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May 21, 2021, 6:09 a.m. EDT

10-Q: KULR TECHNOLOGY GROUP, INC.

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(EDGAR Online via COMTEX) -- 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 March 31, 2021 and for the three months ended March 31, 2021 and 2020 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, 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 began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company's results of operations and financial position at March 31, 2021.

The full extent of the future impact of COVID-19 on the Company's operations and financial condition is uncertain. Accordingly, COVID-19 could have a material adverse effect on the Company's business, results of operations, financial condition and prospects during 2021 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

Technology Development and Sponsorship Agreement

On March 31, 2021, the Company entered into a multi-year technology development and sponsorship agreement where the Company has committed to spend an aggregate of $1,650,000 payable in three installments, which are due April 1, 2021, January 1, 2022, and January 1, 2023.

Operating Lease

On April 5, 2021, the Company entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021. 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.

Conversion of Series B Preferred Stock

In March 2021, 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.

Securities Purchase Agreement

On May 19, 2021, the Company entered into a SPA with an investor, pursuant to which the Company agreed to issue to the investor 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 Company will also pay the investor a commitment fee of 1,300,000 shares of common stock at the closing of the Offering. The Series D Preferred will have a fixed conversion price of $2.05, will be convertible into an aggregate of 3,170,732 shares of common stock and will have the right to vote on an as-converted basis. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000.

Common Stock

On April 6, 2021, we issued 20,000 shares of immediately vested common stock with a grant date value of approximately $51,000 for legal services.

On April 19, 2021, in connection with the appointment of a new Vice President of Operations (the "VPO") the Board of Directors granted 80,000 restricted shares of our common stock to the VPO. The shares vest in four equal yearly installments on each anniversary of the grant date.

During April, we issued an aggregate of 300,000 shares of common stock in connection with exercises of outstanding warrant pursuant to which we received an aggregate of $375,000 of gross proceeds.

Results of Operations

Three Months Ended March 31, 2021 Compared With the Three Months Ended March 31, 2020







        Revenues
        Our revenues consisted of the following during the three months ended March 31,
        2021 and 2020:
                                For the Three Months Ended
                                        March 31,
                                 2021                2020
        Product sales       $      178,249       $      28,000
        Contract services          239,656              49,500
        Total revenue       $      417,905       $      77,500
        


For the three months ended March 31, 2021 and 2020, we generated $417,905 and $77,550 of revenues, respectively, representing an increase of $340,405, or 439%. Revenue from product sales during the three months ended March 31, 2021 increased by 537% compared to the three months ended March 31, 2020, mainly due to four large contracts received during the three months ended March 31, 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 March 31, 2021 and 2020, cost of revenues was $275,268 and $30,043, respectively, an increase of $245,225 or 816%. The increase was primarily due to higher product sales and service revenues earned during the three months ended March 31, 2021. The gross margin percentage was 34% and 61% for the three months ended March 31, 2021 and 2020, respectively. The decrease in margins during the first quarter of 2021 is primarily the result of a low 15% margin earned on a single large contract during the first quarter of 2021.

Research and Development

Research and development expenses ("R&D") include 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 March 31, 2021 and 2020, R&D expenses were $122,983 and $111,713, respectively, representing an increase of $11,270 or 10%. The increase is primarily due to new energy storage development services provided during the period, partially offset by a reduction in R&D salaries and other salary related costs, such as payroll taxes and other benefits, due to salary reductions implemented at the end of the first quarter of 2020 as a result of COVID-19. 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 travel, salaries, payroll taxes and other benefits, and rent expense.

For the three months ended March 31, 2021 and 2020, selling, general and administrative expenses were $1,492,811 and $465,410, respectively, an increase of $1,027,401 or 221%. The increase is primarily attributable to an increase of approximately $486,000 of marketing and advertising expense, an increase of approximately $376,000 of stock-based compensation resulting primarily from the issuance of restricted stock upon the appointment of the Company's Chief Operating Officer ("COO") and stock granted to consultants during the period, as well as an increase of approximately $87,000 in labor costs as the result of four new hires, including the appointment of the COO.

Other Expenses

For the three months ended March 31, 2021 and 2020, other expenses were $241,566 and $20,587, respectively, representing an increase of $220,979. The increase in other expense is primarily due to amortization of debt discount of $108,124 related to the issuance of notes payable and $132,577 of change in fair value of accrued issuable equity during the three months ended March 31, 2021.

