KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for interest | $ | 2,824 | $ | 446 | ||||
| Non-cash investing and financing activities: | ||||||||
| Value of common stock issued as a commitment fee for the SEDA agreement | $ | 63,259 | $ | - | ||||
| Deferred offering costs charged to equity | $ | 13,042 | ||||||
| Original issuance discount on note payable | $ | 90,000 | $ | - | ||||
| Common stock issued for repayment of note payable | $ | 141,000 | $ | - | ||||
Subscriptions receivable for accrued issuable equity | $ | 220,000 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
KT HIGH-TECH MARKETING, INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(UNAUDITED)NOTE 1 BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
Organization and Operations
KT High-Tech Marketing,KULR Technology Group, Inc. ("KT High-Tech") was incorporated on December 11, 2015. Prior to the reverse recapitalization discussed below, KT High-Tech was an early-stage company planning to market and distribute technology products and components targeting the energy and consumer electronics industries. KT High-Tech intended to market and sell the products to both the end user and supply chain markets and to seek partnerships in developing and distributing such products. After the reverse recapitalization discussed below, KTHT integrated, through its existing business operations with those of itswholly-owned subsidiary, KULR Technology Corporation.
KULR, a wholly-owned subsidiary of KT High-TechCorporation (collectively referred to as “KULR” or the “Company”), was formed in 2013develops and is based in Santa Clara, California. KULR is primarily focused on commercializing itscommercializes high-performance thermal management technologies infor electronics, batteries, and other components across a range of applications. Currently, the high value, high-performance consumer electronicCompany is 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 applications.storage; and 5G communication technologies. KULR owns proprietary carbon fiber based (Carbon Fiber Velvet or “CFV”) thermalprovides heat management solutions that it believes are more effective at storing, conducting,to enhance the performance and dissipating waste heat generated by an electronic system’s internal components (i.e. semiconductor, integrated circuits “chips”)safety of battery packs used in comparison to traditional materials, such as copperelectric vehicles, communication devices, and aluminum. KULR’s technologies can be applied inside a wide array of electronic applications, such as mobile devices, cloud computing, virtual reality platforms, satellites, internet of things, drones,aerospace and connected cars. In addition to thermal management of electronic systems, KULR has developed a highly effective, passive energy storage solution for lithium ion batteries that has been tested and endorsed by the National Aeronautics and Space Administration (“NASA”).
Reverse Recapitalization
On June 8, 2017, KT High-Tech entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with KULR and 100% of the shareholders of KULR (the “KULR Shareholders”). On June 19, 2017 (the “Closing Date”), the Company closed the transaction contemplated by the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, the KULR Stockholders agreed to transfer an aggregate of 25,000,000 shares of KULR’s common stock to the Company in exchange for the Company’s issuance of an aggregate of 50,000,000 shares of the Company’s common stock to the KULR Stockholders (the “Share Exchange”). KULR became a wholly-owned subsidiary of KT High-Tech and the KULR Stockholders now beneficially own approximately 64.57% of KT High-Tech’s common stock on a fully-diluted basis. Upon the closing of the Share Exchange Agreement, a representative of the KULR Stockholders was appointed to be the Company’s second Board Director.defense applications.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of SeptemberJune 30, 20172020 and for the three and ninesix months then ended.ended June 30, 2020 and 2019. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the operating results for the full year ending December 31, 20172020 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with KULR’s and KT High-Tech’sthe Company’s audited financial statements and related disclosures as of December 31, 20162019 and for the year then ended, which are included in the Form 8-K/A and Form 10-Kwere filed with the Securities and Exchange Commission (“SEC”) on June 19, 2017 and March 30, 2017, respectively.Form 10-K on May 14, 2020.
NOTE 2 GOING CONCERN AND MANAGEMENT’S PLANS
The closingCompany has not yet achieved profitability and expects to continue to incur cash outflows from operations. As of June 30, 2020, the Company had cash of $767,906 and a working capital deficit of $931,889. For the six months ended June 30, 2020 and 2019, the Company incurred net losses of $979,238 and $1,187,109, respectively, and used cash in operations of $1,267,427 and $968,882, respectively. 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 revenues to achieve profitability. Further, as of June 30, 2020, the Company has debt principal (excluding Paycheck Protection Program loans) in the amount of $1,275,000 which matures on May 31, 2021.
In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the Share Exchangepotential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 GOING CONCERN AND MANAGEMENT’S PLANS – CONTINUED
Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement was accounted(“SEDA”) with an Investor, pursuant to which the Company may, at its discretion, sell up to an aggregate of $8,000,000 (subject to the Investor’s approval for amounts over $100,000) of shares of the Company’s common stock at a price equal to 80% of the lowest daily volume weighted average price for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by the Investor, at least 5 trading days shall have elapsed from the immediately preceding advance date. See Note 11 – Stockholders’ Deficiency for additional details. Additionally, the Company applied for, and in April 2020, received, a loan of approximately $155,000 under the government Small Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic.
As of June 30, 2020, the Company had approximately $7,242,300 available in connection with the SEDA, subject to certain conditions, in order to fund its ongoing operations; however, there can be no assurance that the Company will be able to continue to sell common shares pursuant to the SEDA at an acceptable price, or without causing undue dilution to existing investors. Further, there is also no assurance that the Company will be able to continue to obtain additional funds on commercially acceptable terms, if at all. If the Company is unable to obtain adequate funds on reasonable terms, it may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures.
The aforementioned conditions indicate that there is substantial doubt about the Company’s ability to continue as a reverse recapitalization undergoing concern within one year after the provisionsfinancial statement issuance date. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 805-40.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 of operations herein reflect the historical results of KULR prior to the completion of the reverse recapitalization since it was determined to be the accounting acquirer, and do not include any adjustment that might become necessary should the historical results of operations for KT High-Tech priorCompany be unable to the completion of the reverse recapitalization. The balance sheetcontinue as of December 31, 2016 presented herein reflects the assets and liabilities of KULR. KT High-Tech’s assets and liabilities are consolidated with the assets and liabilities of KULR as of the Closing Date. The number of shares issued and outstanding and additional paid-in capital of KT High-Tech have been retroactively adjusted to reflect the equivalent number of shares issued by KT High-Tech in the Share Exchange, while KULR’s accumulated deficit is being carried forward as the Company’s accumulated deficit. All costs attributable to the reverse recapitalization were expensed.a going concern.
Use of EstimatesNOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PreparationSince the date of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed inAnnual Report on Form 10-K for the related notes to the financial statements. The Company’s significant estimates used in these financial statements include, but are not limited to, stock-based compensation, the collectability of receivables, inventory valuations, the recoverability and useful lives of long-lived assets and the valuation allowance relatedyear ended December 31, 2019, there have been no material changes to the Company’s deferred tax assets. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates.significant accounting policies, except as disclosed in this note.
Concentrations of Credit Risk
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 maintains cash with major financial institutions.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 aggregatewas an uninsured balance of $517,906 as of June 30, 2020 and no uninsured cash balances as of $1,225,642 and $0 at September 30, 2017 and December 31, 2016, respectively.2019.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the nine months ended September 30, 2016, 100%NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Concentrations of Credit Risk – Continued
The Company had certain customers whose revenue individually represented 10% or more of the Company’s revenues were generated from Customer A. During the three months ended September 30, 2017, 76% and 24% of the Company’s revenues were generated from Customer C and Customer A, respectively. During the nine months ended September 30, 2017, 44%, 42% and 14% of the Company’s revenues were generated from Customer C, Customer B and Customer A, respectively. As of September 30, 2017, receivables from Customer C, Customer B and Customer A comprised 44%, 42%, and 14%, respectively,total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the three months ended June 30, 2020 two customers accounted for 44% and 25% of revenues. For the six months ended June 30, 2020, the same two customers accounted for 48% and 18% of revenues. For the three months ended June 30, 2019, three customers accounted for 17%, 18%, and 64% of revenues. For the six months ended June 30, 2019 one of the same customers accounted for 14% and another customer accounted for 47% of revenues.
