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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  KULR Technology Group Inc    KULR

KULR TECHNOLOGY GROUP INC

(KULR)
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KULR Technology : Note 2 Going Concern and Management's Plans

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08/14/2019 | 03:02pm EDT
The Company has not yet achieved profitability and expects to continue to incur
cash outflows from operations. It is expected that its research and development
and general and administrative expenses will continue to increase and, as a
result, the Company will eventually need to generate significant product
revenues to achieve profitability. These conditions indicate that there is
substantial doubt about the Company's ability to continue as a going concern
within one year after the financial statement issuance date.



The Company is currently funding its operations on a month-to-month basis by
means of private placements. Although the Company's management believes that it
has access to capital resources, there are currently no commitments in place for
new financing at this time and there is no assurance that the Company will be
able to obtain funds on commercially acceptable terms, if at all. If the Company
is unable to obtain adequate funds on reasonable terms, it may be required to
significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms. The Company's operating needs
include the planned costs to operate its business, including amounts required to
fund working capital and capital expenditures.



The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with U.S. GAAP, which contemplate continuation of the
Company as a going concern and the realization of assets and satisfaction of
liabilities in the normal course of business. The unaudited condensed
consolidated financial statements do not include any adjustment that might
become necessary should the Company be unable to continue as a going concern.



  5





Note 3 Summary of Significant Accounting Policies

Since the date of the Annual Report on Form 10-K for the year ended December 31, 2018, there have been no material changes to the Company's significant accounting policies, except as disclosed in this note.



Concentrations



Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and accounts receivable.
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 were no
uninsured cash balances as of June 30, 2019 and December 31, 2018.



Customer concentrations are as follows:




                                                                       Revenues                                              Accounts Receivable
                                            For the Three Months Ended            For the Six Months Ended              As of                 As of
                                                     June 30,                             June 30,                  June 30, 2019       December 31, 2018
                                             2019               2018              2019               2018

Customer A                                           *                 21 %               *                 37 %                 *                       *
Customer B                                           *                  *                 *                 27 %                 *                       *
Customer C                                           *                 70 %               *                 30 %                 *                      63 %
Customer D                                          17 %                *                 *                  *                  16 %                    37 %
Customer E                                          64 %                *                14 %                *                  68 %                     *
Customer F                                          18 %                *                 *                  *                  16 %                     *
Customer G                                           *                  *                47 %                *                   *                       *
Total                                               99 %               91 %              61 %               94 %               100 %                   100 %


* Less than 10%



There is no assurance the Company will continue to receive significant revenues
from any of these customers. A reductions 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. Because
of the Company's significant customer concentrations, its gross profit and
operating income 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.



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 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.




  6





Note 3 Summary of Significant Accounting Policies - Continued

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

· Product sales - Revenue is recognized at the point 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 it delivers a report to the customer.



The following table summarizes our revenue recognized in our condensed consolidated statements of operations:



                        For the Three Months Ended           For the Six Months Ended
                                 June 30,                            June 30,
                        2019                 2018              2019              2018

Product sales       $      52,310$      134,791$     221,750$ 253,143
Contract services           4,000               36,300            29,512         145,988
Total revenue       $      56,310$      171,091$     251,262$ 399,131




As of June 30, 2019 and December 31, 2018, the Company did not have any contract
assets or contract liabilities 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. During the
three and six months ended June 30, 2019 and 2018, there was no revenue
recognized from performance obligations satisfied (or partially satisfied)
in
previous periods.



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            For the Six Months Ended
                                                    June 30,                             June 30,
                                              2019                2018             2019              2018
Non-vested restricted stock                            -           54,028                  -         136,970
Series B Convertible Preferred Stock           1,542,900                -  
       1,542,900               -
Options                                          300,000                -            300,000               -
Total                                          1,842,900           54,028          1,842,900         136,970




Operating Leases


The Company leases properties under operating leases. For leases in effect upon
adoption of Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" at
January 1, 2019 and for any leases commencing thereafter, the Company recognizes
a liability to make lease payments, the "lease liability", and an asset
representing the right to use the underlying asset during the lease term, the
"right-of-use asset". The lease liability is measured at the present value of
the remaining lease payments, discounted at the Company's incremental borrowing
rate. The right-of-use asset is measured at the amount of the lease liability
adjusted for the remaining balance of any lease incentives received, any
cumulative prepaid or accrued rent if the lease payments are uneven throughout
the lease term, any unamortized initial direct costs, and any impairment of the
right-of-use-asset. Operating lease expense consists of a single lease cost
calculated so that the remaining cost of the lease is allocated over the
remaining lease term on a straight-line basis, variable lease payments not
included in the lease liability, and any impairment of the right-of-use asset.



