nine Months Ended September 30, 2017
The closing of the
share exchange agreement with KTC on June 19, 2017 was accounted for as a reverse recapitalization under the provisions of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805-40. The
condensed consolidated statements of operations herein reflect the historical results of KTC prior to the completion of the reverse
recapitalization since it was determined to be the accounting acquirer, and do not include the historical results of operations
for KUTG prior to the completion of the reverse recapitalization.
Revenues
Our revenues consisted
of the following types:
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For the Three Months Ended
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For the Nine Months Ended
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|
|
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September 30,
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|
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September 30,
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|
|
|
2018
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|
|
2017
|
|
|
2018
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|
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2017
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Product sales
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$
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482,798
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|
|
$
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15,106
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|
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$
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735,941
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|
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$
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26,006
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Contract services
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|
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-
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|
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-
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145,988
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-
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Total revenue
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$
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482,798
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|
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$
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15,106
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|
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$
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881,929
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|
|
$
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26,006
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For the three months
ended September 30, 2018 and 2017, we generated $482,798 and $15,106 of revenues, an increase of $467,692. Our revenues during
the three months ended September 30, 2018 consisted of sales of our component product, CFV thermal management solution. Our revenues
during the three months ended September 30, 2017 consisted of sales of our Phase Change Material (“PCM”) heat sink.
The increase was primarily due to an increase in the volume of product sales to one existing customer.
For the nine months
ended September 30, 2018 and 2017, we generated $881,929 and $26,006 of revenues, an increase of $855,923. 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
revenues during the nine months ended September 30, 2017 consisted of sales of our PCM heat sink. The increase in revenue was due
to new contracts entered into during 2018.
Cost of Revenues and Gross Margins
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 at an early stage in our development cycle and the margins
earned can vary significantly between period, customers and products due to the learning process, customer negotiating strengths,
and product mix.
Our customers and prospective
customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization.
Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the
business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable
and lumpy, which can influence the timing, consistency and reporting of sales growth.
Cost of revenue increased
by $23,000, or 44%, from $52,384 for the three months ended September 30, 2017 to $75,384 for the three months ended September
30, 2018. The increase was primarily due to increased volume of contracts in the 2018 period, which required additional labor and
materials. We generated a gross profit of $407,414 for the three months ended September 30 ,2018 as compared to a gross loss of
$32,278 for the three months ended September 30, 2017, representing an improvement in gross profit of $444,692, primarily resulting
from the increase in product revenue due to new contracts entered into during 2018.
Cost of revenue increased
by $150,222, or 138%, from $108,579 for the nine months ended September 30, 2017 to $258,801 for the nine months ended September
30, 2018. The increase was primarily due to increased volume of contracts in the 2018 period, which required additional labor and
materials. We generated a gross profit of $623,128 for the nine months ended September 30 ,2018 as compared to a gross loss of
$82,573 for the nine months ended September 30, 2017, representing an improvement in gross profit of $705,701, primarily resulting
from the increase in product revenue due to new contracts entered into during 2018.
Research and Development
Research and development
(“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution. R&D
expenses are expensed as they are incurred.
For the three months
ended September 30, 2018, R&D expenses increased by $3,318, or 2%, to $161,194 from $157,876 for the three months ended September
30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to an increase in headcount.
For the nine months
ended September 30, 2018, R&D expenses increased by $192,380, or 93%, to $399,884 from $207,504 for the nine months ended September
30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to an increase in headcount.
We expect that our
R&D expenses will continue to increase as we expand our operations.
Research and Development – Related
Parties
R&D – related
parties include expenses associated with the development of our CFV thermal management solutions provided by Energy Science Laboratories,
Inc. (“ESLI”), a R&D company owned by our Chief Technology Officer (“CTO”), as well as services provided
by our CTO. R&D – related parties’ expenses are expensed as they are incurred.
For the three months
ended September 30, 2018, R&D – related parties decreased by $38,767, or 100%, to $0 from $38,767 for the three months
ended September 30, 2017. The decrease is due to a reduction in R&D services provided by ESLI during the current period, which
resulted from the Company hiring its own research and development staff in 2017.
For the nine months
ended September 30, 2018, R&D – related parties decreased by $439,824, or 100%, to $0 from $439,824 for the nine months
ended September 30, 2017. The decrease is due to a reduction in R&D services provided by ESLI during the current period, which
resulted from the Company hiring its own research and development staff in 2017.
Selling, General and Administrative
Selling, general and
administrative expenses consist primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based
compensation, marketing, travel, rent and office expenses.
For the three months
ended September 30, 2018, selling, general and administrative expenses decreased by $144,096, or 24%, to $461,377 from $605,473 for
the three months ended September 30, 2017. The decrease is primarily due to decreased non-cash stock-based compensation expense
of $186,771 due to awards becoming fully vested in the second quarter of 2018, partially offset by increased salaries and other
benefits of approximately $74,000 and professional fees of approximately $55,000 resulting from entering into new consulting agreements.
For the nine months
ended September 30, 2018, selling, general and administrative expenses increased by $888,800, or 87%, to $1,908,635 from $1,019,835 for
the nine months ended September 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately
$233,000 from the hiring of new employees in the third quarter of 2017, increased professional fees of approximately $501,000 resulting
from entering into new consulting agreements, increased travel expenses of approximately $78,000 and increased rent expense of
approximately $72,000 due to entering into a new lease agreement, partially offset by decreased non-cash stock-based compensation
expense of approximately $103,000 due to awards becoming fully vested in the second quarter of 2018.
Other Income (Expense)
For the three months
ended September 30, 2018, other income increased by $23,764 to $23,906 from $142 for the three months ended September 30, 2017.
The increase is primarily due to a gain in the change in fair value of accrued issuable equity of $24,175, which is related to
a decrease in the fair value of our common stock.
For the nine months
ended September 30, 2018, other income (expense) increased by $31,787 to $23,673 from $(8,114) for the nine months ended September
30, 2017. The increase is primarily due to a gain in the change in fair value of accrued issuable equity of $24,175, which is related
to a decrease in the fair value of our common stock.
Liquidity and Capital Resources
For the nine months
ended September 30, 2018 and 2017, cash used in operating activities was $1,064,935 and $263,585, respectively. 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. Our cash provided by operations for the nine months ended September 30, 2017 was primarily
attributable to our net loss of $1,757,850, adjusted for net non-cash expense in the aggregate amount of $414,555, partially offset
by $1,079,710 of net cash provided by changes in the levels of operating assets and liabilities.
For the nine months
ended September 30, 2018 and 2017, cash (used in) provided by investing activities was $(15,476) and $1,907,990, respectively.
Cash used in investing activities during the nine months ended September 30, 2018 was due to purchases of equipment. Cash provided
by investing activities during the nine months ended September 30, 2017 resulted from $1,859,261 of cash acquired in connection
with the share exchange as well as $85,000 of proceeds received from the collection of our note receivable from our CEO, partially
offset by $36,271 of purchases of property and equipment.
For the nine months
ended September 30, 2018 and 2017, cash provided by financing activities was $359,000 and $0, respectively. 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 condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as
a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts
of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result
from the outcome of this uncertainty.
Off Balance Sheet Arrangements
There are no off-balance
sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial
conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
Critical Accounting Policies
For a description of
our critical accounting policies, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly
Report on Form 10-Q.
Recently Adopted Accounting Pronouncements
For a description of
recently adopted accounting pronouncements, including adoption dates and estimated effects, if any, on our condensed consolidated
financial statements, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report
on Form 10-Q.