Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) (the “Exchange Act”). Based on the foregoing evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weakness discussed below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
During the year ended December 31, 2022, we did not design or maintain effective controls to ensure that there is an appropriate review and approval of electronic payments (wires, EFT’s, ACH’s and credit card payments).
We are in the process of implementing a detailed plan for remediation of the material weakness, including developing and maintaining preventative controls around the electronic payment process to ensure proper segregation of duties. As of December 31, 2022, we have upgraded our enterprise software from QuickBooks to NetSuite which provides more documented authorizations and workflow and have implemented a control whereby approval is obtained for credit card payments prior to the purchase being made. Subsequent to December 31, 2022, we have upgraded our banking platform such that all electronic payments will require dual approval in order for funds to be transferred.
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We will continue to devote time and attention to these remedial efforts, and we believe the above actions will be effective in remediating the material weakness described above during the first half of 2023. However, as we continue to evaluate and take corrective actions to improve our internal controls over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above. Our remediation efforts will not be considered complete until the applicable controls operate for a sufficient period and our management has concluded, through testing, that these controls are operating effectively.
Notwithstanding the material weakness in internal control over financial reporting described above, our management has concluded that our consolidated financial statements included in the Annual Report on Form 10-K are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.
Management’s Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 Framework). Based on this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting was not effective as of December 31, 2022 as a result of the material weakness described above.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over current or future financial reporting.
Inherent Limitations of the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Attestation Report of Registered Public Accounting Firm
This Annual Report does not contain an attestation report of our independent registered public accounting firm related to internal control over financial reporting because the rules for smaller reporting companies provide an exemption from the attestation requirement.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Executive Officers and Directors
Our executive officers and directors and their ages are as follows:
Name
Age
Office
Michael Mo
52
Chief Executive Officer and Chairman
Dr. Timothy Knowles
76
Director, Executive Technical Fellow and Secretary
Simon Westbrook
74
Chief Financial Officer
Dr. William Walker
33
Chief Technical Officer
Keith Cochran
57
President and Chief Operating Officer
Michael Carpenter
59
Vice President of Engineering
Dr. Joanna Massey
54
Lead Director
Morio Kurosaki
66
Director
The term of office for each director is one year, or until the next annual meeting of the stockholders.
Michael Mo was appointed CEO and Director of the Company on March 16, 2011, is a technology entrepreneur and successful investor with over 20 years of experience in technology management, product development and marketing. In 2013, he co-founded KULR and has been serving as its CEO since then. From 2007 to 2015, Mr. Mo served as Senior Director of Business Development at Amlogic, Inc., a California high-tech company. Mr. Mo received his Master of Science in Electrical Engineering from the University of California at Santa Barbara in 1995.
Timothy R. Knowles was appointed Executive Technical Fellow and Director of the Company, has over 30 Years of Thermal Management R&D and product development experience for the most challenging space and industrial applications. He conducted research and built building products for various space and industrial customers such as NASA, Boeing, Raytheon, Jet Propulsion Lab, and others. Since 1983, Dr. Knowles has been working as President at ESLI. In addition, in 2013, Dr. Knowles co-founded KULR and has been serving as its CTO since then. From 1977 to 1983, he was a postdoctoral research physicist at Hamburg University. Mr. Knowles received Ph.D. in Physics from University of California San Diego in 1977 and B.S. in Physics from University of Southern California in 1969.
In recognition of Dr. William Walker’s value to the Company and his appointment to the CTO position, Dr. Timothy Knowles changed his title from Chief Technology Officer to Executive Technical Fellow. Dr. Knowles’ change in title was not as a result of any disagreements with the Company on any matter relating to its operations, policies or practices. Dr. Timothy Knowles will also remain a director of the Board.