The Company evaluated their operating leases and elected to apply the short-term
lease measurement and recognition exemption in which the right of use assets and
lease liabilities are not recognized for short-term leases.



  7






 Note 4 Deferred Expenses




Deferred expenses consist of labor and materials that are attributable to
customer contracts that the Company has not completed its performance obligation
under the contract and, as a result, has not recognized revenue. As of June 30,
2019, deferred expenses were $92,516, which consisted of labor and materials,
totaling $43,843 and $48,673, respectively. As of December 31, 2018, there
were
no deferred expenses.


Note 5 Accrued Expenses and Other Current Liabilities

As of June 30, 2019 and December 31, 2018, accrued expenses and other current liabilities consisted of the following:



                                                          June 30,         December 31,
                                                            2019               2018
                                                        (unaudited)
Payroll and vacation                                   $      388,894$      252,043
Legal and professional fees                                    29,745      

47,502

Travel expenses                                                55,226      

48,248

Payroll and income tax payable                                 10,792      

12,678

Research and development expenses                                   -      
       2,850
Credit card payable                                             4,475              4,586
Accrued issuable equity                                        49,459              3,960
Rent                                                              176                176
Other                                                           7,802              2,287

Total accrued expenses and other current liabilities $ 546,569 $

     374,330




The Company has agreed to issue an aggregate of 43,895 shares of common stock
and warrants to purchase 75,000 shares of common stock for consulting fees. As
of June 30, 2019, the stock and warrants had not been issued and, as a result,
$49,459 of accrued issuable equity at fair value was included within accrued
expenses and other current liabilities.



Note 6 Related Party Transactions

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities - related parties consist of a
liability of $58,919 and $83,919 as of June 30, 2019 and December 31, 2018,
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.



Note 7 Stockholders' Deficiency




Common Stock


During the six months ended June 30, 2019, the Company sold an aggregate of 1,361,059 shares of common stock at $0.66 per share to accredited investors for aggregate gross cash proceeds of $898,300.



Stock-Based Compensation


During the three and six months ended June 30, 2019, the Company recognized
stock-based compensation expense of $45,171 and $93,111 (which includes the
issuance of 25,000 shares of immediately-vested common stock for legal fees of
$36,060), respectively, and during the three and six months ended June 30, 2018,
the Company recognized stock-based compensation expense of  $124,835 and
$307,792,respectively, related to restricted common stock, stock options and
warrants, which are included within general and administrative expenses on the
condensed consolidated statements of operations. As of June 30, 2019, there was
$137,003 of unrecognized stock-based compensation expense that will be
recognized over the weighted average remaining vesting period of 2.5 years.


  8





Note 7 Stockholders' Deficiency - Continued

Securities Purchase Agreement

On April 2, 2019, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with the stockholders (the "Sellers") holding 100% of the
ownership interest in TECHTOM Co., Ltd. ("TECHTOM"), a Japanese limited
liability company, pursuant to which the Company agreed to purchase from the
Sellers, subject to the satisfaction of certain closing conditions, all
ownership interests in TECHTOM and any and all claims, notes and other
liabilities owed by TECHTOM to the Sellers (the "Acquisition"). Although no
assurances can be made that the Acquisition will be completed, upon such
Acquisition, TECHTOM would become a wholly-owned subsidiary of the Company.



Pursuant to the Purchase Agreement, the Company agreed to pay the Sellers,
against delivery of all Ownership and Claims, the following aggregate
acquisition price: (i) $1,700,000 cash consideration (the "Cash Consideration");
and (ii) one hundred (100) shares of the Company's Series C Convertible
Preferred Stock ("Series C Preferred"), which class of Series C Preferred is to
be designated prior to the closing of the Acquisition. It is contemplated that
the Series C Preferred will have, among others, the following rights,
preferences and limitation: (i) a stated value of $10,000 per share; (ii) no
right to receive dividends; (iii) the right to convert each share into twenty
thousand shares of the Company's common stock, which right is subject to a 4.99%
beneficial ownership limitation; and (iv) the right to vote with the Company's
shareholders on an as-converted basis. The rights and preferences of the Series
C Preferred are set forth in further detail in the form of Certificate of
Designation attached as an exhibit to the Purchase Agreement and which
description is qualified in its entirety to such exhibit, which is incorporated
herein by reference.


