UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q

  

(Mark One)

  

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended: March 31, 2021

  

OR

  

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from                     to                    

  

Commission File Number:

000-55564  

 

KULR TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware (State or Other Jurisdiction of Incorporation or Organization)		81-1004273 (I.R.S. Employer Identification No.)
1999 S. Bascom Ave. Suite 700. Campbell, California (Address of principal executive offices)		95008 (Zip Code)

 

Registrant’s telephone number, including area code: 408-663-5247

 

(Former name, former address and former fiscal year, if changed since last report) N/A

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
None.	N/A	N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

 

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	x		Smaller reporting company	x
			Emerging growth company	¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 20, 2021, there were 94,247,200 shares of Common Stock, $0.0001 par value, issued and outstanding.

 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

TABLE OF CONTENTS

 

 

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements		1
Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020		1
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020		2
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the Three Months Ended March 31, 2021 and 2020		3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020		4
Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Mine Safety Disclosures		23
Item 5. Other Information		23
Item 6. Exhibits		24
SIGNATURES		25

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31
		2021				2020
			(unaudited)
Assets
Current Assets:
Cash		$	6,166,755			$	8,880,140
Accounts receivable			345,299				55,492
Inventory			54,135				55,452
Prepaid expenses and other current assets			584,374				159,196
Total Current Assets			7,150,563				9,150,280
Property and equipment, net			53,086				57,857
Total Assets		$	7,203,649			$	9,208,137
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable		$	178,374			$	66,537
Accounts payable - related party			2,628				2,628
Accrued expenses and other current liabilities			414,738				395,012
Accrued issuable equity			333,146				128,380
Notes payable, net of debt discount of $20,074 and $128,198 at March 31, 2021 and December 31, 2020, respectively			1,379,926				2,321,802
Loan payable, current portion			122,299				12,936
Deferred revenue			20,000				20,000
Total Current Liabilities			2,451,111				2,947,295
Loan payable, non-current portion			32,927				142,290
Total Liabilities			2,484,038				3,089,585
Commitments and contingencies (Note 9)
Stockholders' Equity:
Preferred stock, $0.0001 par value, 20,000,000 shares authorized;
Series A Preferred Stock, 1,000,000 shares designated; none issued and outstanding at March 31, 2021 and December 31, 2020			-				-
Series B Convertible Preferred Stock, 31,000 shares designated; 0 and 13,972 shares issued and outstanding and liquidation preference of $0 and $13,972 at March 31, 2021 and December 31, 2020 , respectively			-				1
Series C Preferred Stock, 400 shares designated; none issued and outstanding at March 31, 2021 and December 31, 2020			-				-
Series D Convertible Preferred Stock, 650 shares designated, none issued and outstanding at March 31, 2021 and December 31, 2020 (see Note 10)			-				-
Common stock, $0.0001 par value, 500,000,000 shares authorized; 92,627,200 and 89,908,600 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively			9,263				8,991
Additional paid-in capital			17,671,479				17,355,968
Accumulated deficit			(12,961,131	)			(11,246,408	)
Total Stockholders' Equity			4,719,611				6,118,552
Total Liabilities and Stockholders' Equity		$	7,203,649			$	9,208,137

  

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		For the Three Months Ended March 31,
		2021				2020
Revenue		$	417,905			$	77,500
Cost of revenue			275,268				30,043
Gross Profit			142,637				47,457
Operating Expenses:
Research and development			122,983				111,713
Selling, general, and administrative			1,492,811				465,410
Total Operating Expenses			1,615,794				577,123
Loss From Operations			(1,473,157	)			(529,666	)
Other Expenses
Interest expense, net			(865	)			(1,367	)
Amortization of debt discount			(108,124	)			(19,220	)
Change in fair value of accrued issuable equity			(132,577	)			-
Total Other Expenses			(241,566	)			(20,587	)
Net Loss		$	(1,714,723	)		$	(550,253	)
Net Loss Per Share
- Basic and Diluted		$	(0.02	)		$	(0.01	)
Weighted Average Number of Common Shares Outstanding
- Basic and Diluted			90,078,940				81,098,163

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

(unaudited)

 

		FOR THE THREE MONTHS ENDED MARCH 31, 2021
		Series B Convertible								Series C Convertible																Additional								Total
		Preferred Stock								Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Equity
Balance - January 1, 2021			13,972			$	1				-			$	-				89,908,600			$	8,991			$	17,355,968			$	(11,246,408	)		$	6,118,552
Common stock issued upon conversion of Series B Convertible Preferred Stock			(13,972	)			(1	)			-				-				698,600				70				(69	)			-				-
Stock-based compensation:
Common stock issued for services			-				-				-				-				20,000				2				49,798				-				49,800
Restricted common stock issued			-				-				-				-				2,000,000				200				(200	)			-				-
Amortization of restricted common stock			-				-				-				-				-				-				126,625				-				126,625
Amortization of stock options			-				-				-				-				-				-				9,112				-				9,112
Amortization of market-based award			-				-				-				-				-				-				130,245				-				130,245
Net loss			-				-				-				-				-				-				-				(1,714,723	)			(1,714,723	)
Balance - March 31, 2021			-			$	-				-			$	-				92,627,200			$	9,263			$	17,671,479			$	(12,961,131	)		$	4,719,611

