KULR Technology Group, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc. ("KULR") and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the years ended December 31, 2021 and 2020 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. 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 Annual Report, and other factors that we may not know. Overview KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications. For aerospace and Department of Defense (“DOD”) applications, our solutions target high performance applications in direct energy, hypersonic vehicles and satellite communications. For commercial applications, our main focus is a total solution to battery safety and sustainability by which we aim to mitigate the effects of thermal runaway propagation which has been known to cause random fires in lithium-ion (“Li-ion”) batteries. This total battery safety solution can be used for electric vehicles, energy storage, battery recycling transportation, cloud computing and 5G communication devices. Our proprietary core technology is a carbon fiber material that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with advanced technology users like NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter. KULR’s business model continues to evolve from being a component supplier, to providing more design and testing services to our customers. The next step of evolution is to provide total system solutions to address market needs. In order to scale up as a systems provider more quickly and efficiently in (i) the Li-ion battery energy storage and recycling markets, (ii) battery cell design and safety testing, and (iii) advanced thermal management systems, such as hypersonic vehicles, KULR will actively seek partners for joint venture, technology licensing and other strategic partnership models. The goal is to leverage the Company’s thermal design technology expertise to create market leading products, which KULR will take to market directly to capture more value for KULR shareholders. We have not yet achieved profitability and expect to continue to incur cash outflows from operations, as a result, we will eventually need to generate significant revenues to achieve profitability. Until that time, we shall have to continue to raise cash, as and when required, through equity or debt financings. 18 Table of Contents Recent Developments COVID-19 In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19. While the Company continues to see signs of economic recovery as certain governments begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions and estimates and has determined there were no material adverse impacts on the Company’s results of operations and financial position at December 31, 2021. The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain. Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2022 and beyond, including the demand for its products, interruptions to supply chains, ability to maintain regular research and development and manufacturing schedules as well as the capability to meet customer demands in a timely manner. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. New Officer Hires During 2021, the Company hired the following officers: ● On March 8, 2021, Keith Cochran joined KULR as President and Chief Operating Officer. ● On April 19, 2021, Antonio Martinez joined the Company as its new Vice President of Operations. ● On June 10, 2021, Greg Provenzano joined the Company as its new Vice President of Sales and Marketing. Appointment and Resignation of Independent Directors On June 7, 2021, the following new independent director appointments became effective: ● Morio Kurosaki (Chair of Audit Committee) ● Stayce Harris (Chair of Compensation Committee) ● Joanna Massey (Chair of Nominating and Governance Committee) Effective as of December 13, 2021, Stayce Harris resigned as an independent member of the Board. Operating Lease On April 5, 2021, we entered into an agreement to lease office space for a thirty-six-month period, commencing June 1, 2021 with the option to renew for an additional 5 years. Monthly rental payments under the new lease total $23,787, which are comprised of $18,518 of base rent plus $5,269 for common area costs, with annual escalation of 3.5%. Conversion of Series D Preferred Stock During the year ended December 31, 2021, we sold an aggregate of 650 shares of Series D Preferred pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000. The Series D Preferred shares were convertible into an aggregate of 3,170,730 shares of common stock at a fixed conversion price of $2.05 and had the right to vote on an as-converted basis. We also paid the investor a commitment fee of 1,300,000 shares of common stock in connection with the sale of the Series D Preferred. Notes payable obligations in the aggregate amount of $1,540,000, were paid in full upon the closing of the sale of the Series D Preferred. As of December 31, 2021, we issued an aggregate of 3,170,730 shares of our common stock upon conversion of 650 shares of our Series D Preferred Stock, after which no Series D Preferred shares remained outstanding. 19 Table of Contents Exercise of Warrants During the year ended December 31, 2021, we issued 6,793,358 shares of common stock upon the exercise of warrants for proceeds of $11,719,204. NYSE American Exchange Listing On June 7, 2021, our common stock was up listed and now trades on the NYSE American LLC Exchange. Consolidated Results of Operations Year Ended December 31, 2021 Compared With Year Ended December 31, 2020 Revenue Our revenues consisted of the following types: ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended ​ ​ December 31, ​ ​ 2021 2020 Product sales ​ $ 1,495,328 ​ $ 404,467 Contract services ​ 917,540 ​ 219,498 Total revenue ​ $ 2,412,868 ​ $ 623,965 ​ For the years ended December 31, 2021 and 2020, we generated $2,412,868 and $623,965 of revenues from 20 and 25 customers, respectively, representing an increase of $1,788,903, or 287%. Revenue from product sales during the year ended December 31, 2021 increased by $1,090,861 or 270% compared to the year ended December 31, 2020. Three large contracts received during 2021 for the sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials generated $1,197,368 of revenues. Revenue from contract services during the year ended December 31, 2021 increased by $698,042 or 318% compared to the year ended December 31, 2020. Four large DOD contracts received during 2021 generated $905,504 of revenues. Our service revenues, which include certain research and development contracts and onsite engineering services, have not been hampered by restrictions arising from working under COVID-19 shelter-in-place regulations. 