KULR Technology Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops thermal-management and battery-safety technologies for markets including electric vehicles, aerospace and defense, energy storage, cloud computing and 5G. It filed this report late under SEC COVID-19 filing relief, citing restricted facility access and management and staffing disruptions. The report was signed June 25, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $77,500 | $194,952 | Down 60% |
| Gross profit / margin | $51,574 / 67% | $133,435 / 68% | Gross profit down 61%; company cites product mix |
| Operating expenses | $581,240 | $698,683 | Down about 17% |
| Operating loss | $(529,666) | $(565,248) | Improved |
| Net loss | $(550,253) | $(565,693) | Loss per share $(0.01) in both periods |
| Cash used in operations | $(698,110) | $(286,420) | Cash burn increased |
Product sales fell to $28,000 from $169,440, while contract-services revenue increased to $49,500 from $25,512. Management attributed lower product shipments to COVID-related shutdowns affecting the company and its customers, and said service revenue was less affected by physical shipment restrictions. R&D expense was $111,713 in the financial statements, versus $129,492 in Q1 2019; selling, general and administrative expense was $469,527 versus $569,191. Management cited lower travel, rent and compensation costs for the SG&A decline.
Balance sheet, liquidity and financing
At March 31, 2020, cash was $634,148, compared with $108,857 at December 31, 2019. Current assets were $804,908 and current liabilities were $1,968,188, producing a working-capital deficit of $1,163,280, wider than the $824,481 deficit at year-end. Total liabilities were $2,183,571; stockholders’ deficiency was $1,273,431. No investing cash flows were reported.
Financing activities provided $1,223,401, principally from a $1.5 million promissory note issued for $1.41 million cash proceeds, partly offset by issuance costs and repayment. The note had $1.45 million principal outstanding at quarter-end, with maturity on May 31, 2021; it provides for monthly repayments and a 10% premium on voluntary prepayments. The company also had $8,401 outstanding under a small line of credit.
The company entered a 24-month standby equity distribution agreement (SEDA) permitting up to $8 million in share sales, subject to conditions and investor approval for advances over $100,000. Shares are priced at 80% of the lowest daily volume-weighted average price over a specified five-day period. No SEDA shares were sold by March 31; afterward, 421,197 shares were issued for $526,000. The company received a $155,000 PPP loan in April 2020; forgiveness is not assured. It also repaid $175,000 of note principal after quarter-end.
Outlook, risks and notable developments
Management provided no quantified revenue or earnings guidance. It expects continued operating cash outflows and anticipates R&D and G&A needs will increase as operations expand. The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance; continued operations depend on revenue growth and additional financing. Management cautioned that SEDA funding may be unavailable on acceptable terms and could dilute existing holders, and that failure to secure funding could require significant curtailment or discontinuation of operations.
- COVID-19 disruptions could affect demand, supply chains, R&D, manufacturing and customer delivery; the company said the future financial impact could not be reasonably estimated.
- Customer concentration was high: two customers represented 82% of Q1 revenue, and customer concentration accounted for 99% of accounts receivable at quarter-end. The filing warns that lost, delayed or reduced business from significant customers could materially harm results.
- The company was exploring hypochlorous-acid-based decontamination products but had no independent laboratory results and gave no assurance of commercialization or demand.
- After quarter-end, KULR announced a license and supply agreement for Americase’s battery-bag products using its passive-propagation-resistant technology.
- The six-month San Diego lease was extended through December 31, 2020, at monthly payments of $5,107. PPP loan forgiveness depends on program conditions and is not assured.
Management reported that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control occurred during the quarter. The filing reported no legal proceedings and no material changes to the risk factors in the latest Form 10-K.
Key facts for investors to verify
- Reconcile the R&D figures: the financial statements report $111,713 for Q1 2020 and $129,492 for Q1 2019, but the MD&A narrative contains conflicting amounts and describes the comparison inconsistently.
- Assess liquidity and going-concern risk against ongoing operating cash burn, the working-capital deficit, debt repayment schedule and availability of financing.
- Review actual SEDA proceeds, pricing, remaining capacity and potential dilution; confirm post-quarter debt repayments and the outstanding note balance.
- Track customer concentration, product shipments and COVID-related effects on operations and demand.
- Confirm PPP forgiveness status and the commercial and testing progress of the decontamination products and Americase arrangement.