KULR Technology Group, Inc. (then KT High-Tech Marketing, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company develops and commercializes carbon-fiber thermal-management technologies and related battery-safety products. The financial statements reflect KULR Technology Corporation as the accounting acquirer in the June 2017 reverse recapitalization.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $171,091 | $10,900 | $399,131 | $10,900 |
| Gross profit (loss) | $137,621 | ($45,295) | $215,714 | ($45,295) |
| Gross margin | 80.4% | Not meaningful | 54.0% | Not meaningful |
| Operating expenses | $782,024 | $638,808 | $1,685,948 | $865,047 |
| Operating loss | ($644,403) | ($684,103) | ($1,470,234) | ($910,342) |
| Net loss | ($644,622) | ($690,774) | ($1,470,467) | ($918,598) |
| Basic and diluted loss per share | ($0.01) | ($0.01) | ($0.02) | ($0.02) |
Revenue growth reflected higher product sales and new contract-services revenue. Q2 revenue included $134,791 of product sales and $36,300 of contract services; six-month revenue included $253,143 and $145,988, respectively. Management attributed Q2’s gross-margin improvement to higher-margin products and lower prior-year PCM heat-sink costs. Six-month cost of revenue rose to $183,417, partly due to lower-margin OEM sales and increased labor.
Cash used in operating activities was $779,380 for the six months, versus $281,756 provided in the 2017 period. Investing cash outflow was $8,350, compared with $1,922,216 provided in 2017, largely from cash acquired in the reverse recapitalization. No financing cash flows were reported for either six-month period. Stock-based compensation was $307,792 for the 2018 half year.
Balance sheet and liquidity
At June 30, 2018, cash was $108,031, total current assets $291,130, total current liabilities $787,418, and total assets $364,449. Working capital was a deficit of $496,288 (calculated); the current ratio was approximately 0.37x (calculated). Stockholders’ equity was a deficit of $422,969. The filing reports no borrowings or other interest-bearing debt; current liabilities included $434,950 of accrued expenses and other current liabilities, $190,559 due to related parties, and $161,909 of deferred revenue.
Cash declined from $895,761 at December 31, 2017. Management said available cash was expected to fund operations into Q4 2018, after which external funding would be required. In July, the company sold 278,788 shares for $184,000 gross and $159,000 net proceeds.
Changes, outlook, risks, and unusual items
- Six-month revenue rose from $10,900 to $399,131, while the six-month net loss widened from $918,598 to $1,470,467. Operating expenses increased, including higher R&D staffing and public-company compliance, professional, and consulting costs. Related-party R&D expense fell to zero from $401,057 in the 2017 half year.
- The company had not achieved profitability and disclosed substantial doubt about its ability to continue as a going concern within one year after issuance. Management expected continuing operating losses and rising R&D and general and administrative expenses; no new financing commitments were in place. Failure to raise capital could require curtailing or discontinuing operations or accepting unattractive financing.
- Management expected possible ISC-device revenue in the second half of 2018 and anticipated some customer design engagements could reach early production in the second half of 2018 or in 2019. Neither outcome was assured, and design engagements might not lead to orders.
- In March 2018, the company obtained an exclusive NREL license for Internal Short Circuit technology, with a $12,000 cash payment over one year, royalties of 1.5%–3.75% on defined net sales, minimum annual royalties, and commercialization milestones. No licensed-product sales or royalties had occurred by filing.
- The company revised its Q1 2018 results after identifying omitted product-sale cost of revenue. Cost of revenue was increased by $100,601, operating expenses reduced by $22,000, and net loss increased by $78,601 to $825,845. Management concluded the error was not material to the prior-period statements.
- Disclosure controls were deemed ineffective, with a material weakness involving timely communication of transaction information to financial-reporting staff. The company said it planned stronger vendor-management and purchase-to-pay controls. Customer concentration was significant: two customers represented 91% of Q2 revenue; one customer represented 51% of six-month revenue.
Important facts for investors to verify
- Cash runway, subsequent cash use, and whether additional financing was secured on acceptable terms.
- Conversion of customer engagements into production agreements, purchase orders, and revenue, including ISC commercialization progress.
- Revenue quality and customer concentration, including collection of receivables and fulfillment of the $161,909 deferred-revenue obligations.
- Remediation of the material weakness and the effectiveness of financial-reporting controls following the Q1 cost-of-revenue error.
- Product margins, especially the mix of higher-margin CFV sales and lower-margin OEM products, as revenue scales.