As of June 30, 2020 three customers accounted for 58%, 14%, and 27% of accounts receivable. The customer which accounted for 58% of account receivable as of June 30, 2020 accounted for 25% and 18% of revenues during the three and six months ended June 30, 2020. As of December 31, 2016, a receivable2019, four customers accounted for 33%, 17%, 20%, and 19% of accounts receivable.
There is no assurance the Company will continue to receive significant revenues from Customer A comprised 100%any of these customers. Any reduction or delay in operating activity from any of the Company’s total account receivable.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.
InventoryVendor Concentrations
Inventory is comprised of CFV thermal management solutions and heatsinks, whichVendor concentrations are available for sale. Inventories are stated at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. Inventory that is sold to third parties is included within cost of sales and inventory that is given as samples is included within operating expenses. The Company periodically reviews for slow-moving, excess or obsolete inventories. Products that are determined to be obsolete, if any, are written down to net realizable value. As of September 30, 2017 and December 31, 2016, the Company’s inventory was comprised solely of finished goods.follows:
| Accounts Payable | ||||||||
| As of | As of | |||||||
| June 30, 2020 | December 31, 2019 | |||||||
| Vendor A | 18 | % | 15 | % | ||||
| Vendor B | * | 16 | % | |||||
| Vendor C | * | 17 | % | |||||
| Vendor D | 22 | % | 12 | % | ||||
| Vendor E | 24 | % | * | |||||
| 64 | % | 60 | % | |||||
| * Less than 10% | ||||||||
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Convertible Instruments
The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with ASC Topic 815. The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
LevelNOTE 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The carrying amounts of the Company’s financial instruments, such as cash, accounts receivable and accrued expenses and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amounts of the Company’s short–term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates, are comparable to rates of returns for instruments of similar credit risk.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Revenue Recognition
The Company recognizes revenue whenin 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 realized or realizablepossible more judgment and earned. The Company considersestimates may be required within the revenue realized or realizablerecognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and earned when all ofallocating the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been renderedtransaction price to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Sales are recognized upon shipment to the customer, free on board shipping point, or the point of customer acceptance.each separate performance obligation.
During the three months ended September 30, 2017 and 2016, the Company recognized $15,106 and $0 of revenue relatedThe following five steps are applied to the sale of PCM heat sinks and CFV thermal interfaces, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized $26,006 and $6,900 of revenue related to the sale of PCM heat sinks and CFV thermal interfaces, respectively.achieve that core principle:
Research and Development
Research and development expenses are charged to operations as incurred. During the three months ended September 30, 2017 and 2016, the Company incurred $196,643 and $105,733, respectively, of research and development expenses. During the nine months ended September 30, 2017 and 2016, the Company incurred $647,328 and $301,874, respectively, of research and development expenses.
Stock-Based Compensation
| · | 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 measuresrecognizes revenue primarily from the costfollowing different types of contracts:
| · | Product sales – Revenue is recognized at the point in time the customer obtains control of the goods and the Company satisfies its performance obligation, which is generally at the time it ships the product to the customer. |
| · | Contract services – Revenue is recognized at the point in time that the Company satisfies its performance obligation under the contract, which is generally at the time it delivers a report to the customer. |
The following table summarizes the revenue recognized in the unaudited condensed consolidated statements of operations:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Product sales | $ | 67,130 | $ | 52,310 | $ | 99,130 | $ | 221,750 | ||||||||
| Contract services | 133,998 | 4,000 | 179,498 | 29,512 | ||||||||||||
| Total revenue | $ | 201,128 | $ | 56,310 | $ | 278,628 | $ | 251,262 | ||||||||
As of June 30, 2020 and December 31, 2019, the Company had $0 and $15,000, respectively, of deferred revenue, from contracts with customers. The contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance obligation under the contract. During the three and six months ended June 30, 2020, there was $15,000 of revenue recognized from performance obligations satisfied (or partially satisfied) in exchange for an awardprevious periods.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Sequencing Policy
Under ASC 815-40-35 (“ASC 815”), the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity instruments basedto assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the fair valuebasis of the award. For employees,earliest issuance date of potentially dilutive instruments, with the fair valueearliest grants receiving the first allocation of the award is measured on the grant date and for non-employees, the fair valueshares. Pursuant to ASC 815, issuances of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are requiredsecurities to be provided in exchange for the award, usually the vesting period. The fair value of the Company’s restricted equity instruments was estimated by management based on observations ofemployees and directors, or to compensate grantees in a share-based payment arrangement, are not subject to the cash sales prices of both restricted shares and freely tradable shares. Awards granted to directors are treated on the same basis as awards granted to employees. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.sequencing policy.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. During the three months ended September 30, 2017 and 2016, 596,241 and 1,720,637 weighted average shares of unvested common stock, respectively, were excluded from weighted average common stock outstanding. During the nine months ended September 30, 2017 and 2016, 782,051 and 4,975,441 weighted average shares of unvested common stock, respectively, were excluded from weighted average common stock outstanding. Diluted net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding, plus the net impact of common shares (computed using the treasury stock method),share, if dilutive, resulting from the exercise of outstanding stock options and warrants and the conversion of preferred stock.
Income Taxesconvertible instruments.
The Company recognizes deferred tax assets and liabilities forfollowing shares were excluded from the expected future tax consequencescalculation of items thatweighted average dilutive common shares because their inclusion would have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.anti-dilutive:
The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of September 30, 2017 and December 31, 2016. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the condensed statements of operations.
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Series B Convertible Preferred Stock | 724,350 | 1,542,900 | 724,350 | 1,542,900 | ||||||||||||
| Series C Convertible Preferred Stock | 240,100 | - | 240,100 | - | ||||||||||||
| Options | 395,000 | 300,000 | 395,000 | 300,000 | ||||||||||||
| Warrants | 210,025 | - | 210,025 | - | ||||||||||||
| Total | 1,569,475 | 1,842,900 | 1,569,475 | 1,842,900 | ||||||||||||
Liquidity and Management’s PlansReclassifications
AsCertain prior period balances have been reclassified in order to conform to the current period presentation. These reclassifications have no effect on previously reported results of September 30, 2017, the Company had a cash balance, working capital and an accumulated deficit of $1,653,492, $1,050,984 and $3,691,660, respectively. During the three and nine months ended September 30, 2017, the Company incurred a netoperations or loss of $839,252 and $1,757,850 respectively.per share.
As a result of the closing of the Share Exchange, the Company believes it has sufficient cash to sustain its operations for at least a year from the date of this filing.
On June 13, 2017, the Company collected the $85,000 note receivable from KULR’s Chief Executive Officer (“CEO”) in full as well as outstanding accrued interest in the amount of $3,488.
