KULR Technology Group, Inc. quarterly report, Q1 FY2021

KULR Technology Group, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021. The unaudited consolidated statements cover KULR Technology Group and its wholly owned subsidiary. KULR develops thermal-management technologies for aerospace, defense, battery safety, and commercial electronics applications.

Financial results and liquidity

Metric	Q1 2021	Q1 2020 or comparison
Revenue	$417,905	$77,500; up approximately 439%
Gross profit / margin	$142,637 / 34%	$47,457 / 61%
Operating expenses	$1,615,794	$577,123
Operating loss	$(1,473,157)	$(529,666)
Net loss	$(1,714,723), or $(0.02) per share	$(550,253), or $(0.01) per share
Cash used in operating activities	$(1,663,385)	$(698,110)

• Revenue growth reflected four large contracts; product sales were $178,249 and contract services were $239,656. Management describes customer purchasing and contract timing as lengthy, unpredictable, and lumpy.
• Gross margin declined to 34% from 61%, primarily because one large Q1 contract earned a 15% margin. Management says product mix and early-stage product economics can cause substantial margin variation.
• SG&A rose 221% to $1.49 million, including approximately $486,000 more marketing and advertising expense, $376,000 more stock-based compensation, and $87,000 more labor costs. R&D rose 10% to $122,983.
• At March 31, cash was $6.17 million and working capital was $4.70 million, versus $8.88 million and $6.06 million, respectively, at December 31, 2020. Current liabilities were $2.45 million. Cash fell by $2.71 million during the quarter.
• At March 31, notes payable had $1.40 million principal outstanding, with $1.38 million net carrying value; a separate $155,226 loan payable was also reported. The notes were scheduled to mature in May and June 2021.
• Common shares outstanding increased to 92.63 million at March 31 from 89.91 million at year-end, including 698,600 shares issued on conversion of Series B preferred stock. Weighted-average shares were 90.08 million versus 81.10 million.

Material developments, outlook, and risks

• On May 20, 2021, after quarter-end, KULR closed a financing for $6.5 million gross proceeds by issuing Series D convertible preferred stock and warrants. The preferred stock is convertible into approximately 3.17 million common shares, carries a 10% annual cumulative dividend, and has as-converted voting rights. The warrants cover 2.6 million shares at $2.50; the investor also received a 1.3 million-share commitment fee. KULR said it repaid its aggregate notes payable obligation of $1.54 million in connection with the financing. The filing reports 94,247,200 common shares issued and outstanding as of May 20.
• Management expects operating losses and operating cash use to continue for the foreseeable future, with R&D and G&A expenses expected to increase. It believes working capital is sufficient for at least 12 months after the filing date, while noting that additional revenue or capital may be needed and future financing may not be available on acceptable terms. No quantitative revenue or earnings guidance is provided.
• COVID-19 had no material adverse effect on reported results or financial position as of March 31, according to management, but could affect demand, supply chains, R&D and manufacturing schedules, and timely customer fulfillment.
• Customer concentration is significant: three customers represented 88% of Q1 revenue; two customers represented 78% of receivables. The filing warns that loss, delay, or reduced activity from major customers could materially harm the business. Three vendors accounted for 53% of purchases.
• Other commitments include a $1.65 million multi-year technology development and sponsorship agreement, payable in three installments, and a new 36-month office lease beginning June 2021 at monthly payments of $23,787.
• Management concluded disclosure controls and procedures were not effective at the reasonable-assurance level. The previously identified material weakness involved ineffective independent review and approval of electronic payments; remediation was underway. No material change in internal control was reported during Q1.
• The filing reports no legal proceedings and no material changes to the risk factors in the 2020 Form 10-K. It also states there were no material off-balance-sheet arrangements.

Important facts for investors to verify

• Whether rapid revenue growth can be sustained and customer concentration reduced, given the lumpy contract cycle and dependence on a few customers.
• Whether gross margins improve after the low-margin large contract and how product-versus-service mix affects profitability.
• Cash use, liquidity after the May financing and debt repayment, and the terms and dilution implications of the Series D preferred stock, warrants, and commitment shares.
• Execution and funding of the $1.65 million development agreement, expanded lease costs, and expected increases in operating expenses.
• Progress in remediating the internal-control material weakness and whether disclosure controls become effective.
• The statements report Q1 2020 revenue of $77,500, while MD&A once cites $77,550; investors should confirm the intended comparative figure.