KULR Technology Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company, formerly KT High-Tech Marketing, Inc., changed its name effective August 30, 2018. KULR develops and commercializes carbon-fiber thermal-management products and lithium-ion battery thermal protection technology.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $482,798 | $15,106 | $881,929 | $26,006 |
| Gross profit (loss) | $407,414 | $(37,278) | $623,128 | $(82,573) |
| Gross margin | 84.4% | (246.8%) | 70.7% | (317.5%) |
| Operating expenses | $622,571 | $802,116 | $2,308,519 | $1,667,163 |
| Operating loss | $(215,157) | $(839,394) | $(1,685,391) | $(1,749,736) |
| Net loss | $(191,251) | $(839,252) | $(1,661,718) | $(1,757,850) |
Q3 revenue was primarily CFV thermal-management product sales; nine-month revenue also included $145,988 of contract services. Management attributed growth to new contracts and higher sales volume, including increased purchases from one existing customer. Reported margins reflect product/service mix and may vary by customer and product.
Liquidity and balance sheet at September 30, 2018: Cash was $174,350, down from $895,761 at December 31, 2017. Current assets were $437,379 versus current liabilities of $746,344, a working-capital deficit of $308,965 and current ratio of approximately 0.59. Total assets were $484,524; stockholders’ equity was a deficit of $261,820. The balance sheet lists no interest-bearing debt; liabilities shown are current accrued expenses, related-party accruals and deferred revenue.
For the first nine months, operating cash outflow was $1,064,935 (versus $263,585 in 2017); investing cash outflow was $15,476; and financing provided $359,000. Financing cash proceeds from the private placement were reported as $359,000, while the equity note reports $384,000 gross proceeds less $31,600 issuance costs, or $352,400 net proceeds. The filing does not clearly reconcile these different proceeds figures. Ending cash was $174,350.
Material changes and notable items
- Q3 revenue increased by $467,692 year over year; nine-month revenue increased by $855,923. Product sales rose sharply from a very small prior-year base.
- Nine-month R&D expense increased 93% to $399,884, while related-party R&D expense fell to zero from $439,824. Nine-month SG&A rose 87% to $1,908,635, mainly due to increased salaries, professional fees, travel and rent. Q3 SG&A declined 24%, primarily because stock-based compensation decreased.
- The company raised $384,000 gross through a Q3 private placement of 581,819 shares at $0.66 per share; reported net proceeds were $352,400. Common shares outstanding were 78,021,819 at September 30.
- Revenue was highly concentrated: Customer C accounted for 92% of Q3 revenue and 64% of nine-month revenue; it represented 92% of September 30 accounts receivable.
- A March 2018 exclusive NREL license covers commercialization of patented Internal Short Circuit technology, with a $12,000 cash payment and royalties of 1.5%–3.75% plus specified minimums. No licensed-product sales or royalties had been recorded by filing date.
- After quarter-end, stockholders approved a 15-million-share equity incentive plan, an increase in authorized common shares from 100 million to 500 million, and authorization to issue 1 million Series A voting preferred shares to the CEO. The filing describes authorization, not confirmation that the preferred shares were issued.
Outlook, risks and controls
The company reported that it had not achieved profitability, expected continuing operating cash outflows and anticipated higher R&D and general and administrative costs. Management stated there was substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Operations were being funded month to month; no new financing commitments were in place, and additional financing might not be available on acceptable terms. Failure to obtain funding could require significant curtailment or discontinuation of operations.
Management described customer purchasing and contracting cycles as lengthy, unpredictable and lumpy, and said new-product margins can vary materially. No specific financial guidance was provided. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Disclosure controls and procedures were deemed ineffective, with a material weakness involving timely communication of transaction information to financial-reporting personnel. Management said it intended to strengthen vendor-management and purchase-to-pay controls. Management nevertheless stated that the financial statements fairly presented the company’s position and results in all material respects.
Important facts for investors to verify
- Near-term cash needs, cash-burn rate and the availability and terms of additional financing, given the going-concern warning and low cash balance.
- Whether high customer concentration and contract timing support sustained revenue growth, and whether the Q3 margin is repeatable.
- The reconciliation of private-placement proceeds reported in the cash-flow statement, equity statement and note.
- Progress remediating the disclosed material weakness and improving disclosure controls.
- Implementation and potential dilution from the 15-million-share incentive plan, expanded authorized shares and authorized Series A voting preferred stock.