 

 

		FOR THE THREE MONTHS ENDED MARCH 31, 2020
		Series B Convertible								Series C Convertible																Additional								Total
		Preferred Stock								Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficiency
Balance - January 1, 2020			14,487			$	1				24.01			$	-				81,071,831			$	8,107			$	7,591,239			$	(8,396,312	)		$	(796,965	)
Common stock issued as a commitment fee for the Standby Equity Distribution Agreement			-				-				-				-				95,847				10				63,249				-				63,259
Stock-based compensation:
Amortization of stock options			-				-				-				-				-				-				10,528				-				10,528
Net loss			-				-				-				-				-				-				-				(550,253	)			(550,253	)
Balance - March 31, 2020			14,487			$	1				24.01			$	-				81,167,678			$	8,117			$	7,665,016			$	(8,946,565	)		$	(1,273,431	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the Three Months Ended
		March 31,
		2021				2020
Cash Flows From Operating Activities:
Net loss		$	(1,714,723	)		$	(550,253	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount			108,124				19,220
Depreciation expense			4,771				543
Bad debt expense			-				335
Change in fair value of accrued issuable equity			132,577				-
Stock-based compensation			387,972				12,728
Changes in operating assets and liabilities:
Accounts receivable			(289,807	)			(27,046	)
Inventory			1,317				(4,514	)
Prepaid expenses and other current assets			(425,178	)			(39,142	)
Accounts payable			111,838				(135,283	)
Accrued expenses and other current liabilities			19,724				(6,698	)
Accrued expenses and other current liabilities - related party			-				-
Deferred revenue			-				32,000
Total Adjustments			51,338				(147,857	)
Net Cash Used In Operating Activities			(1,663,385	)			(698,110	)
Cash Flows from Financing Activities:
Proceeds from note payable			-				1,410,000
Payment of debt issuance costs			-				(130,000	)
Repayments of notes payable			(1,050,000	)			(50,000	)
Proceeds from line of credit, net			-				8,401
Payment of financing costs			-				(15,000	)
Net Cash (Used In) Provided By Financing Activities			(1,050,000	)			1,223,401
Net (Decrease) Increase In Cash			(2,713,385	)			525,291
Cash - Beginning of Period			8,880,140				108,857
Cash - End of Period		$	6,166,755			$	634,148
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest		$	367			$	1,367
Income taxes		$	-			$	-
Non-cash investing and financing activities:
Value of common stock issued as a commitment fee for the SEDA agreement		$	-			$	63,259
Common stock issued upon conversion of Series B Convertible Preferred Stock		$	70			$	-
Original issuance discount on note payable		$	-			$	90,000

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1    ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Organization and Operations

 

KULR Technology Group, Inc., through its wholly-owned subsidiary, KULR Technology Corporation (collectively referred to as “KULR” or the “Company”), develops and commercializes high-performance thermal management technologies for electronics, batteries, and other components across a range of applications. Currently, the Company is focused on targeting both, high performance aerospace and Department of Defense (“DOD”) applications, such as satellite communications, directed energy system and hypersonic vehicle, and applying them to mass market commercial applications, such as lithium-ion battery energy storage, electrical vehicle, 5G communication, cloud computer infrastructure, consumer and industrial devices.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of March 31, 2021 and for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2020 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on March 19, 2021.

 

Risks and Uncertainties

 

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. During 2020 and continuing into 2021, the global economy has been, and continues to be, affected by COVID-19. While the Company continues to see signs of economic recovery as certain governments began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position at March 31, 2021.

 

The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain.  Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2021 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 2       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Since the date of the Annual Report on Form 10-K for the year ended December 31, 2020, there have been no material changes to the Company’s significant accounting policies, except as disclosed in this note.

 

Liquidity

 

As of March 31, 2021, the Company had cash and working capital of approximately $6.2 million and $4.7 million, respectively. For the three months ended March 31, 2021, the Company incurred a net loss of approximately $1.7 million and used cash in operations of approximately $1.7 million. On May 20, 2021, the Company raised approximately $6.5 million in connection with a convertible preferred financing agreement. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000. See Note 10 – Subsequent Events for additional details. While the Company anticipates it will continue to incur operating losses and use cash in operating activities for the foreseeable future, the Company believes that its current working capital is sufficient in comparison to its anticipated cash usage for a period of at least twelve months subsequent to the filing date of these condensed consolidated financial statements.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash, accounts receivable, revenue and accounts payable.

 

Cash Concentrations

 

A significant portion of the Company’s cash is held at one major financial institution. The Company has not experienced any losses in such accounts. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There was an uninsured balance of $5,659,918 and $8,513,010 as of March 31, 2021 and December 31, 2020, respectively.