See Note 10 - Subsequent Events for details associated with the termination of the Purchase Agreement.



 Note 8 Leases




The Company has two operating leases for real estate which have remaining terms
that are less than one year. The Company elected not to recognize short-term
leases on the balance sheet and all costs were recognized as selling, general
and administrative expenses on the condensed consolidated statements of
operations. For the three and six months ended June 30, 2019, operating lease
expense was $40,103 and $80,488, respectively. For the three and six months
ended June 30, 2018, operating lease expense was $31,505 and $46,666,
respectively. As of June 30, 2019, the Company does not have any financing
leases.



Note 9 Commitments and Contingencies




Patent License Agreement


On March 21, 2018, the Company entered into an agreement with the National
Renewable Energy Laboratory ("NREL") granting the Company an exclusive license
to commercialize its patented Internal Short Circuit technology. The agreement
shall be effective for as long as the licensed patents are enforceable, subject
to certain early termination provisions specified in the agreement. In
consideration, the Company agreed to pay to NREL the following: (i) a cash
payment of $12,000 payable over one year, (ii) royalties ranging from 1.5% to
3.75% on the net sales price of the licensed products, as defined in the
agreement, with minimum annual royalty payments ranging from $0 to $7,500. In
addition, the Company shall use commercially reasonable efforts to bring the
licensed products to market through a commercialization program that requires
that certain milestones be met, as specified in the agreement. For the three and
six months ended June 30, 2019, the Company recorded royalties of $690 that were
included within cost of revenues. There were no sales of the licensed products
during 2018, such that no royalties were earned during the three and six months
ended June 30, 2018.


Securities Purchase Agreement

On April 2, 2019, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with the stockholders (the "Sellers") holding 100% of the
ownership interest in TECHTOM Co., Ltd. ("TECHTOM"), a Japanese limited
liability company, pursuant to which the Company agreed to purchase from the
Sellers, subject to the satisfaction of certain closing conditions, all
ownership interests in TECHTOM and any and all claims, notes and other
liabilities owed by TECHTOM to the Sellers (the "Acquisition").



On July 5, 2019, the Company entered into a Rescission and Termination Agreement
(the "Termination Agreement") with the Sellers (each Seller, individually, and
the Company, a "Party" or collectively, the "Parties") holding 100% of the
ownership interest in TECHTOM to terminate the Purchase Agreement.



Pursuant to the Termination Agreement, each of the Parties mutually agreed (i)
to rescind and terminate the Purchase Agreement, relieving each Party of their
respective duties and obligations arising under the Purchase Agreement; and (ii)
to a general release of all other respective Parties from all claims arising out
of the Purchase Agreement or the Termination Agreement. Each Party is
responsible for all costs and expenses incurred by such Party in connection with
the Purchase Agreement or the Termination Agreement.



  9






 Note 10 Subsequent Events




Common Stock


On July 8, 2019, the Company issued 25,000 shares of common stock at $0.66 per share in connection with services provided.

On July 9, 2019, the Company issued an aggregate of 39,790 shares of common stock at $0.66 per share in connection with services provided.



Registration Statement


On July 11, 2019, the Company filed a shelf registration statement on Form S-3
with the United States Securities and Exchange Commission ("SEC"). The shelf
registration was declared effective by the SEC, on August 1, 2019. The
registration statement will allow the Company to issue, from time to time at
prices and on terms to be determined at or prior to the time of the offering,
shares of its common stock, shares of our preferred stock or warrants, either
individually or in units, with a total value of up to $50,000,000.



Series B Convertible Preferred Stock




Subsequent to June 30, 2019, holders of Series B Convertible Preferred Stock
converted an aggregate of 16,371 shares of Series B Convertible Preferred Stock
into an aggregate of 818,550 shares of common stock.