Liquidity and Capital Resources

As of March 31, 2021 and December 31, 2020, we had cash balances of $6,166,755 and $8,880,140, respectively, and working capital of $4,699,452 and $6,060,695, respectively.

For the three months ended March 31, 2021 and 2020, cash used in operating activities was $1,663,385 and $698,110, respectively. 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, and $582,106 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, 2020 was primarily attributable to our net loss of $550,253, adjusted for non-cash expenses in the aggregate amount of $32,826, and $180,683 of net cash used to fund changes in the levels of operating assets and liabilities.

There were no cash flows from investing activities for the three months ended March 31, 2021 and 2020.

For the three months ended March 31, 2021 and 2020, cash (used in) provided by financing activities was ($1,050,000) and $1,223,401, respectively. Cash used in financing activities during the three months ended March 31, 2021 represents principal payments on notes payable. The cash provided by financing activities during the three months ended March 31, 2020 primarily represents $1,410,000 of net proceeds from the issuance of a note payable, offset by the payment of $130,000 of debt issuance costs and repayment of notes payable of $50,000.

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 began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company's results of operations and financial position at March 31, 2021.

The full extent of the future impact of COVID-19 on the Company's operations and financial condition is uncertain. Accordingly, COVID-19 could have a material adverse effect on the Company's business, results of operations, financial condition and prospects during 2021 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular R&D and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

During the year ended December 31, 2020, we entered into note purchase agreements in the original aggregate principal amount of $4,000,000 for cash proceeds of $3,710,000. Principal in the amount of $1,550,000 was repaid during the year ended December 31, 2020 and principal in the amount of $1,050,000 was repaid during the three months ended March 31, 2021. Of the $1,400,000 principal balance remaining at March 31, 2021, $525,000 matures on May 31, 2021 and $875,000 matures on June 30, 2021.

In April 2020, the Company received a loan of $155,226 under the government Small Business Administration ("SBA") sponsored Payroll Protection Program ("PPP") to support continuing employment during the COVID-19 pandemic. The PPP Loan ("Note") and accrued interest may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities and maintains its payroll levels. The amount of forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. If the PPP Loan is not forgiven, the Company will begin repaying this loan beginning in November 2021. Any unforgiven balance must be repaid in full by its maturity date, February 28, 2022.

Effective February 27, 2020, the Company entered into a twenty-four month Standby Equity Distribution Agreement ("SEDA") with YAII, pursuant to which the Company may, at its discretion, sell to up to an aggregate of $8,000,000 (subject to YAII's approval for amounts over $100,000) of shares of the Company's common stock at a price equal to Company 80% of the lowest daily volume weighted average price for the five days immediately following the date the Company delivers notice requiring YAII to purchase the shares under the SEDA. For each advance, the Company shall have delivered all shares relating to all prior advances, and, unless waived by YAII, at least 5 trading days shall have elapsed from the immediately preceding advance date. Through March 31, 2021 , the Company issued an aggregate of 1,841,548 shares of common stock at prices between $0.73 - $1.65 per share for aggregate proceeds of $2,214,437 in connection with advance notices submitted to YAII under the SEDA, of which $791,000 of the proceeds were applied directly against the principal due under the Notes. Pursuant to a registered public offering on December 31, 2020, the Company may not issue shares involving variable rate transactions (including shares issuable pursuant to the SEDA), so long as warrants issued in connection with the registered public offering remain outstanding.

On May 19, 2021, the Company entered into a SPA with an investor, pursuant to which the Company agreed to issue to the investor 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 Company will also pay the investor a commitment fee of 1,300,000 shares of common stock at the closing of the Offering. The Series D Preferred will have a fixed conversion price of $2.05, will be convertible into an aggregate of 3,170,732 shares of common stock and will have the right to vote on an as-converted basis. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate notes payable obligation of $1,540,000.

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 that we have access to capital resources through various sources, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. While we believe that we will continue to incur operating losses and use cash in operating activities for the foreseeable future, we believe that our current working capital is sufficient in comparison to our anticipated cash usage for a period of at least the next twelve months subsequent to the filing date of these condensed consolidated financial statements.

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.

May 21, 2021

COMTEX_387006081/2041/2021-05-21T06:09:27

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