NOTE 4 PREPAID EXPENSES
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, prepaid expenses consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Business development services | $ | 70,000 | $ | - | ||||
| Research and development services | 60,000 | - | ||||||
| Professional fees | 10,000 | - | ||||||
| Salary | - | 7,500 | ||||||
| Conference fees | 1,286 | 4,844 | ||||||
| Other | 157 | - | ||||||
| Total prepaid expenses | $ | 141,443 | $ | 12,344 | ||||
| June 30, 2020 | December 31, 2019 | |||||||
| Filing fees | $ | 15,873 | $ | 13,358 | ||||
| Professional fees | 9,750 | - | ||||||
| Security deposit | 8,728 | 16,977 | ||||||
| Other | 6,321 | 4,840 | ||||||
| Insurance | 3,648 | 8,026 | ||||||
| Total prepaid expenses | $ | 44,320 | $ | 43,201 | ||||
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, accrued expenses and other current liabilities consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Accrued legal and professional fees | $ | 116,667 | $ | 18,000 | ||||
| Accrued payroll and vacation | 88,615 | - | ||||||
| Payroll and income tax payable | 12,742 | 36,422 | ||||||
| Accrued research and development expenses | 32,717 | 6,250 | ||||||
| Credit card payable | 25,101 | 9,521 | ||||||
| Other | 23,884 | 2,252 | ||||||
| Total accrued expenses and other current liabilities | $ | 299,726 | $ | 72,445 | ||||
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Payroll and vacation | $ | 409,395 | $ | 525,917 | ||||
| Legal and professional fees | 41,625 | 60,000 | ||||||
| Other | 15,586 | 73,482 | ||||||
| Total accrued expenses and other current liabilities | $ | 466,606 | $ | 659,399 | ||||
See Note 10 – Related Party Transactions for more information on accrued expenses – related party.
NOTE 6 ACCRUED ISSUABLE EQUITY
As of SeptemberJune 30, 2017 and December 31, 2016,2020, accrued expenses and other current liabilities – related parties consistedissuable equity consists of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Accrued research and development expenses - related parties | $ | 507,041 | $ | 351,540 | ||||
| Due to related party | - | 7,701 | ||||||
| Total accrued expenses and other current liabilities - related parties | $ | 507,041 | $ | 359,241 | ||||
| June 30, | ||||
| 2020 | ||||
| Accrued issuable equity for services | $ | 70,500 | ||
| Accrued issuable equity for subscriptions receivable | 220,000 | |||
| $ | 290,500 | |||
Accrued researchIssuable Equity for Services
During the three and development expensessix months ended June 30, 2020, the Company agreed to issue 55,000 and 58,333 shares of common stock to vendors in exchange for services valued at $42,500 and $44,700, respectively (see Note 11 – Stockholders’ Deficiency, Stock-Based Compensation). The shares have not been issued as of June 30, 2020. The fair value of the unissued shares as of June 30, 2020 was $70,500; accordingly, the Company recorded a change in the fair value of accrued issuable equity related to these shares of $25,800 for the six months ended June 30, 2020.
Accrued Issuable Equity for Subscriptions Receivable
Between June 29, 2020 and June 30, 2020, the Company delivered notices requiring the Investor to purchase $220,000 of shares under the SEDA, at a price per share equal to 80% of the lowest daily volume weighted average price at which the shares are traded for the five days immediately following the date the Company delivered such notice.
NOTE 7 LINE OF CREDIT
On February 18, 2020, the Company entered into a financing agreement (the “Line of Credit”) wherein it may borrow up to $10,000. The repayment terms (interest rate, repayment amount and number of consecutive weekly periodic installments) are determined at the time the Company borrows proceeds under the Line of Credit.
On February 19, 2020, the Company borrowed and received gross proceeds of $10,000 under the Line of Credit for its working capital needs, which is being repaid weekly for the next 26 weeks at a weekly interest rate of 1.7%. As of June 30, 2020, the outstanding aggregate principal amount on the Line of Credit was $3,555. During the three and six months ended June 30, 2020, the Company recorded interest expense of $1,382 and $2,178, respectively, related to the Line of Credit. There was no accrued interest related to the Line of Credit as of June 30, 2020. The outstanding balance of the line of credit was paid off in July 2020.
NOTE 8 NOTE PAYABLE
On February 27, 2020, the Company entered into a note purchase agreement with the YAII PN, Ltd., a Cayman Island exempt limited partnership (the “Investor”), pursuant to which the Investor purchased a full recourse promissory note (the “Note”) in the original principal amount of $1,500,000 (“Principal Amount”) for cash proceeds of $1,410,000. The Note included an original issue discount of $90,000, which represents the difference between the principal and proceeds received. The original issue discount, along with the $130,000 advisory fee were recorded as a debt discount which is being amortized over the term of the Note using the effective interest rate method.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8 NOTE PAYABLE – CONTINUED
The Note bears no coupon interest (original issue discount only) and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the Note and which includes the early termination of a standby equity distribution agreement with the Investor (see Note 11 – Stockholders’ Deficiency – Standby Equity Distribution Agreement for additional information). The Company is required to repay the Principal Amount in monthly installments as set forth in the agreement. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid.
During the six months ended June 30, 2020, the Company repaid principal on the Note of $225,000. As of June 30, 2020, the outstanding aggregate principal balance of the Note was $1,275,000. During the three and six months ended June 30, 2020, the Company recognized amortization of debt discount of $77,691 and $96,911, respectively, related to the Note. Please see Note 13 – Subsequent Events for additional information regarding further repayments of the Note.
NOTE 9 LOAN PAYABLE
On April 27, 2020, the Company received approximately $155,000 of cash proceeds pursuant to an unsecured loan provided in connection with the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES Act”).
Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to apply for and receive forgiveness for all or a portion of their respective PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee and compensation levels, as defined, following the funding of the PPP Loan. The Company intends to use the proceeds of their PPP Loans for Qualifying Expenses. However, no assurance is provided that KULR will be able to obtain forgiveness of the PPP Loans in whole or in part. Any amounts not forgiven incur interest at 1.0% per annum and monthly repayments of principal and interest are deferred until the Small Business Administration decides on forgiveness. While the Company’s PPP loans currently have a two-year maturity, the amended law will permit the Company to request a five-year maturity, subject to the approval of the counterparty. During the three and six months ended June 30, 2020, the Company recognized interest expense of $272. As of June 30, 2020 and December 31, 2019, the Company’s accrued interest related to the loan was $272 and $0, respectively.
NOTE 10 RELATED PARTY TRANSACTIONS
Accounts Payable – Related Party
Accounts payable – related partiesparty consists of (a) a liability of $110,000$3,622 and $77,500$4,253 as of SeptemberJune 30, 20172020 and December 31, 2016, respectively, to the Company’s Chief Technology Officer (“CTO”) in connection with consulting services provided to the Company; and (b) a liability of $397,041 and $274,040 as of September 30, 2017 and December 31, 2016,2019, respectively, to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s CTO,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.solutions in prior periods.
Due to related party consisted of certain amounts owed by KULR to KT High-Tech, which were eliminated in consolidation as a result of the reverse recapitalization.
Reverse RecapitalizationAccrued Expenses and Other Current Liabilities – Related Party
See Note 1 - Business Organization, NatureAccrued expenses and other current liabilities – related party consist of Operationsa liability of $0 and Basis$10,419 as of Presentation - Reverse Recapitalization for detailsJune 30, 2020 and December 31, 2019, respectively, to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”), in connection with consulting services provided by ESLI to the Company associated with the development of the Share Exchange.Company’s CFV thermal management solutions.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 11 STOCKHOLDERS’ DEFICIENCY
Common StockStandby Equity Distribution Agreement
DuringOn February 27, 2020, KULR Technology Group, Inc. entered into a SEDA with the nine months ended September 30, 2017,Investor, pursuant to which the Company receivedmay, at its discretion, sell to the Investor up to $8,000,000 of shares of the Company’s common stock (the “Offering”), par value $0.0001 per share (the “Common Stock”). For each share of Common Stock purchased under the SEDA (the “Shares”), the Investor will pay the Company 80% of the lowest daily volume weighted average price of the Common Stock on the OTC Markets OTCQB or other principal market on which the Common Stock is traded for the five days immediately following the date the Company delivers notice requiring the Investor to purchase the Shares under the SEDA.