  10





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. ("KULR" and, including its subsidiary,
KULR Technology Corporation ("KULR"), the "Company") as of June 30, 2019 and for
the three and six months ended June 30, 2019 and 2018 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, 2018 and
for the year then ended, which are included in the Form 10-K filed with the
Securities and Exchange Commission ("SEC") on March 29, 2019. 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 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 electronics, batteries, and other components across an array of
applications. Currently, we are focused on targeting the following applications:
electric vehicles and autonomous driving systems (collectively referred to
herein as "E-Mobility"); artificial intelligence and Cloud computing; energy
storage; and 5G communication technologies. Our proprietary core technology is a
carbon fiber material, with roots in aerospace and defense, that provides what
we believe to be superior thermal conductivity and heat dissipation in 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 E-Mobility
battery powered products safer and more stable.



Our management believes that the E-Mobility industry has created and will create
significant new opportunities for the application of our technology and
know-how. We believe these new opportunities will be further driven by certain
changing preferences that we've observed in younger generations that must
increasingly cope with higher population density, global warming, and the
rapidly evolving communications and computing needs of their personal devices
and the surrounding infrastructure. As a result, we predict that the younger
generations will increasingly prefer to attend meetings by video conference;
rent a car, bike, or scooter, or call an app-based car service instead of owning
a vehicle; and leverage the Cloud to perform tasks traditionally done in person,
such as shopping for lunch, clothes, electronics and other consumer goods that
also leverages an expanding E-Mobility delivery network.



In addition to evolving demands led by consumer-preferences, we have observed
trending manufacturer-led opportunities in industries that have become
increasingly more reliant on the Cloud, on portability and on high-demand
processing power. For example, car manufacturers are increasingly providing
options that take over the responsibility for driving, diagnosing its own
service requirements and analyzing on-board systems data and efficiency. The
communications and entertainment industries are leveraging increasingly more
powerful and portable devices to deliver live and high-definition content and
experiences. These innovations will require high bandwidth communication devices
that can handle the power drain and computational requirements to keep up with
the sophisticated security and software tools that will power these advanced
product offerings. As a result of these manufacturer and consumer trends, we
believe that the new generations of high-powered, small form-factor
semiconductors are out-pacing the ability to control unwanted heat generation
in lithium ion batteries.



The above-described advances in micro technology, portable power, and compact
energy efficient devices linked to an ever-widening Internet of Things ("IoT")
via the Cloud are driving opportunities that forms the focus of the Company's
business development plan. We believe that our core technology and historical
development focus on improving lithium-ion battery performance and safety,
positions us in a competitively advantageous position to enhance key components
to the evolving mobile applications for a wide range of consumer products and
IoT. We have found that as chip performance increases, power consumption
increases, and more heat is generated as a byproduct. When chip size reduces,
there is an increased potential for a hot spot on the chip, which can degrade
system performance, or even cause spontaneous combustion. However, electronic
system components must operate within a specific temperature range on both the
high and low end to operate properly. After strenuous testing, we believe we
have developed heat management solutions that significantly improve upon
traditional heat storage and dissipation solutions and improve upon their
rigidity and durability. We also believe that the traditional solutions are not
equipped to handle the evolving marketplace. However, through a combination of
custom design services and provision of proprietary hardware solutions, our
products reduce manufacturing complexity and provide a lighter weight solution
than traditional thermal management materials and, we believe, can meet the heat
management demands of components and batteries being designed into the newest
mobile technologies and applications.



  11






Our management's growth strategy has put particular focus on targeting
E-Mobility applications for its core technology. We believe we are
well-positioned to provide a broad range of E-mobility solutions, and intend to
expand our business through internal growth and acquisition. In the case of
acquisitions, we seek to acquire businesses in related markets that are
synergistic to our existing operations, technologies, and management experience.
This focus will highlight markets in which we can: (1) integrate our existing
technology into the acquiree's product offerings or simultaneously offer our
products and services through the acquiree's customer base and channels; (2)
gain a leading market position and provide vertically integrated services where
we can secure economies of scale, premium market positioning, and operational
synergies; and/or (3) establish a leading position in selected markets and
channels of the acquiree through a joint broad-based, hi-tech, E-Mobility
branding campaign. We have developed an acquisition discipline based on a set of
financial, market and management criteria to evaluate opportunities. If we were
to successfully close an acquisition, we would seek to integrate it while
minimizing disruption to our existing operations and those of the acquired
business, while exploiting the technical and managerial synergies from
integration.



