Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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:
001-40454
KULR TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
81-1004273
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
4863 Shawline Street, San Diego, California
92111
(Address of principal executive offices)
(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
Common Stock
KULR
NYSE American LLC
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 ☒ 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 ☒ 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
☒
Smaller reporting company
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 ☒
As of November 12, 2021, there were 104,700,707 shares of Common Stock, $0.0001 par value, issued and outstanding.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
3
Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020
4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the Three and Nine Months Ended September 30, 2021
5
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the Three and Nine Months Ended September 30, 2020
6
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020
7
Notes to Condensed Consolidated Financial Statements (unaudited)
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
26
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
28
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
29
SIGNATURES
30
2
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
2021
2020
(unaudited)
Assets
Current Assets:
Cash
$
10,990,056
8,880,140
Accounts receivable
550,379
55,492
Inventory
190,766
55,452
Prepaid expenses and other current assets
450,756
150,468
Total Current Assets
12,181,957
9,141,552
Property and equipment, net
385,750
57,857
Equipment deposits
1,029,805
—
Security deposits
58,941
8,728
Right of use asset
730,115
Total Assets
14,386,568
9,208,137
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
67,359
66,537
Accounts payable - related party
2,628
Accrued expenses and other current liabilities
689,346
395,012
Notes payable, net of debt discount of $0 and $128,198 at September 30, 2021 and December 31, 2020, respectively
2,321,802
Accrued issuable equity
194,134
128,380
Loan payable, current portion
155,226
12,936
Lease liability, current portion
257,198
Deferred revenue
158,816
20,000
Total Current Liabilities
1,522,079
2,947,295
Lease liability, non-current portion
475,540
Loan payable, non-current portion
142,290
Total Liabilities
1,997,619
3,089,585
Commitments and contingencies (Note 11)
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 September 30, 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 September 30, 2021 and December 31, 2020, respectively
1
Series C Preferred Stock, 400 shares designated; none issued and outstanding at September 30, 2021 and December 31, 2020
Series D Preferred Stock, 650 shares designated; none issued and outstanding at September 30, 2021 and December 31, 2020
Common stock, $0.0001 par value, 500,000,000 shares authorized; 101,992,963 and 89,908,600 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
10,200
8,991
Additional paid-in capital
31,462,955
17,355,968
Accumulated deficit
(19,084,206)
(11,246,408)
Total Stockholders' Equity
12,388,949
6,118,552
Total Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
For the Nine Months Ended
Revenue
600,921
136,849
1,647,070
415,477
Cost of revenue
155,138
63,403
869,612
138,180
Gross Profit
445,783
73,446
777,458
277,297
Operating Expenses:
Research and development
481,855
51,820
957,579
221,524
Selling, general, and administrative
3,104,410
832,146
7,320,524
1,719,100
Total Operating Expenses
3,586,265
883,966
8,278,103
1,940,624
Loss From Operations
(3,140,482)
(810,520)
(7,500,645)
(1,663,327)
Other (Expense) Income
Interest expense, net
(758)
(1,284)
(2,389)
(5,004)
Debt redemption costs
(140,000)
Amortization of debt discount
(210,402)
(128,198)
(307,313)
Change in fair value of accrued issuable equity
45,600
9,947
(66,274)
(15,853)
Loss on foreign currency transactions
(292)
Total Other Expenses, net
44,550
(201,739)
(337,153)
(328,170)
Net Loss
(3,095,932)
(1,012,259)
(7,837,798)
(1,991,497)
Deemed dividend to Series D preferred stockholders
(2,624,326)
Net Loss Attributable to Common Stockholders
(10,462,124)
Net Loss Per Share
- Basic and Diluted
(0.03)
(0.01)
(0.11)
(0.02)
Weighted Average Number of Common Shares Outstanding
99,018,630
82,466,734
93,816,203
82,042,241
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
Series B Convertible
Series C Convertible
Series D Convertible
Additional
Total
Preferred Stock
Paid-In
Accumulated
Stockholders'
Shares
Amount
Capital
Deficit
Equity
Balance - January 1, 2021
13,972
89,908,600
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
49,798
49,800
Restricted common stock issued
2,000,000
200
(200)
Amortization of restricted common stock
126,625
Amortization of stock options
9,112
Amortization of market-based award