The Investor’s obligation to purchase the Shares under the SEDA is subject to certain conditions, including the Company maintaining the effectiveness of a registration statement for the securities sold under the SEDA, and subject to the Investor’s approval for amounts over $100,000. In addition, the Company may not request advances if the Shares to be issued would result in the Investor owning more than 4.99% of the Company’s outstanding Common Stock, with any such request being automatically modified to reduce the advance amount. The Company shall not be able to request advances under the SEDA if the Registration Statement is not effective or if any issuances of Common Stock pursuant to any Advances would violate any rules.
The commitment period under the SEDA commenced on February 27, 2020 (the “Effective Date”) and expires on the earliest to occur of (i) first day of the month following the twenty-four months after the Effective Date, (ii) the date on which the Investor has purchased an aggregate amount of $8,000,000 of Shares under the SEDA, or (iii) the date the SEDA is earlier terminated.
The SEDA contains customary representations, warranties and agreements of the Company and the Investor, indemnification rights and other obligations of the parties. The Company has the right to terminate the SEDA at any time upon prior written notice, at no cost to the Company, provided that (i) there are no outstanding advances which have yet to be issued and (ii) the Company has paid all amounts owed to the Investor, including amounts borrowed under the Note (see Note 8 – Note Payable for additional information). The Investor has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of Common Stock.
The Company paid cash of $15,000 and issued to the Investor 95,847 shares of Common Stock to the Investor and as consideration for entering into the SEDA. The shares of common stock issued to the Investor had an issuance date fair value of $63,259. The aggregate consideration of $32,000$78,259 was recorded as deferred offering costs and additional paid in capital on the condensed consolidated balance sheet. During the three and six months ended June 30, 2020, the Company recorded $78,259 of amortization expense related to certain restricted common stock awards that were issued in 2013 and 2014.deferred offering costs.
During the three and six months ended SeptemberJune 30, 20172020 the Company issued an aggregate of 561,564 shares of common stock at prices between $0.72 - $1.62 per share for aggregate proceeds of $757,695 received against advance notices submitted to the Investor under the SEDA, of which $141,000 of the proceeds were applied directly against the note payable. Please see Note 8 – Note Payable for more information.
Between June 29, 2020 and 2016,June 30, 2020, the Company delivered notices requiring the Investor to purchase under the SEDA $220,000. The shares had not been issued as of June 30, 2020. The value of the shares to be delivered pursuant to these notices is recorded as subscriptions receivable and accrued issuable equity on the accompanying condensed consolidated balance sheet. See Note 6 – Accrued Issuable Equity.
Please see Note 13 – Subsequent Events for additional information regarding the sale of Shares subsequent to June 30, 2020.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 11 STOCKHOLDERS’ DEFICIENCY - CONTINUED
Stock-Based Compensation
Common Stock
During the six months ended June 30, 2020, the Company issued 30,000 shares of common stock that vested immediately with a grant date value of approximately $30,000 related to consulting services provided. During the six months ended June 30, 2019, the Company issued 25,000 shares with a grant date value of $36,060 for legal fees.
Stock Options
On January 1, 2020, the Company granted five-year options to purchase a total of 10,000 shares of common stock at an exercise price of $0.66 per share to an employee pursuant to the 2018 Plan. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options vest monthly over three years. The options had an aggregate grant date value of $3,609 which is recognized over the vesting period. The Company estimated the fair value of the options using the Black-Scholes Option Pricing Model with the following assumptions: (a) stock price of $0.66 per share; (b) volatility of 93%; (c) expected term of 2.5 years; (d) risk-free interest rate of 1.58%; and (e) a dividend rate of 0.0%.
Stock-Based Compensation Expense
During the three and six months ended June 30, 2020, the Company recognized stock-based compensation expense of $187,023$82,088 and $8,688, respectively, and during the nine months ended September 30, 2017 and 2016, the Company recognized stock-based compensation expense of $411,181 and $23,636$94,816, respectively, related to restricted common stock awardsand stock options, of which is included within$2,163 and $10,275, respectively was charged to research and development expense and $79,925 and $84,541, respectively was charged to general and administrative expenses on the condensed statements of operations.expense. As of SeptemberJune 30, 2017,2020, there was $464,846$76,329 of unrecognized stock-based compensation expense of which, $341,520 was subject to re-measurement, that will be recognized over the weighted average remaining vesting period of 0.62.0 years.
During the three and six months ended June 30, 2019, the Company recognized stock-based compensation expense of $45,171 and $93,111, 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.
The following table presents information related to stock-based compensation for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Common stock (issued) | $ | 30,000 | $ | - | $ | 30,000 | $ | 36,060 | ||||||||
| Stock options | 9,588 | 7,593 | 20,116 | 7,593 | ||||||||||||
| Accrued issuable equity (common stock) | 42,500 | 37,578 | 44,700 | 28,971 | ||||||||||||
| Accrued issuable equity (warrants) | - | - | - | 20,487 | ||||||||||||
| Total | $ | 82,088 | $ | 45,171 | $ | 94,816 | $ | 93,111 | ||||||||
NOTE 12 COMMITMENTS AND CONTINGENCIES
Operating Lease
On June 15, 2020, the Company entered into an agreement to extend the term of its original lease from June 30, 2020 to December 31, 2020. Monthly rental payments under the renewed lease total $5,107, which are comprised of $4,552 of base rent plus $555 of association fees. For the three and six months ended June 30, 2020, operating lease expense was $17,200 and $27,216, respectively. For the three and six months ended June 30, 2019, operating lease expense was $40,103 and $80,488, respectively. The Company evaluated their operating lease and determined that the short-term exemption available under ASC 842 applies since the lease term is less than 12 months and the lease does not include a purchase option whose exercise is reasonably certain. Since the short-term exemption applies, lease payments are recognized as expense and no right of use asset or lease liability is recorded.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 13 SUBSEQUENT EVENTS
Common Stock
On July 1, 2020, the Company issued 35,000 shares of immediately vested common stock with a grant date value of approximately $25,000 for legal fees.
Standby Equity Distribution Agreement and Repayments of the Note Payable
Subsequent to June 30, 2020, the Company received cash of $220,000 in satisfaction of subscriptions receivable as of June 30, 2020. See Note 6 – Accrued Issuable Equity, Accrued Issuable Equity for Subscriptions Receivable.
Subsequent to June 30, 2020, the Company issued an aggregate of 771,159 shares of common stock at prices between $0.96 - $1.65 per share for aggregate net proceeds of $745,000 received against advance notices submitted to the Investor under the SEDA, which consists of gross proceeds of $915,000 less $170,000 withheld by the Investor to pay down a portion of the Note. See Note 11 Stockholders’ Deficiency – Standby Equity Distribution Agreement and Note 8 – Note Payable.
New Note Purchase Agreement and Promissory Note
The Company also entered into a Note Purchase Agreement, dated July 20, 2020, with the Investor, pursuant to which the Investor purchased a full recourse promissory note (the “July 2020 Note”) in the original principal amount of $2,500,000 (“July 2020 Principal Amount”). In consideration for the issuance of the July 2020 Note by the Company, the purchase price of the Note paid by the Investor was equal to the July 2020 Principal Amount minus an 8% commitment fee and a $10,000 structuring fee.
