KULR Technology Group, Inc. 10-Q

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. 22 Table of Contents New Officer Hires During 2021, the Company hired the following officers: ● On March 8, 2021, Keith Cochran joined KULR as President and Chief Operating Officer. ● On April 19, 2021, Antonio Martinez joined the Company as its new Vice President of Operations. ● On June 10, 2021, Greg Provenzano joined the Company as its new Vice President of Sales and Marketing. Appointment of Members to the Board of Directors On June 7, 2021, the following new independent director appointments became effective: ● Morio Kurosaki (Chair of Audit Committee) ● Stayce Harris (Chair of Compensation Committee) ● Joanna Massey (Chair of Nominating and Governance Committee) 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%. Series D Preferred Stock 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. 23 Table of Contents Results of Operations Three and Nine Months Ended September 30, 2021 Compared With the Three and Nine Months Ended September 30, 2020 Revenues Our revenues consisted of the following during the three months ended September 30, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2021 2020 2021 2020 Product sales ​ $ 600,921 ​ $ 136,849 ​ $ 1,356,530 ​ $ 235,979 Contract services ​ — ​ — ​ 290,540 ​ 179,498 Total revenue ​ $ 600,921 ​ $ 136,849 ​ $ 1,647,070 ​ $ 415,477 ​ 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 Table of Contents 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 Table of Contents 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. 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. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. Critical Accounting Policies For a description of our critical accounting policies, see Note 2 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is a smaller reporting company, as defined by Rule 229.10(f)(1), and is not required to provide the information required by this Item.