130,245
Net loss
(1,714,723)
Balance - March 31, 2021
92,627,200
9,263
17,671,479
(12,961,131)
4,719,611
Issuance of Series D Convertible Preferred Stock, common stock and warrants for cash [1]
650
1,300,000
130
6,134,870
6,135,000
Common stock issued upon the conversion of Series D Convertible Preferred Stock
(650)
3,170,730
317
(317)
Common stock issued upon the exercise of warrants
3,000,000
300
3,712,200
3,712,500
55,000
109,994
110,000
415,000
42
(42)
433,689
15,779
489,774
(3,027,143)
Balance - June 30, 2021
100,567,930
10,058
28,567,426
(15,988,274)
12,589,210
1,185,033
119
1,494,097
1,494,216
85,000
186,391
186,399
155,000
15
(15)
440,333
20,516
754,207
Balance - September 30, 2021
101,992,963
[1] Represents gross proceeds of $6,500,000, net of cash issuance costs of $365,000.
The accompanying notes are an integral part of these condensed consolidated financial statements
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020
to be
Issued
Deficiency
Balance - January 1, 2020
14,487
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
10,528
(550,253)
Balance - March 31, 2020
81,167,678
8,117
7,665,016
(8,946,565)
(1,273,431)
Common stock issued as a commitment fee for the Standby Equity Distribution Agreement [1]
561,564
56
679,381
679,437
30,000
29,997
9,588
(428,985)
Balance - June 30, 2020
81,759,242
8,176
8,383,982
(9,375,550)
(983,391)
Common stock issued pursuant to the SEDA agreement
1,159,449
116
1,394,884
1,395,000
Common stock to be issued pursuant to the SEDA agreement
40,000
35,000
24,997
25,000
10,038
Common stock issued upon conversion of Series B ConvertiblePreferred Stock
(515)
25,758
(3)
Common stock issued uponconversion of Series C Convertible Preferred Stock
(5.11)
56,777
(6)
Balance - September 30, 2020
18.90
83,036,226
8,304
9,813,892
(10,387,809)
(525,612)
[1] Represents gross proceeds of $757,695 less $78,258 of amortized deferred offering costs.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
128,198
307,313
Depreciation and amortization expense
29,166
10,573
Bad debt expense
933
66,274
15,853
Stock-based compensation
2,765,959
252,831
Changes in operating assets and liabilities:
(494,887)
(40,915)
(135,314)
(21,070)
(300,288)
(97,267)
(50,213)
84,702
(1,806)
(254,260)
294,334
(280,129)
Lease liability
(82,079)
138,816
21,600
Total Adjustments
2,442,862
(84,538)
Net Cash Used In Operating Activities
(5,394,936)
(2,076,035)
Cash Flows From Investing Activities:
Deposits for equipment purchases
(1,029,805)
Purchase of property and equipment
(357,059)
(46,087)
Net Cash Used In Investing Activities
(1,386,864)
Cash Flows from Financing Activities:
Proceeds from sale of Series D Convertible Preferred Stock, common stock and warrants
6,500,000
Proceeds from sale of common stock [1]
1,461,695
Repayments of notes payable
(2,450,000)
(159,000)
Proceeds from the exercise of warrants
5,206,716
Proceeds from Paycheck Protection Program loan
Proceeds from note payable
3,710,000
Payment of debt issuance costs
(330,000)
Payment of financing costs
(365,000)
(15,000)
Net Cash Provided By Financing Activities
8,891,716
4,822,921
Net Increase In Cash
2,109,916
2,700,799
Cash - Beginning of Period
108,857
Cash - End of Period
2,809,656
[1]
For the nine months ended September 30, 2020, the amount represents gross proceeds of $2,152,695 less $691,000 withheld by the investor to pay down a portion of the note payable held by the same investor.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
735
3,890
Income taxes
Non-cash investing and financing activities:
Right of use asset for lease liability
814,817
Beneficial conversion feature on Series D Convertible Preferred Stock
2,624,326
Common stock issued as a commitment fee for the SEDA agreement
Deferred offering costs reclassified to equity
13,042
Common stock issued upon the conversion of Series C Convertible Preferred Stock
Common stock issued in satisfaction of accrued issuable equity
209,200
Original issuance discount on note payable
290,000
Common stock issued for repayment of note payable
691,000
Subscriptions receivable for accrued issuable equity
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 high performance aerospace and Department of Defense ("DOD") applications, such as satellite communications, directed energy systems and hypersonic vehicles, and applying them to mass market commercial applications, such as lithium-ion battery energy storage, electrical vehicles, 5G communication, cloud computer infrastructure, and 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 September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 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 begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, 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 has determined there were no material adverse impacts on the Company’s results of operations and financial position at September 30, 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.