 

Customer and Revenue Concentrations

 

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

 

		Revenues								Accounts Receivable
		For the Three Months Ended
		March 31,								As of				As of
		2021				2020				March 31, 2021				December 31, 2020
Customer A			*				23	%			*				*
Customer B			*				59	%			*				*
Customer C			23	%			*				*				*
Customer D			14	%			*				17	%			*
Customer E			51	%			*				61	%			*
Customer F			*				*				*				70	%
Customer G			*				*				*				19	%
Customer H			*				*				*				10	%
Total			88	%			82	%			78	%			99	%

 

* Less than 10%

 

There is no assurance the Company will continue to receive significant revenues from any of these customers. Any reduction or delay in operating activity from any of the Company’s significant customers, or a delay or default in payment by any significant customer, or termination of agreements with significant customers, could materially harm the Company’s business and prospects. As a result of the Company’s significant customer concentrations, its gross profit and results from operations could fluctuate significantly due to changes in political, environmental, or economic conditions, or the loss of, reduction of business from, or less favorable terms with any of the Company’s significant customers.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Vendor Concentrations

 

During the three months ended March 31, 2021, three vendors represented more than 10% of the Company’s purchases and during the three months ended March 31, 2020, four different vendors represented more than 10% of the Company’s purchases, as follows:

 

		For the Three Months Ended
		March 31,
		2021				2020
Vendor A			*				11	%
Vendor B			*				13	%
Vendor C			*				15	%
Vendor D			*				23	%
Vendor E			10	%			*
Vendor F			27	%			*
Vendor G			16	%			*
			53	%			61	%
* Less than 10%

 

Inventory

 

Inventory is comprised of carbon fiber velvet (“CFV”) thermal interface solutions and internal short circuit batteries, which are available for sale. Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. The cost of inventory that is sold to third parties is included within cost of sales and the cost of inventory that is given as samples is included within operating expenses. The Company periodically reviews for slow-moving, excess or obsolete inventories. Products that are determined to be obsolete, if any, are written down to net realizable value. As of March 31, 2021 and December 31, 2020, the Company’s inventory was comprised solely of finished goods.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following five steps are applied to achieve that core principle:

 

	·	Step 1: Identify the contract with the customer;
	·	Step 2: Identify the performance obligations in the contract;
	·	Step 3: Determine the transaction price;
	·	Step 4: Allocate the transaction price to the performance obligations in the contract; and
	·	Step 5: Recognize revenue when the company satisfies a performance obligation.

 

The Company recognizes revenue primarily from the following different types of contracts:

 

·

Product sales – Revenue is recognized at the point in time the customer obtains control of the goods and the Company satisfies its performance obligation, which is generally at the time it ships the product to the customer.

 

·

Contract services – Revenue is recognized at the point in time that the Company satisfies its performance obligation under the contract, which is generally at the time the services are fulfilled and/or accepted by the customer.

 

The following table summarizes the Company’s revenue recognized during the three months ended March 31, 2021 and 2020:

 

		For the Three Months Ended
		March 31,
		2021				2020
Product sales		$	178,249			$	28,000
Contract services			239,656				49,500
Total revenue		$	417,905			$	77,500

 

As of March 31, 2021 and December 31, 2020, the Company had $20,000 and $20,000 of deferred revenue, respectively, from contracts with customers. The contract liabilities represent payments received from customers for which the Company had not yet satisfied its performance obligation under the contract., or the customers have not officially accepted the goods or services provided under the contract. During the three months ended March 31, 2021 and 2020, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.

 

As of March 31, 2021 and December 2020, the Company recorded $63,612 and $31,212, respectively, of deferred labor costs, which is included in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets. Deferred labor costs represent costs to fulfill the Company's contract service revenue. The Company will recognize the deferred labor costs as cost of revenues at the point in time that the Company satisfies its performance obligation under the respective contract, which is generally at the time the services are fulfilled and/or accepted by the customer.

 

 Shipping and Handling Costs

 

Amounts billed to a customer in a sales transaction related to shipping and handling are recorded as revenue. Costs incurred for shipping and handling are included as cost of sales on the accompanying condensed consolidated statements of operations.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of non-vested restricted stock, if not anti-dilutive. 

 

The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:

 

		For the Three Months Ended
		March 31,
		2021				2020
Series B Convertible Preferred Stock			-				724,350
Series C Convertible Preferred Stock			-				240,100
Unvested Restricted Stock			2,000,000				-
Market-based equity award			1,500,000				-
Options			470,000				395,000
Warrants			6,787,911				210,025
Total			10,757,911				1,569,475

 

Reclassifications

 

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net loss.

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 effective January 1, 2021 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures. 

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 3       PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

As of March 31, 2021 and December 31, 2020, prepaid expenses and other current assets consisted of the following:

 

		March 31, 2021				December 31, 2020
Deferred labor costs		$	63,612			$	31,212
Deferred inventory costs			385,363				-
Filing			9,889				9,944
Insurance			16,035				10,429
Marketing			46,353				56,853
Other			23,263				31,426
Professional			31,129				10,603
Security deposit			8,729				8,729
Total prepaid expenses		$	584,374			$	159,196

 

NOTE 4       ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 

 

As of March 31, 2021 and December 31, 2020, accrued expenses and other current liabilities consisted of the following:

 

		March 31,  2021				December 31, 2020
Payroll and vacation		$	108,940			$	279,054
Legal and professional fees			209,000				81,902
Other			96,798				34,056
Total accrued expenses and other current liabilities		$	414,738			$	395,012

 

NOTE 5       ACCRUED ISSUABLE EQUITY

 

A summary of the accrued issuable equity activity during the three months ended March 31, 2021 is presented below. There was no accrued issuable equity during the three months ended March 31, 2020.

