KULR Technology Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020; financial statements are unaudited. KULR develops thermal-management technologies for batteries and electronics, serving aerospace and defense as well as commercial markets including electric vehicles, energy storage, 5G and cloud computing.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $136,849 | $526,722 | $415,477 | $777,984 |
| Gross profit | $75,882 | $417,671 | $287,171 | $578,866 |
| Gross margin | 55% | 79% | 69% | 74% |
| Operating expenses | $886,402 | $684,952 | $1,950,498 | $2,032,444 |
| Operating loss | $(810,520) | $(267,281) | $(1,663,327) | $(1,453,578) |
| Net loss | $(1,012,259) | $(267,534) | $(1,991,497) | $(1,454,643) |
Basic and diluted net loss per share was $(0.01) for Q3 2020 and $(0.02) for the nine-month period. The filing attributes the quarterly revenue decline of 74% and nine-month decline of 47% mainly to a large 2019 defense contract; the customer deferred its next shipment to 2021. Nine-month service revenue increased 96%, while product sales fell. Management said lower gross margins reflected product mix and upfront customer-service costs. Q3 SG&A rose 53%, including higher marketing and stock compensation; nine-month SG&A rose 4%. Nine-month R&D expense fell 39%, partly due to salary reductions and lower headcount.
Cash flow, liquidity and capital
- Cash was $2.810 million at September 30, 2020, versus $108,857 at December 31, 2019. Current assets were $3.108 million and current liabilities $3.513 million, leaving a $404,561 working-capital deficit; the year-end deficit was $824,481.
- For the first nine months, operating cash outflow was $2.076 million (prior year: $1.206 million); investing outflow was $46,087 (prior year: zero); financing inflow was $4.823 million (prior year: $1.052 million). Cash increased by $2.701 million.
- At quarter-end, notes had $3.150 million of principal outstanding, with maturities from May 31 to July 20, 2021; their carrying amount was $2.837 million after debt discount. The $155,226 PPP loan was also outstanding. Loans payable on the balance sheet totaled $155,226, current and non-current combined.
- Total liabilities were $3.697 million, compared with assets of $3.171 million; stockholders’ deficiency was $525,612. Common shares outstanding were 83.036 million at quarter-end and 83.293 million as of November 13, 2020.
- The company reported $307,313 of debt-discount amortization for the nine months, including $210,402 in Q3, contributing to higher other expense.
Outlook, risks and notable items
- Going concern: KULR had not achieved profitability, expected continued operating cash outflows, and stated there was substantial doubt about its ability to continue as a going concern within one year after issuance of the financial statements. Management said additional revenue and/or capital would be needed; failure to secure funding on acceptable terms could require curtailing or discontinuing operations.
- Funding and dilution: The 24-month SEDA permits up to $8 million of stock sales, generally at 80% of the lowest volume-weighted average price over a specified five-day period. Approximately $5.847 million remained available at quarter-end, subject to conditions; the filing cautions that access is not assured and may cause dilution. Through September, 1.721 million shares were issued for about $2.153 million, of which $691,000 went directly to note repayment.
- Debt and subsequent events: After quarter-end, KULR received $40,000 on a SEDA share subscription, issued additional shares whose $100,000 proceeds were applied to notes, and paid $250,000 toward note principal. PPP loan forgiveness was not assured.
- Operating risks: COVID-19 could disrupt demand, supply chains, R&D, manufacturing and customer delivery; the company said the future financial impact could not be reasonably estimated. Revenue timing is described as lengthy, unpredictable and lumpy. Customer concentration was significant: one customer accounted for 44% of nine-month revenue, and one customer represented 56% of quarter-end receivables. Management warned that loss or reduced activity from major customers could materially harm results.
- Business developments: Management described a shift from component supply toward design, testing and broader system solutions, and said it would seek partners for joint ventures, licensing and other strategic arrangements. NASA Marshall awarded a battery-system development agreement in August 2020; the filing also reports two U.S. patents issued in July and August covering thermal-runaway shield and fiber thermal-interface technology. No quantified financial guidance was provided.
- Management reported effective disclosure controls at the reasonable-assurance level, no material change in internal control over financial reporting, and no legal proceedings.
Key facts for investors to verify
- Whether revenue recovers, including timing of the deferred defense shipment and the extent to which service growth can offset weaker product sales.
- Cash runway and access to the SEDA or other financing, including the cost and dilution of future share sales.
- Repayment schedule and terms of the $3.150 million note principal, and whether PPP forgiveness is obtained.
- Customer concentration, receivable collection, and the effects of COVID-19 on delivery and operating plans.
- Whether the company can improve margins and convert announced development work, patents and strategic plans into sustained commercial revenue.