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
During the nine months ended September 30, 2021, the Company raised gross proceeds of $6,500,000 in connection with the sale of preferred stock, common stock and warrants, and raised proceeds of $5,206,716 in connection with the exercise of warrants to purchase common stock. During the nine months ended September 30, 2021, the Company repaid outstanding notes payable in the amount of $2,450,000. Subsequent to September 30, 2021, the Company received an aggregate of $6,500,000 in connection with the exercise of warrants. See Note 12 – Subsequent Events for additional details.
As of September 30, 2021, the Company had cash of $10,990,056 and working capital of $10,659,878. 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 financial statements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist 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 $10,489,922 and $8,513,010 as of September 30, 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
As of
September 30, 2021
December 31, 2020
Customer A
88
%
*
41
96
Customer B
Customer C
12
Customer D
40
Customer E
35
44
Customer F
Customer G
19
Customer H
73
81
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.
Vendor Concentrations
Vendor concentrations are as follows for the three and nine months ended September 30, 2021 and 2020:
Vendor A
17
Vendor B
13
Vendor C
11
Vendor D
Vendor E
Vendor F
Vendor G
Vendor H
Vendor I
48
53
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 September 30, 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.
The following five steps are applied to achieve the core principle of ASC 606:
The Company recognizes revenue primarily from the following different types of contracts:
The following table summarizes the Company's revenue recognized during the three and nine months ended September 30, 2021 and 2020:
Product sales
1,356,530
235,979
Contract services
290,540
179,498
Total revenue
As of September 30, 2021 and December 31, 2020, the Company had $158,816 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 and nine months ended September 30, 2021 and 2020, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
As of September 30, 2021 and December 31, 2020, the Company had $62,908 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 revenues on the accompanying condensed consolidated statements of operations.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, less unvested issued restricted stock. 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, if not antidilutive.
The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
Series B Convertible Preferred Stock
Series C Convertible Preferred Stock
189,000
Unvested restricted stock
2,615,000
Market-based equity awards
Options
590,000
395,000
Warrants
5,202,878
210,025
11,407,878
1,492,625
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 Financial Accounting Standards Board (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.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. ASU 2020-06 requires entities to provide expanded disclosures about the terms and features of convertible instruments and amends certain guidance in ASC 260, Earnings per Share, relating to the computation of earnings per share for convertible instruments and contracts in an entity’s own equity. The guidance becomes effective for the Company on January 1, 2024, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements.
On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company does not expect this new standard to have a material impact on its financial statements.
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed.
NOTE 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of September 30, 2021 and December 31, 2020, prepaid expenses and other current assets consisted of the following:
Deferred labor costs
62,908
31,212
Filing
2,729
9,944
Insurance
66,572
16,035
Marketing
115,794
58,103
Other
11,662
25,820
Professional fees
63,582
9,354
Subscriptions
30,009
Vendor deposits
97,500
Total prepaid expenses
NOTE 4 EQUIPMENT DEPOSITS
The Company entered into agreements with third party contractors for the design and build of a battery packaging and inspection automation system and a cell testing system. On July 22, 2021 and September 27, 2021, the Company paid deposits of $330,000 and $699,805 in connection with these agreements.
