What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 78 added, 50 removed, 78 unchanged (62% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the three months ended March 31, 2022 and 2021 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Quarterly Report.

(“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the three and six months ended June 30, 2022 and 2021 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Quarterly Report.

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.

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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.

In order to scale up as a systems provider more quickly and efficiently in the Li-ion battery energy storage and recycling markets, 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.

During Q1’22, we experienced significant impact to our business due to the COVID-19 lockdown in China.

We had over $325,000 worth of inventory that we had built that could have been recognized as revenue in the first quarter but ended up not being shipped due to the COVID-19 lockdown.

We are happy to report that these products have been shipped to the customer when the lockdown eased a bit.

Much of the COVID-related challenges have meant delays in product shipment, not cancellations, so as restrictions ease in the coming months, we expect to make up for lost time and revenue as we move through our sizeable inventory.

As a core part of our growth strategy aimed at providing total system solutions that address market needs, KULR has secured a financing facility allowing us access to $55M in additional capital for procuring battery cell supplies and other key materials, as well as securing supply chain and manufacturing capacities in North America.

The Company is working to secure inventory allocations in anticipation of ongoing demand from its key end markets.

In total, KULR expects to procure lithium-ion battery cells providing up to 500-megawatt hours (“MWh”) of energy capacity, enough to power approximately 40,000 homes using currently available domestic energy storage options.

Within applications for the energy storage and e-mobility markets, the battery cell supplies would equate to our estimation of revenue opportunity of $250-$350 million, although no assurances can be made of our actual acquisition of cells providing such opportunities or that those opportunities will provide such revenues.

To further control supply chain and manufacturing costs and risks, the Company also intends to use these funds to bring much of its production capabilities to North America.

We have not yet achieved profitability and expect to continue to incur cash outflows from operations.

As a result, we will eventually need to generate significant revenues to achieve profitability.

Until that time, we shall have to continue to raise cash, as and when required, through equity or debt financings.

In June, KULR achieved significant milestone in executing this strategy by securing an initial order for over 75 megawatt hours (“MWh”) of Li-ion battery cell capacity from Taiwan’s E-One Moli Energy Corporation (“Molicel”) to design and build battery applications with the highest safety ratings.

As part of the strategic relationship, KULR would purchase over 700MWh of battery energy capacity to further accelerate its production and supply chain localization initiatives within North America.

Securing this Molicel battery cell supply accelerates our ability to provide total solutions to high value customer applications with revenue potential that could exceed $350 million.

Through the partnership with Molicel, KULR will apply a holistic and comprehensive solution to battery safety and thermal energy management with a suite of technologies including its:

Passive Propagation Resistant (“PPR”) design and testing, Internal Short Circuit (“ISC”) trigger cells, Fractional Thermal Runaway Calorimeter (“FTRC”) testing and AI-powered CellCheck battery management system, to target the following markets:

● Aerospace and defense systems, such as CubeSat batteries meeting JSC 20793 safety requirements and the strategic battery reserve program initiated by NASA

● Energy storage systems

● High-performance electric vehicles and electric vertical take-off and landing (“eVOTL”)

● Premium industrial and consumer electronics

Recent Developments

Sales and Marketing

The KULR Sales and Marketing group further expanded with the onboarding of a Director of Product Marketing, Internal Sales Manager, and Technical Sales Lead.

These individuals bring over 60+ years of experience to the KULR team and will bring more focus on sales related to energy storage and recycling.

Additionally, KULR has added an additional Manufacturer’s Representative team to support East Coast sales.

With the increase in product platforms and expanded sales and marketing capabilities, KULR now has in excess of 300 customers in our active sales funnel.

The Sales team were successful in landing four major commercial accounts for our SafeCase products with deployment trials underway.

Additionally, with support of our major recycling partner, KULR were able to obtain UPS permits allowing for shipment of batteries utilizing the KULR SafeCase products.

This is a major milestone for the expansion of SafeCase utilization.

Additionally, KULR received a follow-on order for the space-developed phase change material (“PCM”) heat sink technology from leading aerospace and defense company Lockheed Martin Corporation.