The July 2020 Note bears no interest and will become immediately due and payable on July 20, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the July 2020 Note. The Company will repay the July 2020 Principal Amount in monthly installments as set forth in the July 2020 Note. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid.
The Company paid a financial advisor a $200,000 advisory fee in connection with the July 2020 Note Purchase Agreement and Note.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the results of operations and financial condition of KT High-Tech Marketing, Inc. ("KT High-Tech" and, including its subsidiary, KULR Technology Corporation (“KULR”), theGroup, Inc. (the “Company”) as of SeptemberJune 30, 20172020 and for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 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 KULR’s and KT High-Tech’sthe Company’s audited financial statements and related disclosures as of December 31, 20162019 and for the year then ended, which are included in the Form 8-K and Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 19, 2017 and March 30, 2017, respectively.May 14, 2020. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company.
Forward-Looking Statements
The information in this report This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. All statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other thanfactors. These statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can beoften identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “should”“continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Quarterly Report, in our other variations or similar words. No assurances can be givenreports filed with the SEC, and other factors that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual resultswe may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.know.
Overview
KT High-Tech Marketing,KULR Technology Group, Inc. (the "Company") was incorporated on December 11, 2015 under the laws of the State of Delaware, and was formerly known as Grant Hill Acquisition Corporation. In April 2016, the Company implemented a change of control by issuing shares to new shareholders, redeeming shares of existing shareholders, electing new officers and directors and accepting the resignations of its then existing officers and directors. In connection with the change of control, the shareholders of the Company and its board of directors unanimously approved the change of the Company’s name from Grant Hill Acquisition Corporation to KT High-Tech Marketing, Inc. in April 2016.
On June 19, 2017, the Company closed a share exchange agreement (the “Share Exchange Agreement”) with, through our wholly-owned subsidiary KULR Technology Corporation, a Delaware Corporation (“KULR”),develops and 100% of the shareholders of KULR (the “KULR Shareholders”). Upon the closing of the Share Exchange Agreement, KULR became a wholly owned subsidiary of the Company. The acquisition of KULR is treated as a reverse acquisition, and the business of KULR was integrated into the Company (the transaction, the “Reverse Acquisition”).
KULR was formed in 2013 and is based in Santa Clara, California. Since its inception, KULR primarily focused on developing and commercializing itscommercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications. Currently, our main focus is a total solution to battery safety by which it acquired through assignment fromwe aim to mitigate the effects of thermal runaway propagation. We also target and license with KULR’s co-founder Dr. Timothy Knowles, inprovide thermal solutions for the high value, high-performance consumer electronicfollowing applications: electric vehicles, cloud computing, 5G communication technologies, and energy storage applications. Priorfor commercial markets as well as directed energy weapons and high-power missile programs for aerospace and defense. Our proprietary core technology is a carbon fiber material that provides what we believe to 2013,be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with NASA, the Company’s technologies wereJet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter.
Battery safety technology is becoming increasingly vital to our world in which battery-operated devices are everywhere. Lithium ion (“Li-ion”) batteries are widely used in numerous advanced space and industrial applications for NASA, Boeing, and Raytheon. A few notable achievements were the use of KULR’s technologies in: the Mars Lander/Rover (battery heat sink), X-31 Battery Heat Sink, Mercury Messenger (battery heat sink), and X-51 Scramjet (heat exchanger).
Prior to the Reverse Acquisition, the Company was an early-stage company planning to market and distribute technology products and components targeting the energy and consumer electronics, industries. The Company intended to marketaerospace, marine and sell the products to both the end user and supply chain markets and to seek partnerships in developing and distributing such products.
After the Reverse Acquisition, the Company integratedautomotive applications. In recent months, KULR has developed a total battery safety solution for its existing business operations with those of its subsidiary, KULR. KULR owns proprietary carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutionscustomers 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”) in comparison to traditional materials, such as copper and aluminum. KULR’s technologies can be applied insidespans a wide array of electronic applications, suchindustries and applications. KULR has seen great success in using our patented thermal runaway shield (“TRS”) technology to prevent cell to cell thermal runaway propagation as mobile devices, cloud computing, virtual reality platforms, satellites, internetwell as module to module propagation. We have designed a total solution for customers from the design stages incorporating our materials all the way to testing their passive propagation resistant (“PPR”) battery packs. We are flexible and can work with different battery pack configurations across various industries. We developed a PPR reference design for CubeSat battery in December 2019. Our research and testing, as well as working alongside battery experts at NASA Johnson Space Center, has positioned us for further advancements at the forefront of things, drones, and connected cars.battery safety.
Thermal Management SolutionsHundreds of millions of Li-ion cells are produced and transported annually and even those packaged to prevent external short can still experience thermal runaway (“TR”) due to internal shorts, caused by latent defects, when fully charged. In these dangerous cases, a torch-like fire is released as energy escapes from the cell and sends nearby cells into TR resulting in a large fire. As part of our total battery safety solution, we have designed a bag out of our TRS material to suppress the flames and prevent the TR event. Suitably placed, the TRS provides a means of protection not only from adjacent batteries but also outside fires of arbitrary origin. Experts at NASA’s Propulsion & Power Division found our TRS successful at extinguishing the fire generated by cells when they intentionally triggered the batteries into dangerous failures. Our TRS bag is currently being used on the International Space Station (“ISS”) through a project with Leidos, for storing laptop batteries in order to reduce the risk of TR.
Another key element of our battery safety solution is KULR internal short circuit (“ISC”) device and trigger cells which are used for cell testing and screening. Our patented ISC device, licensed from NASA/NREL, can be inserted by OEMs or manufacturers into cells to mimic failure conditions in a cell. Once the trigger device is placed inside the cell, it can be intentionally triggered on demand causing the cell to short circuit. Currently, we provide ISC devices to OEMs and cell manufacturers, as well as ready-made ISC trigger cells to customers to identify failure modes and safety issues within their systems. Currently we are creating an ecosystem based on our technology which can be applied to different battery architectures and chemistries.
Our management believes that within commercial markets, aerospace and defense, and high-value applications, cell testing and screening has become a topic of focus. Therefore, we plan to expand our capabilities to include full battery analysis and testing as outlined by NASA Johnson Space Center. We plan to fully incorporate this into our holistic approach to battery safety along with our PPR battery pack design and testing services, ISC device and trigger cell products and TRS bags. With increasing regulations and pressure from government bodies to mitigate the dangers of battery fires and TR, we plan to further develop our capabilities in this arena.
Three key vectors have driven advancementsOur management projects high priority and growth in semiconductorsthe aerospace and electronics systems – performance, power,defense sectors, specifically in regard to directed energy, hypersonic weapon programs, and size. These vectors, however, often counteract one another. As chip performance increases, power consumption increasesspace missions. Directed energy is currently in the spotlight as experts predict it will greatly impact the future of warfare. Our CRUX cathode generates powerful electron pulses by field emission from the tops of our carbon fiber coating which has the potential to further develop the current technology. Thermal management is another critical component of both hypersonic weapons programs and more heatspace missions and is generated as a byproduct. When chip size reduces, there is an increased potentialanother area in which our products excel. Our carbon fiber solutions are used 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 improvein missile defense programs and are particularly effective because of their survivability at very high temperatures. They are also very effective at transferring heat storage and dissipation, rigidity problemsmitigate the risk of overheating in such high-risk environments. Historically we have provided value to this sector and durability. Its products are lightweightwe look forward to further developing our relationships with Airforce Research Lab, Naval Research Lab and reduce manufacturing complexity associated with traditional thermal management materials.prime contractors to market our solutions.