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 product revenues to achieve
profitability. These conditions indicate that there is substantial doubt about
our ability to continue as a going concern within one year after the financial
statement issuance date. Historically, we have been able to raise funds to
support our business operations, although there can be no assurance that we will
be successful in raising additional funds in the future.



Recent Developments


Termination of the Securities Purchase Agreement




On July 5, 2019, the Company entered into a Rescission and Termination Agreement
(the "Termination Agreement") with the stockholders (the "Sellers") (each
Seller, individually, and the Company, a "Party" or collectively, the "Parties")
holding 100% of the ownership interest in TECHTOM Co., Ltd. ("TECHTOM") to
terminate the Securities Purchase Agreement between the Company and the Sellers,
dated April 2, 2019 (the "Purchase Agreement"). The Company originally entered
into the Purchase Agreement to, among other things, purchase all the ownership
interests of TECHTOM from the Sellers, as previously disclosed in the Company's
Form 8-K filed on April 3, 2019.



Pursuant to the Termination Agreement, each of the Parties mutually agreed (i)
to rescind and terminate the Purchase Agreement, relieving each Party of their
respective duties and obligations arising under the Purchase Agreement; and (ii)
to a general release of all other respective Parties from all claims arising out
of the Purchase Agreement or the Termination Agreement. Each Party is
responsible for all costs and expenses incurred by such Party in connection with
the Purchase Agreement or the Termination Agreement.



Change of Ticker Symbol


Effective on July 11, 2019, the Company changed its trading symbol from "KUTG" to "KULR."



  12






Results of Operations



Three and Six Months Ended June 30, 2019 Compared With Three and Six Months Ended June 30, 2018



Revenues


Our revenues consisted of the following:



                        For the Three Months Ended           For the Six Months Ended
                                 June 30,                            June 30,
                        2019                 2018              2019              2018

Product sales       $      52,310$      134,791$     221,750$ 253,143
Contract services           4,000               36,300            29,512         145,988
Total revenue       $      56,310$      171,091$     251,262$ 399,131
For the three months ended June 30, 2019 and 2018, we generated $56,310 and
$171,091 of revenues, a decrease of $114,781, or 67%. The decrease was primarily
due to a decrease in the volume of product sales, as well as the decrease in
service contract completions during the second quarter of 2019.



Our revenues during the three months ended June 30, 2019 primarily consisted of
sales of our component product, CFV thermal management solution, ISC battery
cell products, as well as certain research and development contract and onsite
engineering services. Our revenues during the three months ended June 30, 2018
consisted of sales of our component product, CFV thermal management solution as
well as certain research and development contract services.



Our revenue for the three months ended June 30, 2019 and 2018 was generated from 4 and 6 different customers, respectively.

For the six months ended June 30, 2019 and 2018, we generated $251,262 and $399,131 of revenues, a decrease of $147,869, or 37%. The decrease was primarily due to a decrease in service contract completions during the 2019 period.




Our revenues during the six months ended June 30, 2019 consisted of our
component product, CFV thermal management solution, ISC battery cell products as
well as certain research and development contract and onsite engineering
services Our revenues during the six months ended June 30, 2018 consisted of
sales of our component product, CFV thermal management solution, sales of an
Original Equipment Manufacturer ("OEM") product as well as certain research and
development contract services.



Our revenue for the six months ended June 30, 2019 and 2018 was generated from 13 and 10 different customers, respectively.



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 part in our reported average
margins for any period. Also, we are introducing new products in the early
stages of 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.



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.



For the three months ended June 30, 2019 and 2018, cost of revenues was $28,550
and $33,470, respectively, a decrease of $4,920, or 15%. The decrease was
primarily due to lower sales of higher margin products. The gross margin
percentage was 49% and 80% for the three months ended June 30, 2019 and 2018,
respectively. The decrease in margins during the 2019 period was primarily due
to a reduction in sales of higher margin products as compared to the 2018
period.