Operations and HR

The KULR organization took a tremendous leap forward in completing ISO 9001 certification for our San Diego headquarter facility during the quarter.

This is an exceptional accomplishment for the team and demonstrates KULR’s dedication is pursuit of manufacturing excellence and operational controls.

Our fully automated battery testing capability has begun installation with initial processing capabilities of approximately 500,000 18650/21700 cells annually in support of NASA WI-37.

System installation will complete in Q3’22 with full capacity processing initiating in Q4’22.

This capability will be used to support NASA and DOD battery cell deployments as well as for internal demands related to KULR qualified cells deployments.

KULR hired an additional 10 permanent employees during the second quarter and maintains an outsource strategy for software development and volume TRS manufacturing.

We have 42 full-time and two part-time employees as of June 30, 2022.

In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic.

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Although recent cases and deaths from the COVID-19 pandemic have generally declined in the United States, spread of COVID-19 in China recently resulted in a temporary lockdown covering all of Shanghai, China where our manufacturing partner has its headquarter.

During this period, we saw significant inventory buildup in China and we were unable to recognize over $325,000 in revenue in the quarterly period ended March 31, 2022, which inventory buildup was caused by delays in shipment to customers that could not be completed during the COVID-19 lockdown in China.

We are now taking active steps to direct our production and supply chain activities to North America to geographically diversify and potentially reduce further COVID-19 impacts.

During the first quarter of 2022, we experienced significant impact to our business due to the COVID-19 lockdown in China.

As of March 2022, inventory in excess of $325,000 could not be shipped due to the COVID-19 lockdown in Shanghai.

The product was shipped, and revenue was recognized during the second quarter.

COVID-related challenges have resulted in delays in product shipment, not cancellations.

As restrictions ease in the coming months, we expect to make up for lost time and revenue as we move through our sizeable inventory.

We are currently taking active steps to direct our production and supply chain activities to North America to geographically diversify and potentially reduce further COVID-19 impacts.

The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain.

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The foregoing Is a summary description of certain terms of the SEPA, Note Purchase Agreement and Promissory Note.

For a full description of all terms, please refer to the copies of the SEPA, the Note Purchase Agreement and the Promissory Note that are filed as Exhibit 10.1, Exhibit 10.2 and Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 16, 2022 and is incorporated herein by reference.

Results of Operations

Three Months Ended March 31, 2022 Compared With Three Months Ended March 31, 2021

Three and Six Months Ended June 30, 2022 Compared With Three and Six Months Ended June 30, 2021

Our revenues consisted of the following types:

For the Three Months Ended

For the Six Months Ended

Product sales

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Total revenue

For the three months ended March 31, 2022 and 2021, we generated $200,499 and $417,905 of revenues from 11 and 10 customers, respectively, representing a decrease of $217,406, or 52%.

Revenue from product sales during the three months ended March 31, 2022 decreased by $5,650 or 3% compared to the three months ended March 31, 2021.

The Company generated $172,599 of revenues in connection with 11 product sales completed during the first quarter of 2022 for the sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials.

Due to mandated COVID-19 lockdowns in China, we were unable to ship certain finished goods which significantly affected product revenues recognized during the three months ended March 31, 2022.

We expect the lockdown protocols to be lifted and our products to ship during the three months ended June 30, 2022, at which time we will recognize revenue of $325,000 related to affected sales.

As a result of the restrictions and loss of flexibility we experienced during this period we are looking at bringing a portion of our manufacturing process back home to our US facility.

We anticipate that the improvements in logistic flexibility and response times will more than offset increases in assembly labor cost, if any, and enable us to better support our US customers while maintaining our gross margins.

Revenue from contract services during the three months ended March 31, 2022 decreased by approximately $211,756 or 88% compared to the three months ended March 31, 2021.

Three large DOD contracts received during the first quarter of 2021 generated $233,656 of revenues.

For the three months ended June 30, 2022 and 2021, we generated $587,546 and $628,244 of revenues from 12 and 6 customers, respectively, representing a decrease of $40,698, or 6%.