 

Balance, January 1, 2021		$	128,380
Additions			121,990
Reclassifications to equity			(49,800	)
Mark-to market			132,576
Balance, March 31, 2021		$	333,146

 

During the three months ended March 31, 2021, the Company entered into certain contractual arrangements for services in exchange for a fixed number of shares of common stock of the Company, having an aggregate grant date value of $121,989. The Company settled certain of its accrued issuable equity obligations through the issuance of an aggregate of 20,000 shares with an aggregate fair value of $49,800.

 

During the three months ended March 31, 2021, the Company recorded $132,577 of losses related to the change in fair value of accrued issuable equity.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 6       NOTES PAYABLE

 

A summary of notes payable activity during the three months ended March 31, 2021 and 2020, is presented below:

 

		Notes				Debt
		Payable				Discount				Total
Balance, January 1, 2021		$	2,450,000			$	(128,198	)		$	2,321,802
Repayments in cash			(1,050,000	)			-				(1,050,000	)
Amortization of debt discount			-				108,124				108,124
Outstanding, March 31, 2021		$	1,400,000			$	(20,074	)		$	1,379,926

 

During the year ended December 31, 2020, the Company entered into note purchase agreements in the original aggregate principal amount of $4,000,000 (“Principal Amount”) for cash proceeds of $3,710,000. The Notes included an original issue discount of $290,000, which represents the difference between the principal and proceeds received. The original issue discount, along with the $340,000 advisory fees were recorded as a debt discount which are being amortized over the term of the respective Notes using the effective interest rate method.

 

The Notes bears no coupon interest (original issue discount only). The Company repaid principal $1,550,000 during the year ended December 31, 2020 and repaid additional principal in the amount of $1,050,000 during the three months ended March 31, 2021. Of the $1,400,000 principal balance remaining at March 31, 2021, $525,000 matures on May 31, 2021 and $875,000 matures on June 30, 2021.

 

During the three months ended March 31, 2021 and 2020, the Company recorded amortization of debt discount in the amount of $108,124 and $19,220, respectively. Subsequent to March 31, 2021, the Company repaid principal on the Notes in the aggregate amount of $350,000.

 

NOTE 7     RELATED PARTY TRANSACTIONS

 

Accounts Payable – Related Party

 

Accounts payable – related party consists of a liability of $2,628 and $2,628, as of March 31, 2021 and December 31, 2020, respectively, to Energy Science Laboratories, Inc. (“ESLI”), a company controlled by the Company’s Chief Technology Officer (“CTO”), in connection with consulting services provided to the Company associated with the development of the Company’s CFV thermal management solutions in prior periods.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 8      STOCKHOLDERS' EQUITY (DEFICIENCY)

 

Common Stock Issued upon Conversion of Series B Preferred Stock

 

During the three months ended March 31, 2021, the Company issued an aggregate of 698,600 shares of common stock upon the conversion of 13,972 shares of Series B Preferred stock, after which there remained no further Series B Preferred Stock outstanding.

 

Stock-Based Compensation

 

During the three months ended March 31, 2021 and 2020, the Company recognized stock-based compensation expense of $387,972 and $12,728, respectively, related to common stock and restricted common stock, warrants and stock options, of which $7,405 and $8,112, respectively, is included in research and development expenses and $250,322 and $4,616, respectively, is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

The following table presents information related to stock-based compensation expense for the three months ended March 31, 2021 and 2020:

 

		For the Three Months Ended
		March 31,
		2021				2020
Common stock issued for services		$	49,800			$	2,200
Amortization of restricted common stock			126,625				-
Amortization of market-based award			130,245				-
Stock options			9,112				10,528
Accrued issuable equity (common stock)			72,190				-
Total		$	387,972			$	12,728

 

(1)

See Note 5 – Accrued Issuable Equity, for additional details.

 

Common Stock Issued for Services

 

On February 26, 2021, the Company issued 20,000 shares of immediately vested common stock with an aggregate grant date value of $49,800 for consulting services provided during January and February 2021.

 

Restricted Common Stock

 

During the three months ended March 31, 2021, the Company recorded stock-based compensation of $17,875 in connection with the amortization of restricted stock issued pursuant to consulting agreements during the fourth quarter of 2020.

 

On March 1, 2021, the Company issued 2,000,000 shares of its common stock (the “COO Shares”) with an aggregate grant date value of $5,220,000 in connection with the appointment of the Company’s Chief Operating Officer (see Note 9 – Commitments and Contingencies). The shares vest in four equal annual installments beginning on March 1, 2022. During March 2021, the Company recorded stock-based compensation of $108,750 related to the amortization of the grant date value of the COO Shares.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

As of March 31, 2021, there is $5,178,744 of unrecognized stock-based compensation related to restricted stock awards which will be amortized over the remaining vesting period of 3.89 years.

 

Stock Options

 

On January 1, 2020, the Company granted five-year options to purchase a total of 10,000 shares of common stock at an exercise price of $0.66 per share to an employee pursuant to the 2018 Plan. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options vest monthly over three years. The options had an aggregate grant date value of $3,609 which is recognized over the vesting period.

