KULR Technology Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 16, 2021. KULR develops thermal-management technologies for battery, electronics, aerospace and defense applications, with commercial markets including energy storage, electric vehicles, cloud computing and 5G.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $628,244 | $201,128 | $1,046,149 | $278,628 |
| Gross profit | $189,038 | $156,394 | $331,675 | $203,851 |
| Gross margin | 30% | 78% | 32% | 73% |
| Operating expenses | $3,076,044 | $479,535 | $4,691,838 | $1,056,658 |
| Operating loss | $(2,887,006) | $(323,141) | $(4,360,163) | $(852,807) |
| Net loss | $(3,027,143) | $(428,985) | $(4,741,866) | $(979,238) |
| Net loss attributable to common stockholders | $(5,651,469) | $(428,985) | $(7,366,192) | $(979,238) |
- Revenue rose 212% in Q2 and 275% for the first half, which management attributed largely to four new contracts received in Q1. Product sales increased substantially, while Q2 contract-services revenue declined year over year.
- Gross margin fell sharply, which management attributed primarily to product mix; it notes that margins also vary by product, customer and stage of development.
- Research and development expense increased to $352,741 in Q2 and $475,724 for the half. Selling, general and administrative expense rose to $2,723,303 and $4,216,114, respectively. Management cited stock compensation, marketing, new hires and professional services among the drivers.
- Stock-based compensation was $1,085,891 in Q2 and $1,473,863 for the first half, including expense associated with restricted shares and market-based awards.
- Q2 net loss attributable to common stockholders includes a $2,624,326 deemed dividend related to the Series D preferred financing; this was not a cash operating expense.
Cash, debt and liquidity
- At June 30, cash was $12,159,583 and working capital was $12,194,403, compared with cash of $8,880,140 at December 31, 2020. Total liabilities were $1,793,304; stockholders’ equity was $12,589,210.
- For the six months, operating cash use was $4,081,565, investing cash use was $36,492, and financing cash provided was $7,397,500. Cash increased by $3,279,443 to $12,159,583.
- The company raised $6.5 million in gross proceeds from Series D preferred stock and warrants and received $3,712,500 from warrant exercises; it reported $2,450,000 in cash repayments of notes payable and $365,000 of financing costs. Notes payable had no balance at June 30. A $155,226 current loan payable remained, and the filing says the PPP loan was still outstanding, with the company intending to seek full forgiveness.
- Management expects continued operating losses and operating cash use, but believes working capital is sufficient for at least 12 months from the filing date. The company said approximately $5.707 million remained available under its Standby Equity Distribution Agreement, but it was then precluded from issuing shares under it while certain variable-rate-transaction warrants remained outstanding.
Material changes, outlook and risks
- The company listed its common stock on NYSE American in June. Shares outstanding increased from 89,908,600 at year-end to 100,567,930 at June 30; the filing reports 101,701,263 shares outstanding as of August 16.
- All 650 Series D preferred shares issued in May were converted into approximately 3.17 million common shares in June. The financing included warrants to purchase 2.6 million shares at $2.50 and a 1.3 million-share commitment fee. The preferred stock carried a 10% annual dividend rate.
- A new San Diego office lease began June 1 for an initial three-year term. The balance sheet records lease liabilities of $794,425, split between current and non-current portions.
- The company committed $1.65 million to a multi-year technology development and sponsorship agreement; $250,000 was paid in April, and $83,333 was expensed in the first half.
- Customer concentration is significant: the largest customer represented 69% of Q2 revenue and 62% of first-half revenue; customers each representing at least 10% collectively accounted for 89% and 88%, respectively. Management warns that customer delays, reduced activity or loss of a major customer could materially harm results.
- COVID-19’s future effects remain uncertain, including potential effects on demand, supply chains, schedules and customer fulfillment. Management reported no material adverse impact on results or financial position as of June 30.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level. The filing identifies an unremediated material weakness involving independent review and approval of electronic payments; remediation was in progress.
- No revenue or earnings guidance is provided. Management expects R&D spending to increase as operations expand and describes a strategy to evolve from component supply toward design, testing and system solutions, potentially using partners. No legal proceedings were reported, and the company reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth from the four new contracts can continue, given lengthy and unpredictable customer purchase cycles and substantial customer concentration.
- Whether product mix and operating scale can improve gross margins and reduce losses, particularly as operating expenses rise.
- Cash burn and financing needs relative to management’s 12-month liquidity assessment, including the PPP loan status and restrictions on SEDA access.
- Potential dilution from outstanding warrants, equity awards and market-based compensation, and the terms and accounting of the Series D financing.
- Progress in remediating the electronic-payment control weakness and the effectiveness of the controls after remediation.
- The filing gives different repayment descriptions in different sections: the cash-flow statement and notes report $2.45 million of note repayments, while the financing discussion refers to $1.4 million and the MD&A recent-development section cites $1.54 million. Verify the applicable debt balances and repayment amounts against the underlying disclosures.