KULR Technology Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited consolidated results. KULR develops thermal-management technologies for batteries and electronics, targeting e-mobility, cloud computing, energy storage, and 5G applications.
Financial performance and position
- Revenue: Q2 revenue was $56,310, down 67% from $171,091 a year earlier. First-half revenue was $251,262, down 37% from $399,131. Management attributed the declines mainly to fewer product sales and service-contract completions.
- Gross profit and margins: Q2 gross profit was $27,760, with a 49% gross margin versus 80% in Q2 2018, reflecting lower sales of higher-margin products. First-half gross profit was $161,195 and margin was 64%, compared with $215,714 and 54% in the prior-year period; management cited a more favorable product mix.
- Operating expenses and losses: Q2 operating expenses were $648,809, down 17%; operating loss was $621,049 and net loss was $621,416, versus a $644,403 operating loss and $644,622 net loss in Q2 2018. First-half operating expenses were $1,347,492, down 20%; net loss was $1,187,109 versus $1,470,467. Basic and diluted net loss per share was $0.01 for Q2 and the first half.
- Cash flow: First-half cash used in operations was $968,882, compared with $779,380 in 2018. Financing provided $883,300, primarily from common-stock sales, net of deferred offering costs. Cash declined $85,582 to $144,314; there was no investing cash flow in the period.
- Liquidity and liabilities: Current assets were $366,035 and current liabilities were $790,086, a $424,051 working-capital deficit. Total assets were $419,793; stockholders’ deficiency was $370,293. The balance sheet lists no interest-bearing debt; interest expense was $812 for the first half.
- Equity funding: KULR sold 1,361,059 common shares at $0.66 per share for $898,300 gross proceeds during the first half. Shares outstanding were 80,092,315 at June 30, compared with 78,706,256 at year-end.
Material changes and developments
- First-half product sales were $221,750 versus $253,143; contract-services revenue was $29,512 versus $145,988, accounting for most of the year-over-year revenue decline.
- Lower selling, general and administrative costs and research and development costs helped reduce operating expenses. Management said it expects R&D expenses to rise as operations expand.
- The April agreement to acquire TECHTOM for $1.7 million in cash plus Series C preferred stock was rescinded and terminated on July 5, 2019; neither party retained obligations under the agreement.
- A $50 million shelf registration statement became effective August 1, 2019, allowing potential future offerings of common or preferred stock and warrants. Subsequent to quarter-end, holders converted 16,371 Series B preferred shares into 818,550 common shares.
Outlook, risks, and contingencies
- Going concern: The company has not achieved profitability, expects continued operating cash outflows, and disclosed substantial doubt about its ability to continue as a going concern within one year after issuance. Operations were being funded month to month; management said there were no commitments for new financing and warned that funding might not be available on acceptable terms. Failure to raise funds could require curtailing or discontinuing operations.
- Revenue uncertainty: Management described customer purchasing and approval cycles as lengthy, unpredictable, and uneven. Customer concentration is significant: the filing’s table indicates one customer contributed 64% of Q2 2019 revenue and another 47% of first-half 2019 revenue. The filing warns that reduced business, delays, nonpayment, or termination by major customers could materially harm results.
- Operating plans: Management intends to pursue growth, particularly in e-mobility, and expects to need significant product revenue and/or additional capital to fund operations. No quantified revenue or earnings guidance was provided.
- Other items: The company has an exclusive NREL license for Internal Short Circuit technology, with royalties of 1.5%–3.75% on applicable net sales and commercialization milestones. No legal proceedings were reported, and management reported disclosure controls effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether KULR can obtain additional financing and address the disclosed going-concern uncertainty, including the terms and dilution associated with any shelf offerings.
- Whether revenue recovers and customer concentration declines; confirm the underlying customer-concentration table and customer dependence.
- Whether gross margins remain sensitive to product and service mix, and whether operating cash use can be reduced.
- The status and potential costs of customer contracts reflected in $92,516 of deferred expenses at June 30, 2019.
- The impact of Series B conversions and other share issuances on fully diluted share count.