 

On March 12, 2021, in connection with the hire of its Senior Director of Product Development, the Company granted a five-year option to purchase 100,000 shares of common stock to its Senior Director of Product Development. pursuant to the 2018 Plan. The option is exercisable at an exercise price of $2.44 per share. One-fourth of the options will vest on the first-year anniversary of the grant date and the remaining options vest monthly over three years. The options had an aggregate grant date value of $57,819 which is recognized over the vesting period.

 

The Company has computed the fair value of stock options granted using the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

 

		For the Three Months Ended
		March 31,
		2021				2020
Risk free interest rate			0.85	%			1.58	%
Expected term (years)			2.50				2.50
Expected volatility			93.00	%			93.00	%
Expected dividends			0.00	%			0.00	%

 

Option forfeitures are accounted for at the time of occurrence. The expected term used is the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The Company does not yet have a trading history to support its historical volatility calculations. Accordingly, the Company is utilizing an expected volatility figure based on a review of the historical volatility of comparable entities over a period of time equivalent to the expected life of the instrument being valued. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.

 

The weighted average grant date fair value per share of options granted during the three months ended March 31, 2021 and 2020 was $0.58 and $0.36, respectively.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

A summary of options activity during the three months ended March 31, 2021 is presented below:

 

						Weighted				Weighted
						Average				Average
		Number of				Exercise				Remaining				Intrinsic
		Options				Price				Term (Yrs)				Value
Outstanding, January 1, 2021			370,000			$	0.66
Granted			100,000				2.44
Exercised			-				-
Expired			-				-
Forfeited			-				-
Outstanding, March 31, 2021			470,000			$	1.04				2.3			$	677,400
Exercisable, March, 2021			268,607			$	0.66				2.8			$	488,865

 

The following table presents information related to stock options as of March 31, 2021:

 

Options Outstanding								Options Exercisable
								Weighted
				Outstanding				Average				Exercisable
Exercise				Number of				Remaining Life				Number of
Price				Options				In Years				Options
$	0.66				370,000				2.8				268,607
$	2.44				100,000				-				-
					470,000				2.8				268,607

 

Market-Based Award

 

On March 1, 2021, in connection with the appointment of the Company’s COO (see Note 9 – Commitments and Contingencies), the COO is eligible to receive of up to 1,500,000 shares of the Company’s common stock which will be earned based upon achieving certain market capitalization milestones up to $4 billion. The grant date value of this award of $2,911,420 was determined using a Monte Carlo valuation model for market-based vesting awards, and will be amortized over each of the tranches’ prospective derived service period. The following assumptions were used:

 

Risk free interest rate		0.71%
Expected volatility		98.9%
Expected dividend yield		0.00%
Weighted average derived service period		2.20 years
Fair value of common stock on date of grant		$2.61

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 9      COMMITMENTS AND CONTINGENCIES

 

Operating Lease

 

Effective December 22, 2020, the Company entered into a lease addendum to extend the term of its original lease, for space located in San Diego, California used for research and development activities, from December 31, 2020 to June 30, 2021. Monthly rental payments under the renewed lease total $5,127, which is comprised of $4,572 of base rent plus $555 of association fees.

 

 During the three months ended March 31, 2021 and 2020, operating lease expense was $15,402 and $10,016, respectively. As of March 31, 2021, the Company does not have any financing leases.

 

Appointment of President and Chief Operating Officer

 

On January 4, 2021, the Company entered into a consulting agreement with a new Executive Vice President. The consultant provided management and business development services to the Company. In consideration for services provided in January and February 2021, the Company compensated the consultant with $10,000 per month and 10,000 shares of its common stock per month. Effective March 1, 2021, the Company appointed the consultant as President and Chief Operating Officer (“COO”) of the Company, to hold office until the earlier of the expiration of the term of office, a successor is duly elected and qualified, or the earlier of such officer’s death, resignation, disqualification, or removal. In connection with his appointment to COO, the COO received an aggregate of 2,000,000 shares of common stock, which shares will vest in four equal annual installments beginning on March 1, 2022. Additionally, the COO is eligible for incentive-based share grants totaling up to 1,500,000 shares of the Company’s common stock, which will be earned based on achieving certain market capitalization milestones up to $4 billion (see Note 8 – Stockholders Equity (Deficiency).

 

Director Compensation

 

On February 2, 2021, the Board of the Company appointed three new directors on the Board, to hold office until the earlier of the expiration of the term of office of the director whom they have replaced, a successor is duly elected and qualified, or the earlier of such director’s death, resignation, disqualification, or removal. The three directors appointment is contingent upon the Company’s common stock being approved for uplisting to a national exchange. Furthermore, once appointed, each director will receive quarterly cash compensation equal to $10,000 and each director will be granted 20,000 shares of common stock, which shares shall vest quarterly in 5,000 share installments with the first installment vesting immediately upon their appointment.

 

 

KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 10      SUBSEQUENT EVENTS

 

Technology Development and Sponsorship Agreement

 

On March 31, 2021, the Company entered into a multi-year technology development and sponsorship agreement, pursuant to which the Company has committed to spend an aggregate of $1,650,000 in three installments which are due April 1, 2021, January 1, 2022, and January 1, 2023.