For the six months ended June 30, 2022 and 2021, we generated $788,045 and $1,046,149 of revenues, respectively, representing a decrease of $258,104, or 25%, resulting from three contracts received during the first quarter of 2021.

Revenue from product sales during the three months ended June 30, 2022 decreased by $19,696 or 3% compared to the three months ended June 30, 2021.

Revenue from product sales during the six months ended June 30, 2022 decreased by $25,346 or 3% compared to the six months ended June 30, 2021.

Product sales during these periods include sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials.

Revenue from contract services during the three months ended June 30, 2022 decreased by approximately $21,002 or 41% compared to the three months ended June 30, 2021.

Revenue from contract services during the six months ended June 30, 2022 decreased by approximately $232,758 or 80% compared to the six months ended June 30, 2021.

The decrease in revenue for the six months ended June 30, 2022 is primarily attributable to three large DOD contracts received during the first quarter of 2021 generated $233,656 of revenues during the six months ended June 30, 2021.

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.

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Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between periods, customers and products due to the learning process, customer negotiating strengths, and product mix.

For the three months ended March 31, 2022 and 2021, cost of revenues was $122,918 and $275,268, respectively, representing a decrease of $152,350, or 55%.

For the three months ended June 30, 2022 and 2021, cost of revenues was $423,672 and $439,206, respectively, representing an increase of $15,534, or 4%.

The increase was primarily due to increased labor costs to produce finished goods, costs to procure component material for a new product line, and shipping costs from our foreign manufacturer.

The gross margin percentage was 28% and 30% for the three months ended June 30, 2022 and 2021, respectively.

The decrease in margins realized during the three months ended June 30, 2022 is primarily attributable to an increase in headcount for production, new costs related to material for our new Safe Case product, and shipping costs from our foreign manufacturers.

For the six months ended June 30, 2022 and 2021, cost of revenues was $546,590 and $714,474, respectively, representing a decrease of $167,884, or 23%.

The decrease was primarily due to decreased costs as a result of decreased revenues.

The gross margin percentage was 39% and 34% for the three months ended March 31, 2022 and 2021, respectively.

The increase in margins realized during the three months ended March 31, 2022 is primarily attributable to two service contracts that resulted in low gross margins of 15% and 13% during the first and second quarters of 2021, respectively.

The gross margin percentage was 31% and 32% for the six months ended June 30, 2022 and 2021, respectively.

The decrease in margins realized during the six months ended June 30, 2022 is primarily attributable to an increase in headcount for production, new costs for material for our new Safe Case product, and shipping costs from our foreign manufacturers.

Research and Development

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Research and development expenses are charged to operations as incurred.

For the three months ended March 31, 2022 and 2021, R&D expenses were $721,347 and $122,983, respectively, representing an increase of $598,364 or 487%.

The increase during 2022 was comprised primarily of $273,051 related to an increase in employee headcount spent on R&D and three new projects for automation, battery and drone design initiated in 2021, $168,443 related to software engineering services, $147,995 related to product development for high-areal capacity battery electrodes and 3D-engineering for solid state rechargeable batteries, $30,000 related to cell check design services, and $23,151 related to drone engineering services.

For the three months ended June 30, 2022 and 2021, R&D expenses were $999,484 and $352,741, respectively, representing an increase of $646,743 or 183%.

The increase during 2022 was comprised primarily of $350,617 related to an increase in employee headcount spent on R&D and three new projects for automation, battery and drone design initiated in 2021, $148,513 related to cell check design services, $74,024 related to product development for high-areal capacity battery electrodes and 3D-engineering for solid state rechargeable batteries, $37,000 related to software design services and $17,950 related to drone engineering services.

For the six months ended June 30, 2022 and 2021, R&D expenses were $1,720,831 and $475,724, respectively, representing an increase of $1,245,107 or 262%.

The increase is primarily comprised of $625,577 related to the increase in employee headcount spent on battery and drone design, $316,956 related to research in cell check technology, $222,020 related to research in solid state batteries and 3D engineering services, and $67,000 related to cell check design services.

We expect that our R&D expenses will increase as we expand our future operations.