  13






For the six months ended June 30, 2019 and 2018, cost of revenues was $90,067
and $183,417, respectively, a decrease of $93,350, or 51%. The decrease was
primarily due to increased volume of contracts in the 2018 period, which
requested additional labor and materials. The gross margin percentage was 64%
and 54% for the six months ended June 30, 2019 and 2018, respectively. The
increase during the 2019 period resulted primarily from a more favorable product
mix being sold as compared to the previous period.



Research and Development



Research and development ("R&D") includes 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 June 30, 2019, R&D expenses decreased by $4,459, or 4%, to $114,547 from $119,006 for the three months ended June 30, 2018. The decrease is attributable to expenses associated with R&D supplies.

For the six months ended June 30, 2019, R&D expenses decreased by $10,951, or 5%, to $227,739 from $238,690 for the six months ended June 30, 2018. The decrease is attributable to expenses associated with R&D supplies.

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, payroll taxes and other benefits, legal and professional fees, stock-based compensation, marketing, travel, rent and office expenses.




For the three months ended June 30, 2019, selling, general and administrative
expenses decreased by $128,756, or 19%, to $534,262 from $663,018 for the three
months ended June 30, 2018. The decrease is primarily due to decreased
professional fees of approximately $50,000 resulting from the termination of
multiple consulting agreements, non-cash stock-based compensation expense of
approximately $80,000, payroll and benefit expense of approximately $31,000,
partially offset by increased travel expense of approximately $26,000.



For the six months ended June 30, 2019, selling, general and administrative
expenses decreased by $327,505, or 23%, to $1,119,753 from $1,447,258 for the
six months ended June 30, 2018. The decrease is primarily due to a reduction in
payroll and benefit expenses of $66,000, professional fees of approximately
$75,000, non-cash stock-based compensation expense of approximately $215,000,
partially offset by increased rent expense of approximately $34,000.



Liquidity and Capital Resources




For the six months ended June 30, 2019 and 2018, cash used in operating
activities was $968,882 and $779,380, respectively. Our cash used in operations
for the six months ended June 30, 2019 was primarily attributable to our net
loss of $1,187,109, adjusted for non-cash expenses in the aggregate amount of
$99,234, partially offset by $118,993 of net cash provided by changes in the
levels of operating assets and liabilities. Our cash used in operations for the
six months ended June 30, 2018 was primarily attributable to our net loss of
$1,470,467, adjusted for non-cash expenses in the aggregate amount of $316,316,
partially offset by $374,771 of net cash provided by changes in the levels of
operating assets and liabilities.



For the six months ended June 30, 2019 and 2018, cash used in investing activities was $0 and $8,350, respectively. Cash used in investing activities during the six months ended June 30, 2018 was due to purchases of equipment.




For the six months ended June 30, 2019, and 2018, cash provided by financing
activities was $883,300 and $0, respectively. Cash provided by financing
activities the six months ended June 30, 2019 consisted of approximately
$898,000 proceeds from sale of common stock, partially offset by the payment of
$15,000 of deferred offering costs.



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 product revenues and/or raise
additional capital to fund our operations. These conditions indicate that there
is substantial doubt about our ability to continue as a going concern within one
year after the financial statement issuance date.



  14





We are currently funding our operations on a month-to-month basis. Although our
management believes that we have access to capital resources, there are
currently no commitments in place for new financing at this time and there is no
assurance that we will be able to obtain funds on commercially acceptable terms,
if at all. If we are unable to obtain adequate funds on reasonable terms, we may
be required to significantly curtail or discontinue operations or obtain funds
by entering into financing agreements on unattractive terms. Our operating needs
include the planned costs to operate our business, including amounts required to
fund working capital and capital expenditures.



Our unaudited condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q have been prepared in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"), which contemplate our continuation as a going concern and the
realization of assets and satisfaction of liabilities in the normal course of
business. The carrying amounts of assets and liabilities presented in the
consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The unaudited condensed consolidated financial
statements do not include any adjustment that might result from the outcome
of
this uncertainty.


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 3 - Summary of
Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on
Form 10-Q.

© Edgar Online, source Glimpses

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Managers
NameTitle
Michael Mo Chairman & Chief Executive Officer
Simon P. Westbrook Chief Financial Officer
Timothy R. Knowles Secretary, Director & Chief Technical Officer
Michael G. Carpenter Vice President-Engineering
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