 

Operating Lease

 

On April 5, 2021, the Company entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021. Monthly rental payments under the new lease total $23,787, which are comprised of $18,518 of base rent plus $5,269 for common area costs.

 

Common Stock

 

On April 6, 2021, the Company issued 20,000 shares of immediately vested common stock with an aggregate grant date value of $51,000 for legal services. The shares were issued pursuant to the Company’s 2018 Incentive Plan.

 

During April 2021, the Company issued an aggregate of 300,000 shares of common stock upon the exercise of outstanding warrants pursuant to which the Company received an aggregate of $375,000 of gross proceeds.

 

Securities Purchase Agreement

 

On May 19, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with an investor, pursuant to which the Company agreed to issue to the investor an aggregate of 650 shares of Series D convertible preferred stock (the “Series D Preferred”) pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock (the “Warrants”) at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000 (the “Offering”). The Company will also pay the investor a commitment fee of 1,300,000 shares of common stock at the closing of the Offering. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000.

 

The Series D Preferred will have a fixed conversion price of $2.05, will be convertible into an aggregate of 3,170,732 shares of common stock and will have the right to vote on an as-converted basis.  Holders of the Series D Preferred shall be entitled to receive cumulative dividends annually at an annual rate equal to ten percent (10%). Dividends shall be payable in cash or, at the option of the holder of the Series D Preferred, converted into shares of common stock as provided in the certificate of designation for the Series D Preferred. Provided that the shares of common stock issuable upon conversion of the Series D Preferred is registered pursuant to an effective registration statement, the Company shall have the option, but not the obligation, to redeem, in cash, all or part of the Series D Preferred.

 

As a condition to entering into the SPA, the investor agreed that, commencing on the closing date and until the earliest of (i) listing of the Company’s common stock on a national exchange or (ii) June 4, 2021, the Series D Preferred and the Warrants will be subject to a standard lock-up provision.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc. (the “Company”) as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2020 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 19, 2021. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Quarterly Report, in our other reports filed with the SEC, and other factors that we may not know.

 

 Overview

 

 KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications. For aerospace and DOD applications, our solutions target high performance applications in direct energy, hypersonic vehicles and satellite communications. For commercial applications, our main focus is a total solution to battery safety by which we aim to mitigate the effects of thermal runaway propagation. This total battery safety solution can be used for electric vehicles, energy storage, battery recycling transportation, cloud computing and 5G communication devices. Our proprietary core technology is a carbon fiber material that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter.

 

 KULR’s business model continues to evolve from being a component supplier, to providing more design and testing services to our customers. The next step of evolution is to provide total system solutions to address market needs. In order to scale up as a systems provider more quickly and efficiently in (i) the Li-ion battery energy storage and recycling markets, (ii) battery cell design and safety testing, and (iii) advanced thermal management systems, such as hypersonic vehicles, KULR will actively seek partners for joint venture, technology licensing and other strategic partnership models. The goal is to leverage the Company’s thermal design technology expertise to create market leading products, which KULR will take to market directly to capture more value for KULR shareholders.

 

 

Recent Developments

 

 COVID-19

 

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. During 2020 and continuing into 2021, the global economy has been, and continues to be, affected by COVID-19. While the Company continues to see signs of economic recovery as certain governments began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position at March 31, 2021.

 

The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain.  Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2021 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Appointment of Keith Cochran

 

On March 8, 2021, our Board of Directors (the “Board”) appointed Keith Cochran as President and Chief Operating Officer of the Company, to hold office until the earlier of the expiration of the term of office, a successor is duly elected and qualified, or the earlier of such officer’s death, resignation, disqualification, or removal.

 

As compensation for his services as President and Chief Operating Officer of the Company, Mr. Cochran will receive: (1) a salary of $250,000 per annum and commensurate benefits; (2) 2,000,000 restricted shares of the Company’s common stock, which shares shall vest, so long as Mr. Cochran remains employed by the Company, in four (4) equal yearly installments, with the first installment amount to vest on March 1, 2022 and annually thereafter; and (3) eligibility, also subject to Mr. Cochran’s continued employment with the Company, for incentive based grants of up to 1,500,000 shares, which shall be earned upon the Company achieving certain market capitalization milestones.

 

Technology Development and Sponsorship Agreement

 

On March 31, 2021, the Company entered into a multi-year technology development and sponsorship agreement where the Company has committed to spend an aggregate of $1,650,000 payable in three installments, which are due April 1, 2021, January 1, 2022, and January 1, 2023.

 

Operating Lease

 

On April 5, 2021, the Company entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021. Monthly rental payments under the new lease total $23,787, which are comprised of $18,518 of base rent plus $5,269 for common area costs.

 

Conversion of Series B Preferred Stock

 

In March 2021, KULR issued an aggregate of 698,600 shares of our common stock upon conversion of 13,972 shares of our Series B Preferred Stock, after which there remained no further Series B Preferred Stock outstanding.

