What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-28 compared with 2022-03-28 · 79 added, 70 removed, 85 unchanged (64% of the section changed)

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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.

(“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, 2022 and 2021 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.

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The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

War in Ukraine

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.

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.

On November 1, 2022, Dr.

William Walker was appointed as the new Chief Technology Officer.

Appointment of Lead Director

On November 1, 2022, our existing independent director, Dr.

Joanna Massey, was designated Lead Director of our Board.

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.

During March 2022, the Company issued an aggregate of 70,143 shares of common stock upon the exercise of warrants pursuant to which the Company received an aggregate of $87,679 of gross proceeds.

During April 2022, the Company issued an aggregate of 2,346,525 shares of common stock upon the exercise of warrants pursuant to which the Company received an aggregate of $2,933,156 of gross proceeds.

Consolidated Results of Operations

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Revenue from product sales during the year ended December 31, 2022 increased by $1,147,997 or 77% compared to the year ended December 31, 2021.

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.

Product sales during these periods include sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, thermal fiber thermal interface (“FTI”) materials and heatsink technology.

The increase in revenue from product sales for the year ended December 31, 2022 is primarily due to two contracts for custom TRS kits and heatsink technology which generated approximately $1,270,000 and $322,000 respectively, partially offset by a decrease attributable to contracts which generated approximately $485,000 for battery cells for the year ended December 31, 2021.

Revenue from contract services during the year ended December 31, 2022 increased by $433,769 or 47% compared to the year ended December 31, 2021.

Four large DOD contracts received during 2021 generated $905,504 of revenues.

The increase in revenue for the year ended December 31, 2022 is primarily due to three large contracts which generated approximately $1,272,000, partially offset by a decrease attributable to contracts which generated approximately $862,600

for the year ended December 31, 2021.

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.

Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitments.

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.

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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.

The Company expects that margins will normalize as it prepares for the anticipated volume production of its product mix.

For the years ended December 31, 2022 and 2021, cost of revenues was $1,630,527 and $1,102,038, respectively, representing an increase of $528,489, or 48%.

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The gross margin percentage was 59% and 54% for the years ended December 31, 2022 and 2021, 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.

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 (“R&D”) 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, 2022 and 2021, R&D expenses were $3,977,563 and $1,662,183, respectively, representing an increase of $2,315,380 or 139%.

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.

The increase is primarily comprised of $1,337,351 related to planned increases in headcount in order to build future capacity, and $978,029 related to new R&D initiatives designed to build future revenue growth.

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

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For the years ended December 31, 2022 and 2021, selling, general and administrative expenses were $16,672,526 and $11,162,062, respectively, an increase of $5,510,464 or 49%.

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.

This increase is primarily due to an increase in employee related costs to build future capacity for planned revenue growth of $2,484,407, marketing and advertising expenses of $1,500,371, travel expenses primarily related to customer and vendor relations of $484,214, NetSuite implementation costs of $390,000, and $315,773 of SEC filing fees and professional services.

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.

For the years ended December 31, 2022 and 2021, other expenses, net, were $1,150,497 and $397,736, respectively, representing an increase of $752,761 or 189%.

The increase is primarily attributable to the increase in interest expense recorded in connection with notes payable and the Prepaid Advance of $932,538, an increase in the related amortization of debt discount of $383,627, and the loss on debt extinguishment of $8,508, partially offset by a $272,856 increase in the change in fair value of accrued issuable equity, $158,675 gain on forgiveness of PPP loan and interest, and a decrease of debt redemption costs of $140,000.

Liquidity and Capital Resources

As of December 31, 2022 and 2021, we had cash balances of $10,333,563 and $14,863,301, respectively, and working capital of $6,055,477 and $13,302,935, respectively.

On May 13, 2022, we issued a $5,000,000 Promissory Note to Yorkville for gross proceeds of $4,750,000.

On the same date, we entered into a SEPA which gives us the right, but not the obligation, to sell up to $50,000,000 of shares of our common stock to Yorkville during the 24 months following the effective date of the SEPA.

Further, on September 23, 2022, we entered into the Supplemental SEPA, which allows us to request advances, (each, a “Prepaid Advance”), still up to an aggregate of $50,000,000, from Yorkville.

Pursuant to the terms of the Supplemental SEPA, Yorkville has the right to receive shares, and may select the timing and delivery of such shares (via an “Investor Notice”), in an amount up to the balance of the Prepaid Advance in order to pay down the Prepaid Advance.

The aggregate common shares issued under the SEPA and the Supplemental SEPA cannot exceed $50,000,000.

We may not request that the investor purchase shares pursuant to the SEPA at any time that there is an outstanding balance owed under a Prepaid Advance.

On September 23, 2022, the Company received proceeds from a Prepaid Advance in the amount of $15,000,000 (“the Initial Prepaid Advance”), of which, $3,850,000 and $566,932 was withheld to repay the Promissory Note and related interest and premiums owed to Yorkville.

During September through December 2022, the Company issued 5,375,269 shares of common stock, at purchase prices per share ranging from $0.99 to $1.84 pursuant to Investor Notices, in satisfaction of the Initial Prepaid Advance liability in the amount of $6,000,000.

As of March 28, 2023, the remaining balance on the initial Prepaid Advance is $5,750,000.

See Note 10 - Prepaid Advance Liability in the accompanying consolidated financial statements for additional information.

For the years ended December 31, 2022 and 2021, cash used in operating activities was $17,354,125 and $6,805,674, respectively.

