KULR Technology Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. KULR develops thermal-management technologies for batteries and electronics, targeting electric mobility, cloud computing, energy storage, and 5G applications. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $194,952 | $228,040 |
| Gross profit / margin | $133,435 / 68% | $78,093 / 34% |
| Operating expenses | $698,683 | $903,924 |
| Operating loss | $(565,248) | $(825,831) |
| Net loss | $(565,693) | $(825,845) |
| Net cash used in operations | $(286,420) | $(470,370) |
- Revenue declined 15%, primarily because fewer contract-service engagements were completed. Product sales increased to $169,440 from $118,352, while contract-services revenue fell to $25,512 from $109,688.
- Gross margin improved to 68% from 34%, which management attributed primarily to a more favorable product mix. Net loss narrowed by approximately 31% as operating expenses decreased.
- Cash fell to $98,476 from $229,896. Current assets were $212,097 versus current liabilities of $753,658, implying negative working capital of $541,561 and a current ratio of about 0.28. Total assets were $253,888; stockholders’ deficiency was $499,770.
- Cash used in operating activities was partly offset by $155,000 of common-stock proceeds. No investing cash flows were reported. The balance sheet lists no long-term liabilities or separate debt balance; it reports current liabilities, including accounts payable and accrued expenses.
- During Q1, KULR issued 234,849 shares at $0.66 for $155,000 gross proceeds. It reported 78,966,105 shares outstanding at March 31 and 80,092,315 as of May 9, 2019.
Material changes, outlook, and risks
- Management said it expects R&D and general and administrative expenses to increase and that significant product revenue and/or additional capital will be needed to reach profitability and fund operations. The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year of issuance.
- Operations were being funded month to month, with no financing commitments in place at filing. Management cautioned that financing may not be available on acceptable terms and that failure to raise funds could require curtailing or discontinuing operations. No quantified revenue or earnings guidance was provided.
- After quarter-end, the company reported completing additional private-placement closings: $473,300 on April 12 and $270,000 on April 30. It said aggregate proceeds from the offering were $1,612,300 for 2,442,879 shares.
- On April 2, KULR agreed, subject to closing conditions, to acquire all of TECHTOM Co., Ltd. for $1.7 million cash plus 100 proposed Series C preferred shares. The filing says completion is not assured; the contemplated preferred shares have a stated value of $10,000 each and conversion rights, subject to a 4.99% beneficial-ownership limitation.
- Customer concentration was significant: two customers accounted for 78% of Q1 revenue. Management also described customer purchasing cycles as lengthy, unpredictable, and uneven, and noted that margins can vary by product and mix.
- The 2018 comparative figures are revised. KULR identified an omission of product-sale cost of revenue, attributing it to information not being provided during an accounting-duty transition. The revision increased Q1 2018 cost of revenue by $100,601 and net loss by $78,601; the company concluded the error was not material. Management reported disclosure controls were effective and no material internal-control change other than lease-accounting implementation.
- The company reported no legal proceedings and no material changes to the risk factors in its 2018 Form 10-K. It also disclosed an NREL patent license with royalties of 1.5%–3.75% of applicable net sales and milestone obligations; no licensed-product sales or royalties had been reported as of filing.
Important facts for investors to verify
- Cash runway, near-term operating obligations, and whether further financing is available on acceptable terms.
- Progress toward revenue growth and the sustainability of the improved gross margin given the lower service revenue and customer concentration.
- Whether the TECHTOM acquisition closes, its funding source, and the final Series C terms and potential dilution.
- The revised 2018 comparative financials and the company’s remediation of the accounting-information handoff issue.
- Share count and dilution following the private-placement closings and any conversion of preferred securities.