KULR Technology Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; financial statements are unaudited. KULR develops thermal-management, battery-safety and related energy-management technologies for aerospace, defense and commercial markets.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.696 million | $0.588 million | $4.455 million | $0.788 million |
| Gross profit / margin | $1.002 million / 37% | $0.164 million / 28% | $1.646 million / 37% | $0.241 million / 31% |
| Operating expenses | $7.000 million | $5.326 million | $13.904 million | $9.582 million |
| Operating loss | $(5.997) million | $(5.162) million | $(12.258) million | $(9.340) million |
| Net loss | $(6.335) million | $(5.255) million | $(12.938) million | $(9.391) million |
| Basic and diluted loss per share | $(0.05) | $(0.05) | $(0.11) | $(0.09) |
- Revenue increased 359% in Q2 and 465% for the first six months year over year. Product sales and contract services both grew; management attributed much of the service increase to new contracts.
- Revenue growth outpaced cost of revenue, lifting reported gross margin. However, operating expenses also increased, including R&D and SG&A, and operating and net losses widened.
- At June 30, cash was $1.321 million, versus $10.334 million at December 31, 2022. Working capital was a deficit of $4.720 million, compared with positive working capital of $6.055 million at year-end.
- For the six months, operating cash use was $9.859 million, investing cash use was $0.895 million, and financing provided $1.741 million. Cash declined by $9.013 million.
- Total liabilities were $11.785 million, all classified as current. These included a $7.251 million net prepaid advance liability; stockholders’ equity was $3.474 million. The filing reports no long-term liabilities at June 30.
Material changes and notable items
- Q2 revenue rose by $2.108 million year over year. Management cited product sales of components, internal-short-circuit battery products and Thermal Runway Shield technology, alongside higher contract-service revenue.
- Six-month R&D expense rose 62% to $2.796 million, primarily from planned hiring and a new R&D facility. SG&A rose 41% to $11.107 million, including higher labor, depreciation, consulting, marketing, travel and vibration-technology acquisition costs.
- Interest expense and debt-discount amortization on Yorkville prepaid advances increased other expense. During the first half, the company issued 4.079 million shares to Yorkville, applying $4.467 million against principal and accrued interest.
- Customer concentration remained high: one customer represented 46% of Q2 revenue and 48% of receivables at June 30; the top three customers accounted for 83% of Q2 revenue. Management warns that customer loss, reduced activity or delayed payment could materially harm results.
- Subsequent to quarter-end, an August 16, 2023 agreement with Yorkville set cash repayments: $3.0 million principal plus a $150,000 premium and accrued interest by August 25, followed by three $1.383 million principal payments at the ends of October, November and December, each plus a 5% premium and accrued interest. Timely payments restrict Yorkville’s ability to submit share-purchase notices. A financing exceeding $15 million triggers a separate payoff provision of 105% of outstanding principal plus accrued interest and termination of the SEPA agreements.
- The company acquired intellectual property for $75,000 and entered an exclusive thermal-runaway-calorimeter license with 5.5% sales royalties and $20,000 minimum annual royalties. It also reported committed spending for automation equipment, an asset purchase and R&D.
Outlook, risks and controls
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance. It cited recurring losses and operating cash use, the working-capital deficit, limited cash, near-term Yorkville repayments and other commitments. Management plans to pursue revenue growth, cost control, additional financing and an extension or equity conversion of the advance; it had no committed additional financing and gave no assurance these actions would succeed.
- Management expects R&D expenses to increase as operations expand. The filing does not provide quantified revenue, earnings or cash-flow guidance.
- Management said there were no material changes to the risk factors in the 2022 Form 10-K, apart from the added going-concern risk. Legal proceedings: none reported.
- Disclosure controls were deemed ineffective at the reasonable-assurance level. A material weakness involving independent review and approval of electronic payments remained at June 30. Preventive controls were introduced in May; management expected remediation by September 30, 2023, but gave no assurance.
Key investor verification points
- Confirm the status and funding of the Yorkville repayment schedule, any financing or amendments, and the resulting cash runway and potential equity dilution.
- Assess whether revenue growth is recurring and profitable, given customer concentration, the timing of contracts and continued operating losses.
- Track cash burn, working capital, collections and committed expenditures against the company’s financing needs.
- Verify remediation of the electronic-payment control weakness and monitor subsequent control assessments.
- Review the terms and accounting effects of the prepaid advances, share issuances, equity awards and related acquisition or licensing commitments.