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Selling, general and administrative expenses consisted primarily of stock-based compensation, payroll taxes and other benefits, consulting fees, registration fees, office expenses, rent expense, directors and officers insurance, travel and entertainment, marketing and advertising, and filing fees.

For the three months ended March 31, 2022 and 2021, selling, general and administrative expenses were $3,534,923 and $1,492,811, respectively, an increase of $2,042,112, or 137%.

The increase is primarily due to increases of approximately $854,243 for stock-based compensation issued to employees and consultants, $530,314 in labor costs as a result of 25 new hires during the last twelve months, $185,557 for consulting contractor services, $114,603 for NYSE registration fees, $110,888 for office expenses and supplies, $58,483 for rent expense due to the execution of a new operating lease agreement during the period, $28,654 for directors and officers insurance, $24,262 for travel and entertainment due to the lifting of COVID-19 dining and travel restrictions, $20,399 for expanded marketing and advertising expenses, and $14,049 for filing fees.

Other Income (Expense)

For the three months ended March 31, 2022 and 2021, other income (expense) was $42,134 and ($241,566), respectively, representing a change of $283,700 or 117%.

The change is primarily attributable to the change in fair value of accrued issuable equity of $175,617 and the decrease in the amortization of debt discount recorded in connection with notes payable issued in 2020 of $108,124.

For the three months ended June 30, 2022 and 2021, selling, general and administrative expenses were $4,326,162 and $2,723,303, respectively, an increase of $1,602,859, or 59%.

The increase is primarily due to increases of approximately $530,484 in labor costs as a result of 25 new hires during the last twelve months, $515,984 for expanded marketing and advertising expenses, $130,389 for legal and professional services, $123,518 for office related expenses and supplies resulting from the increase in headcount, $94,904 for travel and entertainment expenses due to the lifting of COVID-19 restrictions, $37,913 for membership dues and subscriptions, $37,120 for depreciation expense primarily due to facility improvements and computer equipment for the increase in headcount, and $26,825 for directors and officers insurance.

For the six months ended June 30, 2022 and 2021, selling, general and administrative expenses were $7,861,085 and $4,216,114, respectively, an increase of $3,644,971, or 86%.

The increase is primarily due to increases of approximately $1,052,004 in labor costs as a result of 25 new hires during the last twelve months, $809,991 for stock-based compensation issued to employees and consultants, $536,383 for expanded marketing and advertising expenses, $319,723 for legal and professional services, $149,000 for NYSE registration fees, $234,406 for office related expenses and supplies, $119,166 for travel and entertainment due to the lifting of COVID-19 restrictions, $76,200 for rent expense due to the execution of a new operating lease agreement during the period, $69,645 for depreciation expense primarily due to facility improvements, and computer equipment for the increase in headcount, and $55,479 for directors and officers insurance.

Other (Expense) Income

For the three months ended June 30, 2022 and 2021, net other expense was $92,913 and $140,137, respectively, representing a decrease of $47,224 or 34%.

The change is primarily attributable to the decrease in debt redemption costs of $140,000, and the change in fair value of accrued issuable equity of $31,977, partially offset by an increase in the amortization of the debt discount and interest expense recorded in connection with notes payable issued in 2022 of $83,145 and $41,608, respectively.

For the six months ended June 30, 2022 and 2021, net other expense was $50,779 and $381,703, respectively, representing a change of $330,924 or 87%.

The change is primarily attributable to the change in fair value of accrued issuable equity of $207,594, the decrease in debt redemption costs of $140,000, and a decrease in the amortization of debt discount of $24,979, partially offset by an increase in interest expense of $41,649 recorded in connection with the notes payable issued in 2022.

Liquidity and Capital Resources

As of March 31, 2022 and December 2021, we had cash balances of $10,132,676 and $14,863,301, respectively, and working capital of $9,975,086 and $13,302,935, respectively.

As of June 30, 2022 and December 2021, we had cash balances of $12,991,732 and $14,863,301, respectively, and working capital of $8,477,713 and $13,302,935, respectively.

On May 13, 2022, the Company issued a $5,000,000 Promissory Note to an investor for gross proceeds of $4,750,000.