 

Securities Purchase Agreement

 

On May 19, 2021, the Company entered into a SPA with an investor, pursuant to which the Company agreed to issue to the investor an aggregate of 650 shares of Series D Preferred pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000. The Company will also pay the investor a commitment fee of 1,300,000 shares of common stock at the closing of the Offering. The Series D Preferred will have a fixed conversion price of $2.05, will be convertible into an aggregate of 3,170,732 shares of common stock and will have the right to vote on an as-converted basis. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000.

 

 

Common Stock

 

On April 6, 2021, we issued 20,000 shares of immediately vested common stock with a grant date value of approximately $51,000 for legal services.

 

On April 19, 2021, in connection with the appointment of a new Vice President of Operations (the “VPO”) the Board of Directors granted 80,000 restricted shares of our common stock to the VPO. The shares vest in four equal yearly installments on each anniversary of the grant date.

 

During April, we issued an aggregate of 300,000 shares of common stock in connection with exercises of outstanding warrant pursuant to which we received an aggregate of $375,000 of gross proceeds.

 

Results of Operations

 

Three Months Ended March 31, 2021 Compared With the Three Months Ended March 31, 2020

 

Revenues

 

Our revenues consisted of the following during the three months ended March 31, 2021 and 2020:

 

		For the Three Months Ended
		March 31,
		2021				2020
Product sales		$	178,249			$	28,000
Contract services			239,656				49,500
Total revenue		$	417,905			$	77,500

 

For the three months ended March 31, 2021 and 2020, we generated $417,905 and $77,550 of revenues, respectively, representing an increase of $340,405, or 439%. Revenue from product sales during the three months ended March 31, 2021 increased by 537% compared to the three months ended March 31, 2020, mainly due to four large contracts received during the three months ended March 31, 2021. Product sales during these periods included sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, ISC battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials. Our service revenues, which include certain research and development contracts and onsite engineering services, have not been hampered by restrictions arising from working under COVID-19 shelter-in-place regulations.

 

Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable, and lumpy, which can influence the timing, consistency and reporting of sales growth.

 

Cost of Revenues

 

Cost of revenues consists of the cost of our products as well as labor expenses directly related to product sales or research contract services.

 

Generally, we earn greater margins on revenue from products compared to revenue from services, so product mix plays an important role in our reported average margins for any period. Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between period, customers and products, due to the learning process, customer negotiating strengths, and product mix.

 

 

For the three months ended March 31, 2021 and 2020, cost of revenues was $275,268 and $30,043, respectively, an increase of $245,225 or 816%. The increase was primarily due to higher product sales and service revenues earned during the three months ended March 31, 2021. The gross margin percentage was 34% and 61% for the three months ended March 31, 2021 and 2020, respectively. The decrease in margins during the first quarter of 2021 is primarily the result of a low 15% margin earned on a single large contract during the first quarter of 2021.

 

Research and Development

 

Research and development expenses (“R&D”) include expenses incurred in connection with the R&D of our CFV thermal management solution. R&D expenses are expensed as they are incurred.

 

For the three months ended March 31, 2021 and 2020, R&D expenses were $122,983 and $111,713, respectively, representing an increase of $11,270 or 10%. The increase is primarily due to new energy storage development services provided during the period, partially offset by a reduction in R&D salaries and other salary related costs, such as payroll taxes and other benefits, due to salary reductions implemented at the end of the first quarter of 2020 as a result of COVID-19. We expect that our R&D expenses will increase as we expand our future operations.

 

Selling, General and Administrative

 

Selling, general and administrative expenses consist primarily of travel, salaries, payroll taxes and other benefits, and rent expense.

 

For the three months ended March 31, 2021 and 2020, selling, general and administrative expenses were $1,492,811 and $465,410, respectively, an increase of $1,027,401 or 221%. The increase is primarily attributable to an increase of approximately $486,000 of marketing and advertising expense, an increase of approximately $376,000 of stock-based compensation resulting primarily from the issuance of restricted stock upon the appointment of the Company’s Chief Operating Officer (“COO”) and stock granted to consultants during the period, as well as an increase of approximately $87,000 in labor costs as the result of four new hires, including the appointment of the COO.

 

Other Expenses

 

 For the three months ended March 31, 2021 and 2020, other expenses were $241,566 and $20,587, respectively, representing an increase of $220,979. The increase in other expense is primarily due to amortization of debt discount of $108,124 related to the issuance of notes payable and $132,577 of change in fair value of accrued issuable equity during the three months ended March 31, 2021.

 

Liquidity and Capital Resources

 

As of March 31, 2021 and December 31, 2020, we had cash balances of $6,166,755 and $8,880,140, respectively, and working capital of $4,699,452 and $6,060,695, respectively.

 

For the three months ended March 31, 2021 and 2020, cash used in operating activities was $1,663,385 and $698,110, respectively. Our cash used in operations for the three months ended March 31, 2021 was primarily attributable to our net loss of $1,714,723, adjusted for non-cash expenses in the aggregate amount of $633,444, and $582,106 of net cash used to fund changes in the levels of operating assets and liabilities. Our cash used in operations for the three months ended March 31, 2020 was primarily attributable to our net loss of $550,253, adjusted for non-cash expenses in the aggregate amount of $32,826, and $180,683 of net cash used to fund changes in the levels of operating assets and liabilities.