In addition to evolving demands led by aerospace and defense, we have observed trending manufacturer-led opportunities in industries such as electric motor vehicles (“EV”) that have become increasingly more reliant on the Cloud, portability and high-demand processing power. KULR’s high performance thermal interface materials can be used to accelerate 5G communications development due to our material’s core properties: high thermal conductivity, light weight, and low contact pressure. 5G is one of the biggest opportunities going forward for transportation technology and we would like to take part in testing of digital and RF tests for 5G. Testing is still in early phases for both digital and RF communication chips, however, we are seeing a big growth opportunity for thermal management for 5G. Cloud computing is also an application of electronic systems, KULR has developed, in partnership with NASA JSC, a highly effective, lightweightinterest since high power communications chips 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 runawayoptical communication modules require cooling.
We have not yet achieved profitability and expect to continue to incur cash outflows from occurring in neighboring Li-B cells by actingoperations, as a shield or barrierresult, we will eventually need to generate significant revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds to support our business operations, although there can be no assurance, even with the support of borrowing under the SEDA, that we will be successful in between individual Li-B cellsraising additional funds in a battery pack. Although rare, incidents of thermal runaway occurring spontaneously in Li-B cargo shipmentsthe future. Furthermore, we remain focused on growing our operations and inside electronics, including smartphones, hover boards and electric vehicles, are a cause of public concern.eventually achieving profitability, although no assurances can be made that we will achieve such goals.
Recent Developments
COVID-19
In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.
Common Stock
On June 6, 2017,July 1, 2020, we issued 35,000 shares of immediately vested common stock with a grant date value of approximately $25,000 related to legal services provided.
Standby Equity Distribution Agreement, Note Purchase Agreement, and Promissory Note
On February 27, 2020, we entered into a Standby Equity Distribution Agreement (“SEDA”) with YAII PN, Ltd., a Cayman Island exempt limited partnership (“YAII”), pursuant to which the Company filed a Certificatemay, at its discretion, subject to certain conditions, sell to YAII up to $8,000,000 of Designation of Series A Voting Preferred Stock with the Secretary of State of the State of Delaware (the “Certificate of Designation”). Pursuant to the Certificate of Designation, the Company designated 1,000,000 shares of preferred “A” stock, $0.0001 par value percommon stock. For each share (individually or collectively the “Preferred A Stock”). The Preferred A Stock are not convertible into any series or class of stock of the Company. In addition, holders of the Preferred A Stock are not entitled to receive dividends, nor do they have rights to distribution from the assets of the Company in the event of any liquidation, dissolution, or winding up of the Company. Each record holder of Preferred A Stock have the right to vote on any matter with holders of the Company’s common stock and other securities entitled to vote, if any, voting together as one (1) class. Each record holder of Preferred A Stock has that number of votes equal to one-hundred (100) votes per share of Preferred A Stock held by such holder. The record holders of the Preferred A Stock are entitled to the same notice of any regular or special meeting of the shareholders as may or shall be given to holders of common stock entitledpurchased under the SEDA (the “Shares”), YAII will pay the Company 80% of the lowest daily volume weighted average price of the common stock on the OTC Markets OTCQB or other principal market on which the common stock is traded for the five days immediately following the date the Company delivers notice requiring YAII to votepurchase the Shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by YAII, at such meetings.least 5 trading days shall have elapsed from the immediately preceding advance date. The Company agreed to issue, without receiving additional consideration, to YAII 95,847 shares of common stock as commitment shares in consideration for entering into the SEDA. Through June 30, 2020, the Company issued an aggregate of 561,564 shares of common stock at prices between $0.72 - $1.62 per share for aggregate proceeds of $757,695 received against advance notices submitted to YAII under the SEDA, of which $141,000 of the proceeds were applied directly against the note payable. Please see Note 8 – Note Payable for more information.
The Company also entered into a Note Purchase Agreement, dated February 27, 2020, with YAII, pursuant to which YAII purchased a full recourse promissory note (the “Note”) in the original principal amount of $1,500,000 (“Principal Amount”). In consideration for the issuance of the Note by the Company, the purchase price of the Note paid by YAII was equal to the Principal Amount minus an original issue discount equal to 6%. The Note bears no interest and will become immediately due and payable on May 31, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the Note. The Company will repay the Principal Amount in monthly installments as set forth in the Note. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid. Through June 30, 2020, the Company repaid principal on the Note of $225,000.
Subsequent to June 30, 2020, the Company issued an aggregate of 771,159 shares of common stock at prices between $0.96 - $1.65 per share for aggregate proceeds of $745,000 received against advance notices submitted to YAII under the SEDA, which consists of gross proceeds of $915,000 less $170,000 withheld by YAII to pay down a portion of the Note.
New Promissory Note Agreement
The Company also entered into a Note Purchase Agreement, dated July 20, 2020, with YAII, pursuant to which YAII purchased a full recourse promissory note (the “July 2020 Note”) in the original principal amount of $2,500,000 (“July 2020 Principal Amount”). In consideration for the issuance of the July 2020 Note by the Company, the purchase price of the July 2020 Note paid by YAII was equal to the July 2020 Principal Amount, minus an 8% commitment fee and a $10,000 structuring fee.
The July 2020 Note bears no interest and will become immediately due and payable on July 20, 2021 or upon acceleration, redemption or otherwise upon the occurrence of an event of default, as set forth in the July 2020 Note. The Company will repay the July 2020 Principal Amount in monthly installments as set forth in the July 2020 Note. The Company may, at its discretion, prepay any installment amount or the principal amount, subject to a payment premium equal to the 10% of the amount being prepaid.
The Company paid a financial advisor a $200,000 advisory fee in connection with the July 2020 Note Purchase Agreement and Note.
Patents
On July 28, 2020, the U.S. Patent and Trademark Office has issued patent No. 10727462 covering the Company’s thermal runaway shield technology.
On August 4, 2020, the U.S. Patent and Trademark Office has issued patent No. 10734302 covering the Company’s fiber thermal interface technology.
As discussed above, effective on June 19, 2017, pursuant to the Share Exchange Agreement, KULR became a wholly-owned subsidiary of the Company. Accordingly, the Company, through its subsidiary, KULR, will primarily focus its operations on KULR’s thermal management business.
Upon closing of the Share Exchange Agreement on June 19, 2017, the following persons constituted the executive officers and directors of the Company:
* newly appointed as of June 19, 2017
Results of Operations
The closing of the Share Exchange Agreement was accounted for as a reverse recapitalization under the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 805-40. The condensed consolidated statements of operations herein reflect the historical results of KULR prior to the completion of the reverse recapitalization since it was determined to be the accounting acquirer, and do not include the historical results of operations for KT High-Tech prior to the completion of the reverse recapitalization.Three Months Ended June 30, 2020 Compared With Three Months Ended June 30, 2019
Revenues
RevenuesOur revenues consisted of sales of our CFV thermal management solution and PCM heat sinks.the following types:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Product sales | $ | 71,130 | $ | 52,310 | $ | 99,130 | $ | 221,750 | ||||||||
| Contract services | 129,998 | 4,000 | 179,498 | 29,512 | ||||||||||||
| Total revenue | $ | 201,128 | $ | 56,310 | $ | 278,628 | $ | 251,262 | ||||||||
For the three months ended SeptemberJune 30, 20172020 and 2016,2019, we generated $15,106$201,128 and $0$56,310 of revenues, respectively, representing an increase of $15,106.$144,818, or 257%. The increase in revenue was mainly due to a number of new customers who came on stream or ramped up their level of business during the three months ended June 30, 2020. We had sales transactions with 10 customers in the three months ended June 30, 2020 compared to 4 in the three months ended June 30, 2019, reflecting the Company’s ongoing efforts to build new customer relationships over a growing pool of referrals and business development leads. Typically, a customer relationship begins with service projects to research customer problems and design relevant solutions, followed by product deliveries once the proposed solutions are tested and accepted. Our service revenues, which include certain research and development contracts and onsite engineering services, were not hampered by restrictions arising from working under COVID-19 shelter-in-place regulations. Product sales during these periods included sales of our component product, CFV thermal management solution, and ISC battery cell products. The increase in product sales between the three months ended June 30, 2019 and June 30, 2020 was approximately 36%, not as high as for services, due to a combination of limitations of physical product movements, and the early development stage of many of the newer customers.