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 Revenues Cost of revenues consisted 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 as 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 periods, customers and products due to the learning process, customer negotiating strengths, and product mix. For the years ended December 31, 2021 and 2020, cost of revenues was $1,102,038 and $187,903, respectively, representing an increase of $914,135, or 486%. The increase was primarily due to increased costs as a result of increased revenues. The gross margin percentage was 54% and 70% for the years ended December 31, 2021 and 2020, respectively. The decrease in margins realized during the year ended December 31, 2021 is primarily attributable to two service contracts that resulted in a gross margin of 15% and 13% during the first and second quarters of 2021, respectively. 20 Table of Contents Research and Development Research and development includes expenses incurred in connection with the R&D of our CFV thermal management solution, high-areal-capacity battery electrodes, 3D engineering for a rechargeable battery and non-cash stock-based compensation expenses. Research and development expenses are charged to operations as incurred. For the years ended December 31, 2021 and 2020, R&D expenses were $1,662,183 and $289,772, respectively, representing an increase of $1,372,411 or 474%. The increase during 2021 was comprised of the following: a) $464,000 related to an increase in employee headcount spent on R&D and three new projects for automation, battery and drone design initiated during 2021. b) $341,000 related to product development for high-areal capacity battery electrodes and 3D-engineering for solid state rechargeable batteries due to University of Colorado-Boulder. c) $286,000 related to software engineering services due to Key Software Services. d) $116,000 related to drone and engineering services due to International Vibration Technology. e) $75,000 related to engineering design services due to Rapid Composites. We expect that our R&D expenses will increase as we expand our future operations. Selling, General and Administrative Selling, general and administrative expenses consisted primarily of stock-based compensation, marketing and advertising, salaries, payroll taxes and other benefits, accounting and tax, consulting fees, travel and entertainment, rent expense, office expenses, and legal and professional fees. For the years ended December 31, 2021 and 2020, selling, general and administrative expenses were $11,162,062 and $2,486,722, respectively, an increase of $8,675,340, or 349%. The increase is primarily due to increases of approximately $3,858,000 for stock-based compensation related market-based awards and restricted common stock issued to employees and consultants in 2021, $1,727,000 for expanded marketing and advertising expenses, $1,145,000 in labor costs as a result of 19 new hires during the period, $431,000 for consulting contractor services, $403,000 for office expenses and supplies, $321,000 for legal and professional fees, $207,000 for travel and entertainment due to the lifting of COVID-19 dining and travel restrictions, $160,000 for rent expense due to the execution of a new operating lease agreement during the period, $139,000 for a fraudulent transaction due to an information technology related breach in security, and $100,000 for directors and officers insurance. Other (Expense) Income For the years ended December 31, 2021 and 2020, other expenses were $397,736 and $509,664, respectively, representing a decrease of $111,928 or 22%. The decrease is primarily attributable to the decrease in the amortization of debt discount recorded in connection with notes payable issued in 2020 of $374,000, and partially offset by a $140,000 increase of debt redemption costs in connection with the repayment of notes payable issued in 2020 and the $123,000 increase in the change in fair value of accrued issuable equity. Liquidity and Capital Resources As of December 31, 2021 and 2020, we had cash balances of $14,863,301 and $8,880,140, respectively, and working capital of $13,302,935 and $6,194,257, respectively. 21 Table of Contents For the years ended December 31, 2021 and 2020, cash used in operating activities was $6,805,674 and $2,730,253, respectively. Our cash used in operations for the year ended December 31, 2021 was primarily attributable to our net loss of $11,911,151, adjusted for non-cash expenses in the aggregate amount of $4,670,955, as well as $434,522 of net cash generated from changes in the levels of operating assets and liabilities. Our cash used in operations for the year ended December 31, 2020 was primarily attributable to our net loss of $2,850,096, adjusted for non-cash expenses in the aggregate amount of $864,929, as well as $745,086 of net cash used from changes in the levels of operating assets and liabilities. For the years ended December 31, 2021 and 2020, cash used in investing activities was $2,737,235 and $46,087, respectively. Cash used in investing activities during the year ended December 31, 2021 was related to deposits paid for equipment of $2,153,950, purchases of property and equipment of 383,285, and the purchase of an intangible asset for $200,000. Cash used in investing activities during the year ended December 31, 2020 was related to the purchases of property and equipment for $46,087. For the years ended December 31, 2021 and 2020, cash provided by financing activities was $15,526,070 and $11,547,623, respectively. Cash provided by financing activities during the year ended December 31, 2021 was due to proceeds from the exercise of warrants of $11,719,204, proceeds from the sale of Series D Convertible Preferred Stock of $6,500,000, and proceeds from the exercise of