 

There were no cash flows from investing activities for the three months ended March 31, 2021 and 2020.

 

 

For the three months ended March 31, 2021 and 2020, cash (used in) provided by financing activities was ($1,050,000) and $1,223,401, respectively. Cash used in financing activities during the three months ended March 31, 2021 represents principal payments on notes payable. The cash provided by financing activities during the three months ended March 31, 2020 primarily represents $1,410,000 of net proceeds from the issuance of a note payable, offset by the payment of $130,000 of debt issuance costs and repayment of notes payable of $50,000.

 

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. During 2020 and continuing into 2021, the global economy has been, and continues to be, affected by COVID-19. While the Company continues to see signs of economic recovery as certain governments began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position at March 31, 2021.

 

The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain.  Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2021 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

During the year ended December 31, 2020, we entered into note purchase agreements in the original aggregate principal amount of $4,000,000 for cash proceeds of $3,710,000. Principal in the amount of $1,550,000 was repaid during the year ended December 31, 2020 and principal in the amount of $1,050,000 was repaid during the three months ended March 31, 2021. Of the $1,400,000 principal balance remaining at March 31, 2021, $525,000 matures on May 31, 2021 and $875,000 matures on June 30, 2021.

 

In April 2020, the Company received a loan of $155,226 under the government Small Business Administration (“SBA”) sponsored Payroll Protection Program (“PPP”) to support continuing employment during the COVID-19 pandemic. The PPP Loan (“Note”) and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities and maintains its payroll levels. The amount of forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. If the PPP Loan is not forgiven, the Company will begin repaying this loan beginning in November 2021. Any unforgiven balance must be repaid in full by its maturity date, February 28, 2022.

 

Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement (“SEDA”) with YAII, pursuant to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to YAII’s approval for amounts over $100,000) of shares of the Company’s common stock at a price equal to Company 80% of the lowest daily volume weighted average price for the five days immediately following the date the Company delivers notice requiring YAII to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by YAII, at least 5 trading days shall have elapsed from the immediately preceding advance date. Through March 31, 2021 , the Company issued an aggregate of 1,841,548 shares of common stock at prices between $0.73 - $1.65 per share for aggregate proceeds of $2,214,437 in connection with advance notices submitted to YAII under the SEDA, of which $791,000 of the proceeds were applied directly against the principal due under the Notes. Pursuant to a registered public offering on December 31, 2020, the Company may not issue shares involving variable rate transactions (including shares issuable pursuant to the SEDA), so long as warrants issued in connection with the registered public offering remain outstanding.

 

On May 19, 2021, the Company entered into a SPA with an investor, pursuant to which the Company agreed to issue to the investor an aggregate of 650 shares of Series D Preferred pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000. The Company will also pay the investor a commitment fee of 1,300,000 shares of common stock at the closing of the Offering. The Series D Preferred will have a fixed conversion price of $2.05, will be convertible into an aggregate of 3,170,732 shares of common stock and will have the right to vote on an as-converted basis. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000.

 

 

We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant revenues and/or raise additional capital to fund our operations. Although our management believes that we have access to capital resources through various sources, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. While we believe that we will continue to incur operating losses and use cash in operating activities for the foreseeable future, we believe that our current working capital is sufficient in comparison to our anticipated cash usage for a period of at least the next twelve months subsequent to the filing date of these condensed consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Critical Accounting Policies

 

For a description of our critical accounting policies, see Note 2 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is a smaller reporting company, as defined by Rule 229.10(f)(1), and is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our management, with the participation of our principal executive officer and principal financial officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the reasonable assurance level.

 

During the year ended December 31, 2020, our management identified a material weakness in our internal control over financial reporting whereas we did not design or maintain effective controls to ensure that there is an independent review and approval of electronic payments (wires, EFT’s, ACH’s and credit card payments) as our policy of providing timely support to ensure completeness and accuracy of the payment was not followed. We are currently implementing a detailed plan for remediation of the material weakness, including developing and maintaining preventative controls around the electronic payment process to ensure proper segregation of duties.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the first quarter of 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations of the Effectiveness of Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on March 19, 2021.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

In the three months ended March 31, 2021, we issued 698,600 shares of common stock upon conversion of 13,972 shares of our Series B Convertible Preferred Stock.

 

Each of the foregoing transactions was exempt from the registrations requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof. In the alternative, the common stock issued upon the exercise of conversion rights is an exempt security pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS		XBRL Instance*
101.SCH		XBRL Taxonomy Extension Schema*
101.CAL		XBRL Taxonomy Extension Calculation*
101.DEF		XBRL Taxonomy Extension Definition*
101.LAB		XBRL Taxonomy Extension Labels*
101.PRE		XBRL Taxonomy Extension Presentation*

 

*Filed herewith

 

**Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned hereunto duly authorized.

 

May 20, 2021	By	/s/ Michael Mo
		Michael Mo
		Chief Executive Officer and Chairman
		(Principal Executive Officer)

 

May 20, 2021	By	/s/ Simon Westbrook
		Simon Westbrook
		Chief Financial Officer
		(Principal Financial and Accounting Officer)