For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we generated $26,006$278,628 and $6,900$251,262 of revenues, from 14 and 13 customers, respectively, representing an increase of $19,106,$27,366, or 277%11%. Revenue from product sales decreased by 55% compared to the six months ended June 30, 2019, partly due to the result of physical shipment delays under the impact of the COVID-19 related shut downs, and partly due to the timing of product orders from customers. Product sales during these periods included sales of our component product, CFV thermal management solution, and ISC battery cell products. Revenue from services sales increased by 508% between the six months ended June 30, 2019 and June 30, 2020 as a result of increased project requirements from some of the Company’s new and existing customers. Our service revenues, which include certain research and development contracts and onsite engineering services, were not hampered by restrictions arising from working under COVID-19 shelter-in-place regulations.
Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable and lumpy, which can influence the timing, consistency and reporting of sales growth.
Cost of Revenues
Cost of revenues consists of research and developmentthe cost of our products as well as labor expenses directly related to product sales as well as the cost of our CFV thermal management solution and PCM heat sinks.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.
For the three months ended SeptemberJune 30, 20172020 and 2016,2019, cost of revenues were $52,384was $41,413 and $0,$28,550, respectively, an increase of $52,384.$12,863, or 45%. The increase was primarily due toresearch higher salaries paid during the three months ended June 30, 2020. The gross margin percentage was 79% and development expenses that were attributable49% for the three months ended June 30, 2020 and 2019, respectively. The increase in margins during 2020 was primarily due to an increase in sales of higher margin products as compared to the prior period as well as a result of a difference in product mix between the comparable periods and sale of services to a sales agreement.major new customer.
For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, cost of revenues were $108,579was $67,339 and $7,749,$90,067, respectively, an increasea decrease of $100,830,$22,728, or 1,301%25%. The increasedecrease was primarily due to researcha more favorable product mix being sold as compared to the prior period. The gross margin percentage was 76% and development expenses that were attributable64% for the six months ended June 30, 2020 and 2019, respectively. The improvement in margins during 2020 was primarily the result of both change in product mix and the sale of services to a sales agreement.major new customer.
Research and Development
Research and development (“R&D”) includes expenses incurred in connection with the research and developmentR&D of our CFV thermal management solution. Research and developmentR&D expenses are expensed as they are incurred.
For the three months ended SeptemberJune 30, 2017, research2020 and development2019, R&D expenses increased to $157,876 from $14,090 in the comparable 2016 period, an increasewere $57,991 and $114,547, respectively, a decrease of $143,786,$56,556 or 1,020%49%. The increasedecrease is primarily attributabledue to reductions in salaries and other salary related costs, such as payroll taxes and other benefits, as a research consulting agreement which commenced in September 2016 as well as new consulting agreements and service contracts which commenced in the third quarterresult of 2017.COVID-19.
For the ninesix months ended SeptemberJune 30, 2017, research2020 and development2019, R&D expenses increased to $207,504 from $16,173 in the comparable 2016 period, an increasewere $169,704 and $227,739, respectively, a decrease of $191,331,$58,035 or 1,183%25%. The increasedecrease is primarily attributable to a research consulting agreement which commencedreductions in September 2016salaries and other salary related costs, such as well as new consulting agreementspayroll taxes and service contracts which commenced inother benefits, implemented during the thirdend of the first quarter of 2017.2020 due to COVID-19.
We expect that our research and developmentR&D expenses will to continue increase in the future.as we expand our future operations.
ResearchSelling, General and Development – Related PartiesAdministrative
ResearchSelling, general and development – related parties includesadministrative expenses associated withconsist primarily of travel, salaries, payroll taxes and other benefits, and rent expense.
For the developmentthree months ended June 30, 2020 and 2019, selling, general and administrative expenses were $424,865 and $534,262, respectively, a decrease of our CFV thermal management solutions provided$109,397 or 20%. The decrease is primarily due to a $24,000 decrease in rent expense due to the termination of an operating lease during the end of the fourth quarter of 2019, a $115,000 decrease in contract labor, salaries and other benefits due to the salary reductions implemented during the three months ended March 31, 2020 and a $44,000 decrease in travel expenses due to decreased travel as a result of COVID-19, partially offset by Energy Science Laboratories, Inc. (“ESLI”),an increase in stock-based compensation of $51,000 and marketing expenses of $32,000.
For the six months ended June 30, 2020 and 2019, selling, general and administrative expenses were $894,392 and $1,119,753, respectively, a researchdecrease of $225,361, or 20%. The decrease is primarily due to a decrease of approximately $87,000 of travel expense resulting from decreased travel due to COVID-19 restrictions, $86,000 of payroll and development company ownedbenefits due to salary reductions implemented as a result of COVID-19, $53,000 of rent expense resulting from the termination of an operating lease in the fourth quarter of 2019, partially offset by our Chief Technology Officer (“CTO”)”, as well as services provided from our CTO. Research and development – related parties expenses are expensed as they are incurred.an increase of approximately $35,000 of stock-based compensation expense.
Other Expenses
For the three months ended SeptemberJune 30, 2017, research2020 and development – related parties decreased by$52,876, or 58%, to $38,767 from $91,6432019, other expense was $105,844 and $367, respectively, an increase of $105,477. The increase in the comparable 2016 period. The decreaseother expense is primarily due to the amortization of debt discount related to the issuance of a decreasenote payable and the change in the amountfair value of work provided by ESLIaccrued issuable equity during the 2017 period as we brought more of our research and development in-house.current quarter.
For the ninesix months ended SeptemberJune 30, 2017, research2020 and development – related parties increased by$154,123, or 54%, to $439,824 from $285,701 in the comparable 2016 period.2019, other expense was $126,431 and $812, respectively, an increase of $125,619. The increase is due to an increase in the amount of work provided by ESLI during the 2017 period.
We expect that our research and development expenses will continue to increase in the future.
General and Administrative
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, 2017, general and administrative expenses increased by $512,915, or 555%, to $605,273 from $92,358 in the comparable 2016 period. The increaseexpense is primarily due to an increase in non-cash stock-based compensation expensethe amortization of approximately $178,000, increased payroll expenses from the hiring of new employees in the third quarter of 2017, increased marketing expenses as well as increased professional feesdebt discount related to being a public company.
For the nine months ended September 30, 2017, general and administrative expenses increased by $720,911, or242%, to $1,019,235 from $298,324 in the comparable 2016 period. The increase is primarily to an increase in non-cash stock-based compensation expense of approximately $388,000, increased payroll expenses from the hiring of new employees in the third quarter of 2017, increased marketing expenses as well as increased professional fees incurred with regards to the Share Exchange and being a public company.