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See Financing Activities under Recent Developments above for additional details.

For the three months ended March 31, 2022 and 2021, cash used in operating activities was $4,574,490 and $1,663,385, respectively.

Our cash used in operations for the three months ended March 31, 2022 was primarily attributable to our net loss of $4,136,555, adjusted for non-cash expenses in the aggregate amount of $1,436,127, as well as $1,874,062 of net cash used to fund changes in the levels of operating assets and liabilities.

Our cash used in operations for the three months ended March 31, 2021 was primarily attributable to our net loss of $1,714,723, adjusted for non-cash expenses in the aggregate amount of $633,444, as well as $582,106 of net cash used to fund changes in the levels of operating assets and liabilities.

For the three months ended March 31, 2022 and 2021, cash used in investing activities was $248,889 and $0, respectively.

Cash used in investing activities during the three months ended March 31, 2022 was related to deposits paid for equipment of $227,538 and purchases of property and equipment of $21,351.

For the three months ended March 31, 2022 and 2020, cash provided by (used in) financing activities was $92,754 and ($1,050,000), respectively.

Cash provided by financing activities during the three months ended March 31, 2022 was due to proceeds from the exercise of warrants of $87,679 and proceeds from the exercise of options of $5,075.

Cash used in financing activities during the three months ended March 31, 2021 was due to repayments of notes payable of $1,050,000.

Future cash requirements for our current liabilities include approximately $1,758,786 for accounts payable and accrued expenses (including lease liabilities) and $155,226 related to our PPP loan, for which we have applied for forgiveness.

The Company has also committed to spend $970,546 related to capital expenditures for the construction of a new automation facility, $867,224 for automation and testing equipment, $586,286 for research and development, and $450,000 related to a sponsorship agreement.

Cash requirements for long term liabilities consist of $267,900 for lease payments, and $148,049 for research and development.

For the six months ended June 30, 2022 and 2021, cash used in operating activities was $9,010,695 and $4,081,565, respectively.

Our cash used in operations for the six months ended June 30, 2022 was primarily attributable to our net loss of $9,391,240, adjusted for non-cash expenses in the aggregate amount of $2,485,419, as well as $2,104,874 of net cash used to fund changes in the levels of operating assets and liabilities.

Our cash used in operations for the six months ended June 30, 2021 was primarily attributable to our net loss of $4,741,866, adjusted for non-cash expenses in the aggregate amount of $1,723,843, and $1,063,542 of net cash used to fund changes in the levels of operating assets and liabilities.

For the six months ended June 30, 2022 and 2021, cash used in investing activities was $546,784 and $36,492, respectively.

Cash used in investing activities during the six months ended June 30, 2022 was related to deposits paid for equipment of $429,008 and purchases of property and equipment of $117,776.

For the six months ended June 30, 2022 and 2021, cash provided by financing activities was $7,685,910 and $7,397,500, respectively.

Cash provided by financing activities during the six months ended June 30, 2022 was due to proceeds from a promissory note of $4,750,000, proceeds from the exercise of warrants of $3,020,835 and proceeds from the exercise of options of $5,075, partially offset by issuance costs related to the note payable and deferred financing costs related to the SEPA for $17,200 and $72,800, respectively.

Cash provided by financing activities during the six months ended June 30, 2021 was due to $6,500,000 of proceeds from the sale of preferred stock and $3,712,500 received in connection with the exercise of warrants, partially offset by the $2,450,000 of principal repayments on notes payable and $365,000 of financing costs paid during the period.

Future cash requirements for our current liabilities include approximately $5,056,744, of principal for the promissory note and loan payable, $2,087,402 for accounts payable and accrued expenses (including lease liabilities).

The Company has also committed to spend $1,800,000 related to various sponsorship agreements, $981,648 related to capital expenditures for the construction of a new automation facility, $357,119 for automation and testing equipment, and $610,960 for research and development.

Cash requirements for long term liabilities consist of $212,852 for lease payments, $98,482 for loans payable, and $49,350 for research and development.

The Company intends to meet these cash requirements from its current cash balance, proceeds from the SEPA and from future revenues.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis