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March 19, 2021, 3:01 p.m. EDT

10-K: KULR TECHNOLOGY GROUP, INC.

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 years ended December 31, 2020 and 2019 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual 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. 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 Annual Report, 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 Department of Defense ("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 and sustainability by which we aim to mitigate the effects of thermal runaway propagation which has been known to cause random fires in lithium-ion ("Li-ion") batteries. 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 advanced technology users like 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.

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 the sale of stock.

Recent Developments

Paycheck Protection Program Loan

On April 27, 2020, we received the proceeds of a $155,226 loan in connection with the CARES Act Paycheck Protection Program (PPP) being administered by the Small Business Administration. The Company believes that it will qualify for loan forgiveness under the terms of the PPP Agreement.

COVID-19

In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Our business is dependent on developing new markets and new products to be used on a global basis, thus restrictions on travel led to reduced demand for our products and interruptions to supply chains. Also, the local regulations such as "Shelter in Place" affected our ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. 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.

Standby Equity Distribution Agreement and Notes Payable

On February 27, 2020, we entered into a Standby Equity Distribution Agreement ("SEDA") with YAII PN, Ltd., a Cayman Island exempt limited partnership ("YAII"). Under the terms of this Agreement, the Company raised an aggregate of $2,292,695 from the facility. As of December 31, 2020, the Company had approximately $5,707,305 available in connection with the SEDA, however, so long as warrants issued on December 31, 2020 in an unrelated transaction remain outstanding, the Company may not issue shares in connection with variable rate transactions. During the year ended December 31, 2020, the Company issued notes to YAII in the aggregate amount of $4,000,000, of which the Company repaid principal on the notes in the aggregate amount of $1,550,000 ($791,000 was repaid from proceeds from the SEDA). Subsequent to December 31, 2020, the Company repaid principal on the notes in the aggregate amount of $1,050,000.

Registered Direct Offering

On December 31, 2020, we closed a registered direct offering conducted pursuant to a securities purchase agreement ("Purchase Agreement") with the purchasers set forth on the signature page thereto (the "Purchasers") for the purchase and sale of an aggregate of 6,400,001 shares of our common stock (the "Shares"), and warrants to purchase an aggregate of up to 6,400,001 shares of common stock ("Warrants"), at a combined purchase price of $1.25 per Share and Warrant. The aggregate gross proceeds to us were equal to approximately $8 million. The Warrants are immediately exercisable and may be exercised at any time until December 31, 2025, at an exercise price of $1.25 per share. Lake Street Capital Markets, LLC and Maxim Group LLC acted as co-placement agents in connection with the registered direct offering. We paid the co-placement agents a cash fee of 7.0% of the gross proceeds we received under the Purchase Agreement. We also reimbursed the co-placement agents for certain out-of-pocket accountable expenses incurred by them in connection with this offering of $50,000. We paid total approximate offering expenses, other than the placement agent fees, of approximately $170,000, which includes the co-placement agents' reimbursable expenses, legal, financial advisory fees, accounting, printing costs, listing fees, and various other expenses associated with registering and issuing the shares. We intend to use the net proceeds from this offering for capital expenditures, as well as for working capital and general corporate purposes.

The Shares and Warrants (and underlying shares) were offered, and will be issued, pursuant to the Prospectus Supplement, dated December 29, 2020, to the Prospectus included in our Registration Statement on Form S-3 (Registration No. 333- 232614) filed with the Securities and Exchange Commission on July 11, 2019 and declared effective on August 1, 2019.

Appointment of Keith Cochran

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

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

Appointment of Independent Directors

On February 20, 2021, the Board, contingent upon the Company's common stock being approved for uplisting to a national exchange, approved the appointment of Morio Kurosaki as an independent member of the Board. Mr. Kurosaki will also serve as chair of the Audit Committee. As such, the Board has determined that Mr. Kurosaki is a financial expert within the meaning of SEC regulations. Additionally, Mr. Kurosaki will serve as a member of both the Compensation Committee and the Nominating and Governance Committee.

In connection with his appointments, Mr. Kurosaki will be compensated (1) $10,000 per quarter, beginning on and subject to approval for uplisting, and (2) 20,000 restricted shares of the Company's common stock, which shares shall vest equally in 5,000 share increments per quarter beginning on and subject to approval for uplisting.

On February 20, 2021, the Board, contingent upon the Company's common stock being approved for uplisting to a national exchange, approved the appointment of Stayce D. Harris as an independent member of the Board. Ms. Harris will also serve as chair of the Compensation Committee. Additionally, Ms. Harris will serve as a member of both the Audit Committee and the Nominating and Governance Committee.

In connection with her appointments, Ms. Harris will be compensated (1) $10,000 per quarter, beginning on and subject to approval for uplisting, and (2) 20,000 restricted shares of the Company's common stock, which shares shall vest equally in 5,000 share increments per quarter beginning on and subject to approval for uplisting.

On February 20, 2021, the Board, contingent upon the Company's common stock being approved for uplisting to a national exchange, approved the appointment of Joanna D. Massey as an independent member of the Board. Ms. Massey will also serve as chair of the Nominating and Governance Committee. Additionally, Ms. Massey will serve as a member of both the Audit Committee and the Compensation Committee. .

In connection with her appointments, and subject to the receipt of her acknowledgment of the same, Ms. Massey will be compensated (1) $10,000 per quarter, beginning on and subject to approval for uplisting, and (2) 20,000 restricted shares of the Company's common stock, which shares shall vest equally in 5,000 share increments per quarter beginning on and subject to approval for uplisting.

Conversion of Series C Preferred Stock

During the year ended December 31, 2020, KULR issued an aggregate of 56,778 shares of our common stock upon voluntary conversions of 5.11 shares of our Series C Preferred Stock.

Effective as of December 31, 2020, KULR issued an aggregate of 177,885 shares of our common stock and warrants to purchase an aggregate of 177,885 shares of our common stock at an exercise price of $1.25 per share, upon a deemed automatic conversion of 18.90 shares of our Series C Preferred Stock, after which there remained no further Series C Preferred Stock outstanding. Although the conversion shares were issued subsequent to the deemed automatic conversion, in connection with a registered direct offering that closed on December 31, 2020, the conversions were made effective as of December 31, 2020 pursuant to an automatic conversion feature of the Series C Preferred Stock under which the stated value of each share was converted into the same securities issued in the registered direct offering at an effective conversion price of 85% of the aggregate purchase price of such securities.

Conversion of Series B Preferred Stock

During the year ended December 31, 2020, KULR issued an aggregate of 25,758 shares of our common stock upon conversion of 515 shares of our Series B Preferred Stock.

Subsequent to the year ended December 31, 2020, KULR issued an aggregate of 698,600 shares of our common stock upon conversion of 13,972 shares of our Series B Preferred Stock, after which there remained no further Series B Preferred Stock outstanding.

Consolidated Results of Operations







        Year Ended December 31, 2020 Compared With Year Ended December 31, 2019
        Revenue
        Our revenues consisted of the following types:
                              For the Years Ended
                                  December 31,
                               2020          2019
        Product sales       $  404,467     $ 735,431
        Contract services      219,498        94,967
        Total revenue       $  623,965     $ 830,398
        


For the years ended December 31, 2020 and 2019, we generated $623,965 and $830,398 of revenues from 25 and 27 customers, respectively, representing a decrease of $206,433, or 25%. Revenue from product sales during the year ended December 31, 2020 decreased by 45% compared to the year ended December 31, 2019, primarily due to a large DOD contract of about $355,000 received during the year ended December 31, 2019. The customer has pushed its next shipment of product to 2021. Product sales during these periods included sales of our component products, CFV thermal management solutions, ISC battery cells and devices, patented technology, and thermal FTI materials. Revenue from services increased by 131% for the year ended December 31, 2020 as compared to the year ended December 31, 2019, due to increased project requirements from some of our new and existing customers. Our service revenues, which include certain research and development contracts and onsite engineering services, were not hampered by restrictions arising from working under COVID-19 shelter-in-place regulations.

We are still in the early stages of business growth and development of customer relationships which typically begin on a project-by-project basis, leading to limited volume trials and eventually, product sales. As a result, in the absence of a large installed customer base, our sales can be lumpy and vary from one period to another.

Cost of Revenue and Gross Margin

Cost of revenues consisted 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 as 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 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.

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 years ended December 31, 2020 and 2019, cost of revenues was $169,016 and $226,505, respectively, representing a decrease of $57,489, or 25%. The decrease was primarily due to reduced costs as a result of reduced revenues. The gross margin percentage was 73% for both of the years ended December 31, 2020 and 2019.

Research and Development

Research and development ("R&D") included expenses incurred in connection with the R&D of our CFV thermal management solution and non-cash stock-based compensation expenses. R&D expenses are expensed as they are incurred.

For the years ended December 31, 2020 and 2019, R&D expenses were $289,772 and $502,225, respectively, representing a decrease of $212,453 or 42%. The decrease is attributable to reductions in salaries and other salary related costs, such as payroll taxes and other benefits, implemented during the end of the first quarter of 2020 due to COVID-19, as well as a reduction in head count between the comparable periods.

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

Selling, General and Administrative

Selling, general and administrative expenses consisted primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based compensation, marketing, travel, rent and office expenses.

For the years ended December 31, 2020 and 2019, selling, general and administrative expenses were $2,505,609 and $2,080,941, respectively, an increase of $424,668, or 20%. The increase is primarily due to increases of approximately $529,000 for marketing and advertising expense and $262,000 for stock-based compensation related to consultants and employees, partially offset by decreases of approximately $116,000 of travel, meals, and entertainment expense due to COVID-19 restrictions, $99,000 of rent expense due to the termination of an operating lease during the end of the fourth quarter of 2019, $30,000 of professional fees, $98,000 of payroll and benefits due to salary reductions implemented during the end of the first quarter of 2020 as a result of COVID-19, and $17,000 of conference and seminar expenses due to the travel restrictions and stay-at-home orders as a result of COVID-19.

Other (Expenses) Income

For the years ended December 31, 2020 and 2019, other expenses were $509,664 and $480, respectively, representing an increase of $509,184. The increase is primarily attributable to the amortization of debt discount recorded in connection with notes payable issued in 2020.

Liquidity and Capital Resources

As of December 31, 2020 and 2019, we had cash balances of $8,880,140 and $108,857, respectively, and working capital (deficit) of $6,202,985 and $(824,481), respectively.

For the years ended December 31, 2020 and 2019, cash used in operating activities was $2,730,253 and $1,188,339, respectively. Our cash used in operations for the year ended December 31, 2020 was primarily attributable to our net loss of $2,850,096, adjusted for non-cash expenses in the aggregate amount of $864,929, as well as $754,086 of net cash used to fund changes in the levels of operating assets and liabilities. Our cash used in operations for the year ended December 31, 2019 was primarily attributable to our net loss of $1,979,753, adjusted for non-cash expenses in the aggregate amount of $237,990, as well as $553,424 of net cash provided by changes in the levels of operating assets and liabilities.

For the years ended December 31, 2020 and 2019, cash used in investing activities was $46,087 and $0, respectively. Cash used in investing activities during the year ended December 31, 2020 was related to the purchases of equipment.

For the years ended December 31, 2020 and 2019, cash provided by financing activities was $11,547,623 and $1,067,300, respectively. Cash provided by financing activities during the year ended December 31, 2020 was due to the net proceeds from notes payable of $3,710,000, proceeds from the Paycheck Protection Program loan of $155,226, proceeds from the sale of our common stock pursuant to the SEDA agreement of $1,501,696, and proceeds from the sale of common stock and warrants received in a public offering of $8,000,001. These amounts were partially offset by $340,000 for the payment of debt issuance costs, $759,000 for the repayments on notes and $720,300 of cash paid in offering costs related to sale of our equity securities. Cash provided by financing activities during the year ended December 31, 2019 was due to the gross proceeds of common stock offering of $898,300 and proceeds from the issuance of our Series C Convertible Preferred Stock of $184,000, partially offset by cash offering costs paid of $15,000.

Subsequent to December 31, 2020, we made cash payments totaling $1,050,000 to pay down a portion of the outstanding principal due under our notes payable.

We have not yet achieved profitability and expect to continue to incur cash outflows from operations. It is expected that our research and development and general and administrative expenses will continue to increase and, as a result, we will eventually need to generate significant revenues and/or raise additional capital to fund our operations. Although our management believes our current cash on hand is sufficient to meet our operating and capital requirements for at least the next twelve months from the date these financial statements are issued, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, on a go-forward basis. 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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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.

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

See Note 2 - Summary of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for our critical accounting policies.

Recently Issued Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for a summary of recently issued and adopted accounting pronouncements.

Mar 19, 2021

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