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of September 30, 2021 and December 31, 2020, accrued expenses and other current liabilities consisted of the following:
Board compensation
60,808
Payroll and vacation
219,547
278,854
Legal and professional fees
232,200
81,902
97,222
79,569
34,256
Total accrued expenses and other current liabilities
14
NOTE 6 ACCRUED ISSUABLE EQUITY
A summary of the accrued issuable equity activity during the nine months ended September 30, 2021 is presented below.
Balance, January 1, 2021
Additions
208,680
Reclassifications to equity upon issuance
(209,200)
Mark-to market
Balance, September 30, 2021
During the nine months ended September 30, 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 $208,680, and settled certain of its accrued issuable equity obligations through the issuance of an aggregate of 100,000 shares with an aggregate fair value of $209,200.
During the three and nine months ended September 30, 2021, the Company recorded income of $45,600 and a charge of $66,274, respectively, related to the change in fair value of accrued issuable equity.
NOTE 7 LEASES
On April 5, 2021, the Company entered into a new lease agreement for office space in San Diego, California, effective June 1, 2021. The initial lease term is three years and there is an option to renew for an additional five years. Management does not expect to exercise its option to renew. Monthly rental payments under the new lease begin at $23,787, which is comprised of $18,518 of base rent plus $5,268 of common area maintenance fees, with annual escalation of 3.5%. The Company paid a security deposit of $50,213 in connection with the new lease agreement.
The Company determined that the value of the lease liability and the related right-of-use asset at inception was $814,817, using an estimated incremental borrowing rate of 5%.
The Company also rents office space in San Diego, California on a month-to-month basis, at monthly rent of $5,127, which is comprised of $4,572 of base rent plus $555 of association fees.
During the three and nine months ended September 30, 2021, aggregate operating lease expense was $89,305 and $144,765, respectively. For the three and nine months ended September 30, 2020, operating lease expense was $15,616 and $42,832, respectively. As of September 30, 2021, the Company did not have any financing leases.
Maturities of lease liabilities as of September 30, 2021 were as follows:
Maturity Date
Remaining three months ending December 31, 2021
71,361
2022
289,981
2023
297,917
2024
125,530
Total lease payments
784,789
Less: Imputed interest
(52,051)
Present value of lease liabilities
732,738
Less: current portion
(257,198)
Lease liabilities, non-current portion
Supplemental cash flow information related to the lease was as follows:
For the Nine Months Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating lease
82,079
Right-of-use asset obtained in exchange for lease obligations
Operating lease
NOTE 8 NOTES PAYABLE
A summary of notes payable activity during the nine months ended September 30, 2021 is presented below:
Notes
Debt
Payable
Discount
2,450,000
Repayments in cash
Outstanding, September 30, 2021
NOTE 9 RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 2021, the Company had no material related party transactions.
Accounts Payable – Related Party
Accounts payable – related party consisted of a liability of $0 and $2,628, as of September 30, 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.
NOTE 10 STOCKHOLDERS’ EQUITY
Series D Preferred Stock
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 also agreed to 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 remaining notes payable obligation of $1,400,000.
The Series D Preferred have a fixed conversion price of $2.05, are convertible into an aggregate of 3,170,732 shares of common stock and 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
16
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.
The Company determined that the Series D Preferred was permanent equity given that there was no redemption provision at the holder’s option and it was determined that the conversion option was clearly and closely related to the equity host, so it didn’t need to be bifurcated. The Company further determined that the $10,000 cash structuring fee paid to the investor, would be accounted for as a reduction of the $6,500,000 of gross proceeds. The remaining proceeds of $6,490,000 were allocated on a relative fair value basis to the Series D Preferred ($3,875,675), the commitment shares ($1,339,582) and the Warrant ($1,274,743). The Company used the Black-Scholes option pricing model to determine the fair value of the Warrant using the following assumptions: exercise price of $2.50 per share, market price of $2.05 per share, expected term of 1.0 year, volatility of 142% and a risk-free interest rate of 0.05%. Finally, the Company determined that the Series D Preferred had a beneficial conversion feature equal to $2,624,326 which is a deemed dividend and represents an adjustment to the numerator in the loss per share calculation. The cash issuance costs of $365,000 (inclusive of the $10,000 cash structuring fee) were charged to additional paid-in-capital.
On June 17, 2021, all of the outstanding shares of Series D Preferred were converted into common stock. See “Common Stock”, below.
On May 20, 2021, the Company issued 1,300,000 shares of common stock with an issuance date value of $2,665,000 as a commitment fee to the investor, for the purchase of Series D Preferred. The value of the shares of common stock issued was accounted for as a reduction of the proceeds from the sale of the Series D Preferred.
On June 17, 2021, the Company issued 3,170,730 shares of common stock upon the conversion of 650 shares of Series D Preferred, after which no Series D Preferred shares remained outstanding.
Stock-Based Compensation
During the three month and nine months ended September 30, 2021, the Company recognized stock-based compensation expense of $1,292,096 and $2,765,959, respectively of which $0 and $15,190, respectively, is included in research and development expenses, and $1,292,096 and $2,750,770, respectively, is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation expense of $158,014 and $252,831, respectively, of which $7,424 and $22,961, respectively was charged to research and development expense and $150,590 and $229,870, 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 for the three months and nine months ended September 30, 2021 and 2020:
Common stock for services
77,040
147,976
345,679
222,676
1,000,647
Amortization of market-based awards
1,374,226
Stock options
45,407
30,155
1,292,096
158,014
Common Stock Issued for Services
For the three and nine months ended September 30, 2021, the Company issued 85,000 and 160,000 shares of immediately vested common stock, respectively, having an aggregate grant date value of $186,399 and $346,199, respectively.
During the three and nine months ended September 30, 2021, the Company issued an aggregate of 1,185,033 and 4,185,033 shares of common stock, respectively, in connection with exercises of outstanding warrants pursuant to which we received gross proceeds in the aggregate amount of $1,494,216 and $5,206,716, respectively.
A summary of warrants activity during the nine months ended September 30, 2021 is presented below:
Weighted
Average
Number of
Exercise
Remaining
Intrinsic
Price
Term (Yrs)
Value
Outstanding, January 1, 2021
6,787,911
1.25
2,600,000
2.50
Exercised
(4,185,033)
(1.24)
Expired
Forfeited
1.88
4.4
2,158,307
Exercisable, September 30, 2021
The following table presents information related to warrants as of September 30, 2021:
Warrants Outstanding
Warrants Exercisable
Outstanding
Exercisable
Remaining Life
In Years
2,594,553
4.3
1.50
8,325
0.2
4.6
Restricted Common Stock
The following table presents information related to restricted common stock (excluding Market-Based Awards) as of September 30, 2021:
Weighted Average
Shares of Restricted
Grant Date
Fair Value
Non-vested balance, January 1, 2021
72,500
1.24
Granted
2,570,000
2.55
Vested
(27,500)
2.06
Non-vested shares, September 30, 2021
2.52
18
As of September 30, 2021, there was $5,560,259 of unrecognized stock-based compensation expense related to restricted stock that will be recognized over the weighted average remaining vesting period of 3.2 years.
Stock Options
A summary of options activity (excluding Market-Based Awards) during the nine months ended September 30, 2021 is presented below:
370,000
0.66
220,000
2.30
1.27
3.2
527,600
Exercisable,September 30, 2021
324,167
2.3
460,317
The following table presents information related to stock options (excluding Market-Based Awards) as of September 30, 2021:
Options Outstanding
Options Exercisable
1.99
10,000
2.03
2.05
2.08
2.13
2.27
2.43
2.44
100,000
As of September 30, 2021, there was $175,780 of unrecognized stock-based compensation expense related to stock options, which will be recognized over the weighted average remaining vesting period of 2.9 years.
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:
Risk free interest rate
0.20% - 0.23
N/A
0.20% - 0.85
1.58
Expected term (years)
3.50
2.5 - 3.5
Expected volatility
109.00
93% - 109
93.00
Expected dividends
0
For the three and nine months ended September 30, 2021, the stock options had a weighted average grant date value of $1.55 and $0.80 per option share, respectively. For the nine months ended September 30, 2020, the stock options had a weighted average grant date value of $0.36 per option share. There were no stock options granted during the three months ended September 30, 2020.
See Market-Based Awards below for additional information.
Market-Based Awards
The following table presents information related to market-based awards as of September 30, 2021:
Award
Restricted stock units
1,500,000
1.94
1.72
3.66
On March 1, 2021, in connection with the appointment of the Company’s Chief Operating Officer (the “COO”), the COO became 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.
On June 10, 2021, the Chief Executive Officer (the “CEO”) received an option for the purchase of up to 1,500,000 shares of the Company’s common stock at an exercise price of $2.60, which will be earned based upon achieving certain market capitalization milestones up to $4 billion. The grant date value of this award of $2,579,000 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 in applying the Monte Carlo valuation model to the Company’s market-based awards described above.
March 1,
June 10,
0.71
0.73
98.9
98.5
Expected dividend yield
Expected life of market-based awards
2.1
years
2.2
Fair value of common stock on date of grant
2.61
2.62
20
As of September 30, 2021, there was $4,116,195 of unrecognized stock-based compensation expense related to market-based awards which will be amortized over the remaining weighted average vesting period of 1.86 years.
NOTE 11 COMMITMENTS AND CONTINGENCIES
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 $900,000 in sponsorship fees, payable in three installments, of which $250,000 was paid on April 1, 2021, $300,000 is payable on January 1, 2022, and $350,000 is payable on January 1, 2023. The April 1, 2021 payment of $250,000 was recorded as a prepaid expense and is being amortized over the performance period. During the nine months ended September 30, 2021, $166,667 of sponsorship fees expense was recognized related to the agreement.
In addition, the Company has committed to paying an aggregate of $750,000 related to technology development fees, which is to be paid in three equal installments during 2021, 2022 and 2023. As of September 30, 2021, no portion of the technology fees has been paid.
Research and Development Agreements
On April 5, 2021, the Company entered into a research and development agreement to develop high-areal-capacity battery electrodes to increase the energy density of batteries. Pursuant to the terms of the agreement, the Company has committed to spend an aggregate amount of $580,375, payable in eight quarterly installments of $72,547. During the nine months ended September 30, 2021, $145,094 of expense was recognized related to this agreement.
On August 18, 2021, the Company entered into a multi-year research and development agreement for a solid-state rechargeable battery, pursuant to which the Company has committed to spend an aggregate amount of $592,196 in eight quarterly payments of $74,025. During the nine months ended September 30, 2021, $24,675 of expense was recognized related to the agreement.
NOTE 12 SUBSEQUENT EVENTS
During October 2021, the Company issued an aggregate of 1,600,000 shares of common stock upon the exercise of outstanding warrants pursuant to which the Company received an aggregate of $4,000,000 of gross proceeds.
During November 2021, the Company issued 107,744 unregistered shares of common stock as an equity incentive grant, which shares are subject to a four-year vesting schedule.
During November 2021, the Company issued an aggregate of 1,000,000 shares of common stock upon the exercise of outstanding warrants pursuant to which the Company received an aggregate of $2,500,000 of gross proceeds.
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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 September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 should be read in conjunction with our condensed consolidated 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 begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, 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; however, given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition.
New Officer Hires
During 2021, the Company hired the following officers:
Appointment of Members to the Board of Directors
On June 7, 2021, the following new independent director appointments became effective:
Operating Lease
On April 5, 2021, we entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021 with the option to renew for an additional 5 years. 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, with annual escalation of 3.5%.
On May 20, 2021, we sold 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 Series D Preferred shares were convertible into an aggregate of 3,170,732 shares of common stock at a fixed conversion price of $2.05 and had the right to vote on an as-converted basis. We also paid the investor a commitment fee of 1,300,000 shares of common stock in connection with the sale of the Series D Preferred. Notes payable obligations in the aggregate amount of $1,540,000, were paid in full upon the closing of the sale of the Series D Preferred.
On June 17, 2021, we issued an aggregate of 3,170,730 shares of our common stock upon conversion of 650 shares of our Series D Preferred Stock, after which no Series D Preferred shares remained outstanding.
Exercise of Warrants
During the nine months ended September 30, 2021, we issued 4,185,033 shares of common stock upon the exercise of warrants for proceeds of $5,206,716.
NYSE American Exchange Listing
On June 7, 2021, the Company’s common stock was up listed and now trades on the NYSE American Exchange.
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Results of Operations
Three and Nine Months Ended September 30, 2021 Compared With the Three and Nine Months Ended September 30, 2020
Our revenues consisted of the following during the three months ended September 30, 2021 and 2020:
For the three months ended September 30, 2021 and 2020, we generated $600,921 and $136,849 of revenues, respectively, representing an increase of $464,072, or 339%. For the nine months ended September 30, 2021 and 2020, we generated $1,647,070 and $415,477 of revenues, respectively, representing an increase of $1,231,593, or 296%, primarily resulting from three new contracts received during the first three quarters of 2021. Revenue from product sales during the three and nine months ended September 30, 2021 increased by 339% and 475%, respectively, compared to the three and nine months ended September 30, 2020, primarily resulting from two large contracts received during the first three quarters of 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 September 30, 2021 and 2020, cost of revenues was $155,138 and $63,403, respectively, an increase of $91,735 or 145%. The increase was primarily due to higher revenues earned during the three months ended September 30, 2021. The gross margin percentage was 74% and 54% for the three months ended September 30, 2021 and 2020, respectively. The increase in margins during the third quarter of 2021 is primarily the result of changes in product mix sold during the third quarter.
For the nine months ended September 30, 2021 and 2020, cost of revenues was $869,612 and $138,180, respectively, an increase of $731,432 or 529%. The increase was primarily due to higher revenues earned during the nine months ended September 30, 2021. The gross margin percentage was 47% and 67% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in margins realized during the nine months ended September 30, 2021 is primarily attributable to an individual contract that resulted in a gross margin of 13% during the second quarter of 2021.
24
Research and Development
Research and development expenses (“R&D”) include expenses incurred in connection with the R&D of our CFV thermal management solution and solid-state rechargeable batteries. R&D expenses are expensed as they are incurred.
For the three months ended September 30, 2021 and 2020, R&D expenses were $481,855 and $51,820, respectively, representing an increase of $430,035 or 830%. For the nine months ended September 30, 2021 and 2020, R&D expenses were $957,579 and $221,524, respectively, representing an increase of $736,055 or 332%. The increase is primarily due to thermal energy management report fees and energy storage development services provided during the period. 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 salaries, stock-based compensation, legal and professional expense, marketing and advertising expense, payroll taxes and other benefits, and rent expense.
For the three months ended September 30, 2021 and 2020, selling, general and administrative expenses were $3,104,410 and $832,146, respectively, an increase of $2,272,264 or 273%. The increase is primarily attributable to an increase of approximately $1,116,000 of stock-based compensation, an increase of approximately $252,000 of marketing and advertising expense, an increase of approximately $210,000 for professional fees resulting from engagements for financial services, quality and automation services, as well as an increase of approximately $342,000 in labor costs as the result of sixteen new hires, an increase of approximately $193,000 of miscellaneous expenses, and an increase of approximately $92,000 of travel and entertainment expenses due to the lifting of COVID-19 dining and traveling restrictions.
For the nine months ended September 30, 2021 and 2020, selling, general and administrative expenses were $7,320,524 and $1,719,100, respectively, an increase of $5,601,424 or 326%. The increase is primarily attributable to an increase of approximately $2,511,000 of stock-based compensation, an increase of approximately $1,389,000 of marketing and advertising expense, an increase of approximately $648,000 in labor costs as the result of eight new hires, an increase of approximately $433,000 for professional fees resulting from engagements for financial services, quality and automation services, and an increase of approximately $451,000 of miscellaneous expenses, and an increase of approximately $163,000 of travel and entertainment expenses due to the lifting of COVID-19 dining and traveling restrictions.
Other Expenses
For the three months ended September 30, 2021 and 2020, other income (expenses) were $44,550 and $(201,739), respectively, representing an increase of $246,289. The increase in other income is primarily due to no 2021 charges for amortization of debt discount and the increased income from the change in fair value of accrued issuable equity of $45,600.
For the nine months ended September 30, 2021 and 2020, other expenses were $337,153 and $328,170, respectively, representing an increase of $8,983 or 3%. The increase in other expense is primarily due to the 2021 debt redemptions costs of $140,000 associated with the repayment of notes payable, and an increase of $50,000 of expenses related to the change in fair value of accrued issuable equity, partially offset by a decrease of amortization of debt discount of $179,000 during the nine months ended September 30, 2021.
Liquidity and Capital Resources
As of September 30, 2021, we had a cash balance of $10,990,056 and working capital of $10,659,878. We incurred a net loss of $7,837,798 during the nine months ended September 30, 2021 and had an accumulated deficit totaling $19,084,206 as of September 30, 2021. While the Company anticipates it will continue to incur operating losses and use cash in operating activities for the near 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 financial statements.
For the nine months ended September 30, 2021 and 2020, cash used in operating activities was $5,394,935 and $2,076,035, respectively. Our cash used in operations for the nine months ended September 30, 2021 was primarily
25
attributable to our net loss of $7,837,798, adjusted for non-cash expenses in the aggregate amount of $2,989,598, and $546,735 of net cash used to fund changes in the levels of operating assets and liabilities. Our cash used in operations for the nine months ended September 30, 2020 was primarily attributable to our net loss of $1,991,497, adjusted for non-cash expenses in the aggregate amount of $587,503, and $672,041 of net cash used to fund changes in the levels of operating assets and liabilities.
For the nine months ended September 30, 2021 and 2020, cash used in investing activities was $1,386,864 and $46,087, respectively, related to equipment purchases and improvements to the new executive offices.
For the nine months ended September 30, 2021 and 2020, cash provided by financing activities was $8,891,716 and $4,822,921, respectively. Cash provided by financing activities during the nine months ended September 30, 2021 represents $6,500,000 of proceeds from the sale of preferred stock and $5,206,716 received in connection with the exercise of warrants, partially offset by the $2,450,000 principal repayments on notes payable and $365,000 of financing costs paid during the period. Cash provided by financing activities during the nine months ended September 30, 2020 consisted of $3,710,000 of net proceeds from the issuance of notes payable, $155,226 of proceeds from the Paycheck Protection Program loan, and $1,461,695 of net proceeds from the sale of common stock. These amounts were partially offset by $330,000 for the payment of debt issuance costs, $159,000 for the repayments on notes payable and $15,000 of cash paid for financing costs.
Subsequent to September 30, 2021, the Company received an aggregate of $6,500,000 in connection with the exercise of warrants.
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.
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.
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 third 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.
27
PART II – OTHER INFORMATION
None.
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.
During the three months ended September 30, 2021, we issued 51,700 unregistered shares of common stock upon the exercise of warrants.
During the three months ended September 30, 2021, the Company issued 155,000 unregistered shares of common stock for services, which shares are subject to a 6-month vesting schedule.
Each of the foregoing transactions was exempt from the registration 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.
Not applicable.
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
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 Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH
Inline XBRL Taxonomy Extension Schema Document*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*Filed herewith
**Furnished herewith
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.
Date: November 15, 2021
By
/s/ Michael Mo
Michael Mo
Chief Executive Officer
(Principal Executive Officer)
/s/ Simon Westbrook
Simon Westbrook
Chief Financial Officer
(Principal Financial and Accounting Officer)