options of $121,866. These amounts were partially offset by repayments of notes payable of $2,450,000, and payment of financing costs of $365,000. Cash provided by financing activities during the year ended December 31, 2020 was due to proceeds from the sale of common stock and warrants of $8,000,001, proceeds from notes payable of $3,710,000, proceeds from the sale of common stock issued pursuant to the SEDA agreement of $1,501,696, and proceeds from the Paycheck Protection Program loan of $155,226. These amounts were partially offset by repayments of notes payable of $759,000, payment of offering costs in connection with the sale of common stock and warrants of $705,300, payment of debt issuance costs of $340,000, and payment of financing costs of $15,000. As of December 31, 2021 and 2020, we had cash balances of $14,863,301 and $8,880,140, respectively, and working capital of $13,302,935 and $6,194,257, respectively. Cash requirements for our current liabilities include approximately, $1,880,113 for accounts payable and accrued expenses (including lease liabilities) and $155,226 related to our PPP loan, for which we will apply for forgiveness. The Company has also committed to spend $1,650,000 in sponsorship fees, capital expenditures of $1,324,251 for automation and testing equipment, and $958,286 for research and development. Cash requirements for long term liabilities consist of $423,447 for lease payments, $350,000 for sponsorship fees, and $245,270 for research and development. The Company intends to meet these cash requirements from its current cash balance and from future revenues. In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. During 2020 and continuing into 2022, the global economy has been, and continues to be, affected by COVID-19. While the Company continues to see signs of economic recovery as certain governments begin to gradually ease restrictions, provide economic stimulus and accelerate vaccine distribution, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions. The Company continues to monitor the impact of COVID-19 on its business and operational assumptions; however, given the uncertainty around the extent and timing of the potential future spread or mitigation of the Coronavirus and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition. The short and long-term worldwide implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions on Russia by the United States or other countries and possible counter sanctions by Russia, and the resulting economic impacts on oil prices and other materials and goods, could affect the price of materials used in the manufacture of our product candidates. If the price of materials used in the manufacturing of our product candidates increase, that would adversely affect our business and the results of our operations. Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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 consolidated financial statements do not necessarily purport to represent realizable or settlement values. Critical Accounting Estimates The preparation of financial statements and related disclosures must be in conformity with U.S. GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be 22 Table of Contents affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our accounting policies are more fully described in Note 2 – Summary of Significant Accounting Policies, in our financial statements included at the end of this Annual Report. Stock-Based Compensation We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant. The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services are required to be provided in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period that the estimates are revised. We account for forfeitures as they occur. Series D Convertible Preferred Stock On May 19, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with an investor, pursuant to which the Company agreed to issue to the investor an aggregate of 650 shares of Series D convertible preferred stock (the “Series D Preferred”) pursuant to a new designation of preferred stock, and one-year warrants to purchase 2,600,000 shares of common stock (the “Warrants”) at a price of $2.50 per share, for aggregate gross proceeds of $6,500,000 (the “Offering”). The Company also agreed to pay the investor a commitment fee of 1,300,000 shares of common stock (the “Commitment Shares”) at the closing of the Offering. The closing of the Offering occurred on May 20, 2021. The accounting for the Offering required valuations of each of (a) the Series D Preferred; (b) the Warrants; and (c) the Commitment Shares. Management employed the assistance of a valuation specialist to value the Series D Preferred using the backsolve valuation method. The backsolve valuation method utilized the Black-Scholes option model to allocate the value of a company between various share classes. The Warrants were also valued using the Black-Scholes option model. The Commitment Shares and the common stock value input to the Black-Scholes option model were valued by reference the fair value of our common stock (generally an observable market price, as our common stock is publicly traded). The remaining inputs to the Black-Scholes option model require assumptions, including the expected term of the financial instrument (judgment is required), the expected volatility of our common stock over the expected term (generally estimated by reference to the historical volatilities of selected peer group companies ), our expected dividend rate over the expected term (currently estimated as zero, given that we are not projecting profits over the intermediate term) and the expected risk-free rate over the expected term (generally estimated by reference to United States treasury instruments with similar remaining terms). Recently Issued Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements included within this Annual Report for a summary of recently issued and adopted accounting pronouncements. ​ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item. ​ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See “Index to Consolidated Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K. ​ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ​ 23 Table of Contents