Interest Income – Related Party
Interest income – related party consists of income generated from our loan receivable from our CEO.
For the three months ended September 30, 2017, interest income – related party decreased by $750 to $0 from $750. The decrease was due to the collectionissuance of a note receivablepayable and the change in fair value of accrued issuable equity during the second quarter of 2017.
For the nine months ended September 30, 2017, interest income – related party decreased by $65 to $1,337 from $1,402. The decrease was due to the collection of a note receivable in the second quarter of 2017.
Interest Expense – Related Party
Interest expense – related party consists of interest on a KT High-Tech promissory note purchased by KULR in 2017. Since the KT High-Tech and KULR reverse recapitalization, all interest expense related to the promissory note has been eliminated in consolidation.current quarter.
For the nine months ended September 30, 2017, interest expense – related party was $9,593.
Liquidity and Capital Resources
Operating ActivitiesAs of June 30, 2020 and December 31, 2019, we had cash balances of $767,906 and $108,857, respectively, and working capital deficits of $931,889 and $824,481, respectively.
For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, cash used in operating activities was $263,585$1,267,427 and $553,453,$968,882, respectively. Our cash used in operations for the ninesix months ended SeptemberJune 30, 20172020 was primarily attributable to our net loss of $1,757,850,$979,238, adjusted for net non-cash expenseexpenses in the aggregate amount of $414,555, partially offset by $1,079,710$223,994, and $512,183 of net cash provided byused to find changes in the levels of operating assets and liabilities. Our cash used in operations for the ninesix months ended SeptemberJune 30, 20162019 was primarily attributable to our net loss of $600,221,$1,187,109, adjusted for net non-cash expenseexpenses in the aggregate amount of $24,136,$99,234, partially offset by $22,632$118,993 of net cash provided by changes in the levels of operating assets and liabilities.
Investing Activities
For the ninesix months ended SeptemberJune 30, 20172020 and 2016, cash provided by (used in) investing activities was $1,907,990 and $(85,000), respectively. 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. Our2019, cash used in investing activities forwas $30,000 and $0, respectively. Cash used in investing activities during the ninesix months ended SeptemberJune 30, 20162020 was relateddue to the purchasepurchases of a note receivable in the amount of $85,000 from our CEO.equipment.
Financing Activities
NetFor the six months ended June 30, 2020 and 2019, cash provided by financing activities was $1,956,476 and $883,300, respectively. Our cash provided by financing activities for ninethe six months ended SeptemberJune 30, 20162020 was $550,000 which was relateddue to $1,410,000 of net proceeds from the issuance of a note payable, $155,226 of proceeds from the Paycheck Protection Program loan, and $616,695 of net proceeds from the sale of common stock. These amounts were partially offset by $130,000 for the payment of debt issuance costs, $84,000 for the repayments on notes and $15,000 of cash paid in offering costs. Cash provided by financing activities during the six months ended June 30, 2019 consisted of $898,300 of proceeds from the sale of common stock offset by $15,000 cash paid for offering costs.
In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel could lead to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as “Shelter in Place” will affect our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.
Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with YAII, pursuant to which the Company may, at its discretion, sell to up to an aggregate of 1,833,334$8,000,000 (subject to YAII’s approval for amounts over $100,000) of shares of Series A1 convertible preferredthe Company’s common stock at a price equal to investors. There were no cash flows from financing activitiesCompany 80% of the lowest daily volume weighted average price for the nine months ended Septemberfive days immediately following the date the Company delivers notice requiring YAII to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by YAII, at least 5 trading days shall have elapsed from the immediately preceding advance date. Through June 30, 2017.
Summary2020, we issued an aggregate of 561,564 shares of common stock at prices between $0.72 - $1.62 per share for aggregate proceeds of $757,695 received against advance notices submitted to YAII under the SEDA, of which $141,000 of the proceeds were applied directly against the note payable (see Note 9 – Stockholder Deficiency for additional details). Additionally, the Company applied for, and in April 2020, received, a loan of $155,000 under the government Small Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic.
As of SeptemberJune 30, 2017,2020, we had approximately $7,242,300 available in connection with the SEDA, in order to fund our ongoing operations; however, there can be no assurance that we will be able to continue sell common shares pursuant to the SEDA at an acceptable price, or without causing undue dilution to our existing investors. Subsequent to June 30, 2020, we issued an aggregate of 771,159 shares of common stock at prices between $0.96 - $1.65 per share for aggregate proceeds of $745,000 received against advance notices submitted to YAII under the SEDA, which consists of gross proceeds of $915,000 less $170,000 withheld by YAII to pay down a portion of the Note.
During July 2020, we also received net proceeds of $2,090,000 pursuant to a Note Purchase Agreement with YAII (the “July 2020 Note”). The July 2020 Note bears no interest, matures on July 20, 2021, and will be paid in monthly installments through the maturity date.
We have not yet achieved profitability and expect to continue to incur cash balance,outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant revenues and/or raise additional capital to fund our operations. Although our management believes that we have access to capital resources through the SEDA or other sources, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. The conditions outlined above indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date.
Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and an accumulated deficitthe realization of $1,653,492, $1,050,984assets and $3,691,660, respectively. Duringsatisfaction of liabilities in the threenormal course of business. The carrying amounts of assets and nine months ended September 30, 2017, we incurred a net lossliabilities presented in the unaudited condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of $839,252 and $1,757,850, respectively.this uncertainty.
AsOff-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 resultcurrent or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of the closing of the Share Exchange, we believe we have sufficient cashoperations, liquidity, capital expenditures or capital resources that is material to sustain our operations for at least a year from the date of this filing.stockholders.
Critical Accounting Policies
There are no material changes from theFor a description of our critical accounting policies, set forthsee Note 3 – Summary of Significant Accounting Policies in “Management’s Discussion and AnalysisPart 1, Item 1 of Financial Condition and Results of Operations” of our Currentthis Quarterly Report on Form 8-K which was filed with the SEC on June 19, 2017. Please refer to that document for disclosures regarding the critical accounting policies related to our business.10-Q.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is a smaller reporting company, as defined by Rule 229.10(f)(1), and is not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officers,officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rule 13a-15(b)as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).Act. Based on thatthis evaluation, our management, with the participation of our principal executive officer and principal financial officersofficer, concluded that, as of the end of the period covered by this report, due to the inadequate recordation of certain transactions and communication of those transactions to those integral to our disclosure procedures, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There havehas been no changeschange in our internal control over financial reporting that occurred during the period covered by this reportsecond quarter of 2020 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II.II – OTHER INFORMATION
None.
Not applicable. See, however,There have been no material changes to the risk factors discussed in Item 1A of1A. Risk Factors in our CurrentAnnual Report on Form 8-K,10-K which was filed with the Securities and Exchange CommissionSEC on June 19, 2017.May 14, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety DisclosuresDisclosures.
Not Applicable.applicable.
None.
| 31.1 | ||
| 31.2 | ||
| 101.INS | XBRL | |
| 101.SCH | XBRL Taxonomy Extension Schema* | |
| 101.CAL | XBRL Taxonomy Extension | |
| 101.DEF | XBRL Taxonomy Extension | |
| 101.LAB | XBRL Taxonomy Extension | |
| 101.PRE | XBRL Taxonomy Extension |
*Filed herewith
**Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned hereunto duly authorized.
| By | /s/Michael Mo | |
Michael Mo | ||
Chief Executive Officer | ||
| and Chairman (Principal Executive Officer) |
| By | /s/ | |
Simon Westbrook Chief Financial Officer | ||
( |