KULR Technology Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company develops thermal-management products and services for batteries and electronics, targeting markets including electric mobility, energy storage, cloud computing, and 5G.
Financial performance and position
- Q3 revenue: $526,722, up 9% from $482,798 a year earlier. Product sales were $464,772; contract services were $61,950.
- Nine-month revenue: $777,984, down 12% from $881,929. Management attributed the decline mainly to the lumpy timing of converting service projects into product orders.
- Profitability and margins: Q3 gross profit was $417,671 and gross margin was 79%, versus 84% in Q3 2018. Q3 net loss was $267,534, compared with $191,251. For nine months, gross profit was $578,866, margin was 74% versus 71%, and net loss was $1,454,643 versus $1,661,718.
- Expenses: Q3 operating expenses rose 10% to $684,952, including SG&A of $546,982, up 19%. Nine-month operating expenses fell 12% to $2,032,444.
- Cash flow: Cash used in operations was $1,206,135 for the first nine months, compared with $1,064,935 in 2018. Financing provided $1,052,300; investing used no cash. Cash declined to $76,061 from $229,896 at year-end 2018.
- Liquidity and liabilities: Current assets were $588,145 and current liabilities were $899,221, implying a current ratio of about 0.65 and a working-capital deficit of $311,076. Total assets were $623,492; stockholders’ deficiency was $275,729. The balance sheet presents no separate interest-bearing debt balance.
- Equity and dilution: Common shares outstanding increased to 81,071,831 from 78,706,256 at year-end 2018. The company raised cash through common-stock sales and issued Series C preferred stock and warrants.
Material changes, outlook, and risks
- Q3 revenue growth reflected contract-service revenue; nine-month revenue declined. Management described customer sales cycles as lengthy and unpredictable, and noted that product mix affects margins.
- Management said R&D spending may increase as it develops products and responds to customer feedback. It expects to need significant product revenue and/or additional capital to fund operations.
- The filing states that recurring operating cash outflows and the need for financing raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management said operations were being funded month-to-month; no new financing commitments were in place, and future financing was not assured.
- Customer concentration is significant: Customer A represented 67% of Q3 revenue and 90% of accounts receivable at September 30. Management warned that customer loss, delays, or reduced business could materially harm results.
- Series C preferred stock has a $10,000 stated value per share, senior liquidation preference, and potential 12% annual dividends beginning one year after issuance if declared. Its conversion provisions may result in common-stock dilution.
- The planned TECHTOM acquisition was terminated by mutual agreement in July 2019. The filing reports no legal proceedings and no material changes to previously disclosed risk factors.
- No quantitative revenue, earnings, or cash-flow guidance is provided. Management’s outlook discusses growth opportunities and development projects but cautions that they may not result in future sales.
Important facts for investors to verify
- Cash runway, near-term funding needs, and the terms and availability of any subsequent financing.
- Whether customer development projects convert into recurring, higher-volume product orders, and the persistence of customer concentration.
- Potential dilution and economic obligations from Series C conversion terms, dividends, and warrants.
- The reason for the difference between Q3 revenue growth and the nine-month revenue decline, including product mix and timing of service-to-product conversions.
- Cash-flow figures against the statements: the cash-flow statement reports 2018 operating cash use of $1,064,935; the MD&A text gives $1,064,953.