Our cash used in operations for the year ended December 31, 2022 was primarily attributable to our net loss of $19,436,479, adjusted for non-cash expenses in the aggregate amount of $5,434,100, as well as $3,351,746 of net cash used to fund changes in the levels of operating assets and liabilities.

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, 2022 and 2021, cash used in investing activities was $4,647,974 and $2,737,235, respectively.

Cash used in investing activities during the year ended December 31, 2022 was related to deposits paid for equipment of $1,421,432, purchases of property and equipment of $2,682,970, and the purchase of intangible assets for $543,572.

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, 2022 and 2021, cash provided by financing activities was $17,472,361 and $15,526,070, 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.

Cash provided by financing activities during the year ended December 31, 2022 was due to net proceeds from the Prepaid Advance of $10,573,068, proceeds from a promissory note of $4,750,000, proceeds from the exercise of warrants of $3,020,836, proceeds from the SEPA of $250,000, proceeds from the exercise of options of $53,457.

These amounts were partially offset by repayments of the promissory note of $1,000,000, and payments of issuance costs related to the prepaid advance liability of $85,000, financing costs related to the SEPA for $72,800 and payments of issuance costs in connection with notes payable for $17,200.

Cash provided by financing activities during the year ended December 31, 2021 resulted from proceeds from the exercise of warrants in the amount of $11,719,204, proceeds from the sale of Series D Convertible Preferred Stock and warrants 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.

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.

As of December 31, 2022, future cash requirements for our current liabilities include $3,550,294 for accounts payable and accrued expenses and $223,645 for future payments under operating leases.

The Company has also committed to spend $1,000,000 related to the asset purchase agreement, $825,000 related to sponsorship agreements, $889,171 related to capital expenditures for automation and testing equipment, $391,842 for research and development, and $201,867 for construction related to facility enhancements.

In addition, the Company committed to pay nonrefundable license fees and a minimum royalty of $67,500.

Future cash commitments for long term liabilities consists of $97,958 for the long-term lease and a minimum royalty payment of $27,500.

As of December 31, 2022, the Company also had $9,000,000 of principal outstanding for a prepaid advance liability pursuant to the Supplemental SEPA.

Subsequent to December 31, 2022, the Company issued 2,839,217 shares of common stock in settlement of $3,000,000 of the Prepaid Advance.

As of the filing date of this Form 10-K, the principal balance due on the Prepaid Advance is $6,000,000.

While the Company expects that the prepaid advance liability will be repaid with the issuance of common stock, any prepaid advance balances outstanding for more than twelve months must be repaid in cash.

The Company intends to meet its cash requirements from its current cash balance, proceeds from the SEPA or the Supplemental SEPA, and from future revenues.

Our primary source of liquidity has historically been cash generated from equity and debt offerings.

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued.

The above conditions are indicators that substantial doubt about our ability to continue as

a going concern could exist as we have a history of recurring net losses, recurring use of cash in operations and declining working capital.

Despite these conditions, we have a successful track record of raising capital as needed and continue to have a positive, ongoing relationship with a financial institution that has provided access to capital and will continue to support us.

While no assurance can be provided that we will be successful in raising additional capital from Yorkville, as they are not obligated to advance funds so long as there is an outstanding Prepaid Advance, Yorkville has represented that in most scenarios, with mutual consent, they will continue to provide financial support as evidenced by the funds provided during March 2023.

On March 10, 2023, the Company and Yorkville closed on a second Prepaid Advance in the amount of $2,000,000.

Upon satisfaction of the Prepaid Advance liability, the Company will utilize its ability to draw down on the remaining $33,000,000 available under the SEPA.

Based on the above, we believe we have sufficient liquidity and access to future capital to continue as a going concern for a period of at least twelve months from the date the financial statements have been issued and that our above plans alleviate any potential substantial doubt about our ability to continue as a going concern.

As of March 24, 2023, our cash balance was approximately $7.3 million.

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.

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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

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 and Estimates

The preparation of financial statements and related disclosures must be in conformity with U.S.

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

We believe that the estimates and judgments upon which these reported amounts rely are reasonable based upon information available to us at the time that we make these estimates and judgments.

Significant estimates used in these financial statements include, but are not limited to, assumptions used in projecting future cash flows and liquidity, fair value calculations for intangible assets, equity securities, stock-based compensation and the valuation allowance related to deferred tax assets.

To the extent that there are material differences between these estimates and actual results, our financial results will be affected.

Certain estimates could be affected by external conditions, including those unique to the Company as well as general economic conditions.

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.

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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.

Revenue Recognition

Revenues are recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

We recognize revenues following the five-step model in accordance with ASC 606, Revenue from Contracts with Customers:

(i) identify contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenues when (or as) we satisfy the performance obligation.

The timing of our revenue recognition may differ from the timing of payment by our customers.

A receivable is recorded when revenue is recognized prior to payment, and we have an unconditional right to payment.

Alternatively, we record deferred revenue when payment is received from customers for which the Company had not yet satisfied its performance obligation under the contract, or the customers have not officially accepted the goods or services provided under the contract.

Asset Acquisition

In determining whether an acquisition should be accounted for as a business combination or asset acquisition, we first determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.

If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business and is instead deemed to be an asset.

An asset acquisition is recorded at cost, which includes capitalizing transaction costs, and does not result in the recognition of goodwill.

Stock-Based Compensation

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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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis