Note 9 Subsequent Events

Shareholder Consent

On November 5, 2018, the Company received a written consent of the stockholders representing 78.4% of the issued and outstanding securities of the Company entitled to vote on matters of the stockholders to take the following actions: (i) to amend the Company’s certificate of incorporation with the Delaware Secretary of State increasing the number of authorized shares of the Company’s common stock from 100,000,000 shares to 500,000,000 shares; (ii) to approve, ratify and adopt the Company’s 2018 Equity Incentive Plan, pursuant to which the Company may award up to 15,000,000 shares of the Company’s common stock to employees, nonemployee officers and directors and consultants for the purpose of, among other things, motivating such persons to put forth their maximum efforts for the Company’s growth, profitability and success; and (iii) to approve and authorize, as a measure to protect the progress of the Company by vesting voting control of the Company in its Chief Executive Officer, Michael Mo, the issuance of 1,000,000 shares of the Company’s Series A Voting Preferred Stock to Mr. Mo.

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. ("KUTG") and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 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, 2017 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 17, 2018. 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 Report, in our other reports filed with the SEC, and other factors that we may not know.

Overview

The Company owns proprietary carbon fiber based (Carbon Fiber Velvet or “CFV”) thermal management solutions that it believes are more effective at conducting, dissipating and storing heat generated by an electronic system’s internal components (i.e. semiconductor, integrated circuits “chips”) than traditional materials, such as copper and aluminum. KULR’s technologies can be applied inside a wide array of electronic applications where heat is often a problem, such as mobile devices, cloud computing, virtual reality platforms, satellites, internet of things, drones, and connected cars.

Three key vectors have driven advancements in semiconductors and electronics systems – performance, power, and size. These vectors, however, often counteract one another. As chip performance increases, power consumption increases, and more heat is generated as a byproduct. When chip size reduces, there is an increased potential for a hot spot on the chip, which can degrade system performance. Electronic system components must operate within a specific temperature range on both the high and low end to operate properly. KULR resolves many of the tradeoffs associated with other thermal management materials. KULR’s products improve heat storage and dissipation, rigidity problems and durability. Its products are lightweight and reduce manufacturing complexity associated with traditional thermal management materials.

In addition to thermal management of electronic systems, KULR has developed, in partnership with National Aeronautics and Space Administration (“NASA”) Johnson Space Center (“NASA JSC”), a highly effective, lightweight and passive thermal protection technology, Thermal Runaway Shield (“TRS”) for lithium-ion batteries. KULR’s lithium-ion battery (“Li-B”) TRS product prevents a potentially dangerous combustible condition known as thermal runaway propagation from occurring in neighboring Li-B cells by acting as a shield or barrier in between individual Li-B cells in a battery pack. Although rare, incidents of thermal runaway propagation occurring spontaneously in Li-B cargo shipments and inside electronics, including hoverboards, smartphones, and electric vehicles, are a cause of public concern.

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 product revenues to achieve profitability. These conditions indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date. Historically, we have been able to raise funds to support our business operations, although there can be no assurance we will be successful in raising additional funds in the future.

Recent Developments

In May 2018, we were assigned a trading symbol, “KUTG”, for quotation on the OTC Markets. In August 2018, we were up-listed to the OTCQB.

During the three months ended September 30, 2018, we sold an aggregate of 581,819 shares of common stock at $0.66 per share to accredited investors for aggregate gross and net proceeds of $384,000 and $352,400, respectively.

On August 15, 2018, the Board of Directors approved the 2018 KULR Technology Group Equity Incentive Plan (the “2018 Plan”), subject to approval from a majority of our shareholders. Under the 2018 Plan, 15,000,000 shares of common stock are authorized for issuance. The 2018 Plan provides for the issuance of incentive stock options, non-statutory stock options, rights to purchase common stock, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants of the Company and its affiliates. The 2018 Plan requires the exercise price of stock options to be not less than the fair value of our common stock on the date of grant.

Results of Operations

Three and Nine Months Ended September 30, 2018 Compared With Three and Nine Months Ended September 30, 2017

The closing of the share exchange agreement with KTC on June 19, 2017 was accounted for as a reverse recapitalization under the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805-40. The condensed consolidated statements of operations herein reflect the historical results of KTC prior to the completion of the reverse recapitalization since it was determined to be the accounting acquirer, and do not include the historical results of operations for KUTG prior to the completion of the reverse recapitalization.

For the three months ended September 30, 2018 and 2017, we generated $482,798 and $15,106 of revenues, an increase of $467,692. Our revenues during the three months ended September 30, 2018 consisted of sales of our component product, CFV thermal management solution. Our revenues during the three months ended September 30, 2017 consisted of sales of our Phase Change Material (“PCM”) heat sink. The increase was primarily due to an increase in the volume of product sales to one existing customer.

For the nine months ended September 30, 2018 and 2017, we generated $881,929 and $26,006 of revenues, an increase of $855,923. Our revenues during the nine months ended September 30, 2018 consisted of sales of our component product, CFV thermal management solution, sales of an Original Equipment Manufacturer (“OEM”) product as well as certain research and development contract services. Our revenues during the nine months ended September 30, 2017 consisted of sales of our PCM heat sink. The increase in revenue was due to new contracts entered into during 2018.

Cost of Revenues and Gross Margins

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 part 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.

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 revenue increased by $23,000, or 44%, from $52,384 for the three months ended September 30, 2017 to $75,384 for the three months ended September 30, 2018. The increase was primarily due to increased volume of contracts in the 2018 period, which required additional labor and materials. We generated a gross profit of $407,414 for the three months ended September 30 ,2018 as compared to a gross loss of $32,278 for the three months ended September 30, 2017, representing an improvement in gross profit of $444,692, primarily resulting from the increase in product revenue due to new contracts entered into during 2018.

Cost of revenue increased by $150,222, or 138%, from $108,579 for the nine months ended September 30, 2017 to $258,801 for the nine months ended September 30, 2018. The increase was primarily due to increased volume of contracts in the 2018 period, which required additional labor and materials. We generated a gross profit of $623,128 for the nine months ended September 30 ,2018 as compared to a gross loss of $82,573 for the nine months ended September 30, 2017, representing an improvement in gross profit of $705,701, primarily resulting from the increase in product revenue due to new contracts entered into during 2018.

Research and Development

Research and development (“R&D”) includes 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 September 30, 2018, R&D expenses increased by $3,318, or 2%, to $161,194 from $157,876 for the three months ended September 30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to an increase in headcount.

For the nine months ended September 30, 2018, R&D expenses increased by $192,380, or 93%, to $399,884 from $207,504 for the nine months ended September 30, 2017. The increase is primarily attributable to an increase in salaries and other benefits due to an increase in headcount.

We expect that our R&D expenses will continue to increase as we expand our operations.

Research and Development – Related Parties

R&D – related parties include expenses associated with the development of our CFV thermal management solutions provided by Energy Science Laboratories, Inc. (“ESLI”), a R&D company owned by our Chief Technology Officer (“CTO”), as well as services provided by our CTO. R&D – related parties’ expenses are expensed as they are incurred.

For the three months ended September 30, 2018, R&D – related parties decreased by $38,767, or 100%, to $0 from $38,767 for the three months ended September 30, 2017. The decrease is due to a reduction in R&D services provided by ESLI during the current period, which resulted from the Company hiring its own research and development staff in 2017.

For the nine months ended September 30, 2018, R&D – related parties decreased by $439,824, or 100%, to $0 from $439,824 for the nine months ended September 30, 2017. The decrease is due to a reduction in R&D services provided by ESLI during the current period, which resulted from the Company hiring its own research and development staff in 2017.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries, payroll taxes and other benefits, legal and professional fees, stock-based compensation, marketing, travel, rent and office expenses.

For the three months ended September 30, 2018, selling, general and administrative expenses decreased by $144,096, or 24%, to $461,377 from $605,473 for the three months ended September 30, 2017. The decrease is primarily due to decreased non-cash stock-based compensation expense of $186,771 due to awards becoming fully vested in the second quarter of 2018, partially offset by increased salaries and other benefits of approximately $74,000 and professional fees of approximately $55,000 resulting from entering into new consulting agreements.

For the nine months ended September 30, 2018, selling, general and administrative expenses increased by $888,800, or 87%, to $1,908,635 from $1,019,835 for the nine months ended September 30, 2017. The increase is primarily due to increased salaries and other benefits of approximately $233,000 from the hiring of new employees in the third quarter of 2017, increased professional fees of approximately $501,000 resulting from entering into new consulting agreements, increased travel expenses of approximately $78,000 and increased rent expense of approximately $72,000 due to entering into a new lease agreement, partially offset by decreased non-cash stock-based compensation expense of approximately $103,000 due to awards becoming fully vested in the second quarter of 2018.

Other Income (Expense)

For the three months ended September 30, 2018, other income increased by $23,764 to $23,906 from $142 for the three months ended September 30, 2017. The increase is primarily due to a gain in the change in fair value of accrued issuable equity of $24,175, which is related to a decrease in the fair value of our common stock.

For the nine months ended September 30, 2018, other income (expense) increased by $31,787 to $23,673 from $(8,114) for the nine months ended September 30, 2017. The increase is primarily due to a gain in the change in fair value of accrued issuable equity of $24,175, which is related to a decrease in the fair value of our common stock.

Liquidity and Capital Resources

For the nine months ended September 30, 2018 and 2017, cash used in operating activities was $1,064,935 and $263,585, respectively. Our cash used in operations for the nine months ended September 30, 2018 was primarily attributable to our net loss of $1,661,718, adjusted for non-cash expenses in the aggregate amount of $390,305, partially offset by $206,478 of net cash provided by changes in the levels of operating assets and liabilities. Our cash provided by operations for the nine months ended September 30, 2017 was primarily attributable to our net loss of $1,757,850, adjusted for net non-cash expense in the aggregate amount of $414,555, partially offset by $1,079,710 of net cash provided by changes in the levels of operating assets and liabilities.

For the nine months ended September 30, 2018 and 2017, cash (used in) provided by investing activities was $(15,476) and $1,907,990, respectively. Cash used in investing activities during the nine months ended September 30, 2018 was due to purchases of equipment. Cash provided by investing activities during the nine months ended September 30, 2017 resulted from $1,859,261 of cash acquired in connection with the share exchange as well as $85,000 of proceeds received from the collection of our note receivable from our CEO, partially offset by $36,271 of purchases of property and equipment.

For the nine months ended September 30, 2018 and 2017, cash provided by financing activities was $359,000 and $0, respectively. Cash provided by financing activities during the nine months ended September 30, 2018 was due to the sale of common stock in our private placement.

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 product revenues and/or raise additional capital to fund our operations. These conditions indicate that there is substantial doubt about our ability to continue as a going concern within one year after the financial statement issuance date.

We are currently funding our operations on a month-to-month basis. Although our management believes that we have access to capital resources, there are currently no commitments in place for new financing at this time and there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures.

Our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

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 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

For a description of recently adopted accounting pronouncements, including adoption dates and estimated effects, if any, on our condensed consolidated financial statements, see Note 3 – Summary of Significant Accounting Policies in Part 1, Item 1 of this Quarterly Report on Form 10-Q.