Simon Westbrook was appointed Chief Financial Officer on March 15, 2018. In 2009, Mr. Westbrook founded and has since served as an officer of Aargo, Inc., a company specializing in financial consulting services to corporations in various tech-related industries. Prior to Aargo, Inc., Mr. Westbrook was CFO of Amber Networks, Inc., and the Chief Financial Officer of Sage, Inc. (NASDAQ: SAGI), a Silicon Valley company specializing in flat panel displays. Before joining Sage, Mr. Westbrook held a number of senior financial positions at Creative Technology (NASDAQ: CREAF), a leading PC multimedia company, and Atari Corp (AMEX: ATC), the video game and home computer company both in the USA and overseas. At various times, he has held positions as an advisory board member of the Silicon Valley Financial Executives Institute, and various technology start-up companies where he has assisted in strategic planning, fund raising and team development. Simon is a Chartered Accountant and holds a Master’s in Economics from Trinity College, Cambridge University.
Dr. William Walker was appointed Chief Technical Officer, effective November 1, 2022. Dr. Walker who originally joined the Company in March 2022 as Director of Engineering, has significant experience in professional and research related activities focused on thermo-electrochemical testing and analysis of lithium-ion (Li-ion) battery assemblies and related thermal management products designed for space exploration applications. Prior to joining the Company, from October 2021 to March 2022, Dr. Walker was a Research Scientist at Underwriters Laboratories Inc. since October of 2021. From June 2012 to October 2021, Dr. Walker was employed by the National Aeronautics and Space Administration (NASA) Johnson Space Center (JSC) where he focused on designing battery assemblies for human spaceflight applications capable of safely mitigating the effects of thermal runaway and preventing cell-to-cell propagation. Dr. Walker was recognized with a NASA Trailblazer award and with the RNASA Stellar Award for early career contributions to Li-ion battery thermal analysis and calorimetry methods. Dr. Walker continues to be engaged in the academic and
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professional communities focused on battery safety. Dr. Walker received his B.S. in Mechanical Engineering at West Texas A&M University (WTAMU) and Ph.D. in Materials Science and Engineering at the University of Houston (UH).
Keith Cochran was appointed President and Chief Operating Officer effective March 1, 2021. Mr. Cochran spent twenty-four years in various management roles at Jabil Greenpoint (NYSE: JBL) and most recently as Senior Vice President of its Global Business Unit in Singapore, where he led a smartphone technology division responsible for $3.7 billion in revenues. Mr. Cochran is based in the United States and has vast international experience working with partners in Singapore, India, Brazil, Mexico, China, France, Hungary and other countries. Mr. Cochran has a Bachelor of Science in Business Operations from Devry Institute of Technology.
Michael G. Carpenter serves as KULR’s Vice President of Engineering. Mr. Carpenter has been employed by ESLI since December 1983, serving as Director of the PCM Heatsink Group, Quality Manager, Facility Security Officer (FSO) in the Defense Industrial Security Program from 1988 to 1995. He also has been served as Safety Officer since he joined ESLI in 1983. Mr. Carpenter received his B.S. in Applied Mechanics from the University of California, San Diego in 1983.
Non-Executive Directors
Morio Kurosaki serves as a member of the Company’s board of directors since June 7, 2021. Mr. Kurosaki founded IT-Farm Corporation (“IT-Farm”), a Japanese venture capital firm, in 1999. Mr. Kurosaki has been the President of IT-Farm since the company’s inception. Mr. Kurosaki has led early investments in notable companies such as Zoom Video Communications (Nasdaq: ZM); ContextLogic (Nasdaq: WISH); Treasure Data, acquired by ARM Holdings (Nasdaq: NVDA); Tubi, acquired by Fox Corporation (Nasdaq: FOX); Red Hot Labs, acquired by Google (Nasdaq: GOOGL); lvl5, acquired by DoorDash (NYSE: DASH); Accel Technology, acquired by Marvell Technology Group (Nasdaq: MRVL), and Extreme DA, acquired by Synopsis (Nasdaq: SNPS). Mr. Kurosaki has also served as Asia-Pacific advisory member of ARM Holdings, acquired by SoftBank Group Corporation (OTCMKTS: SFTBY). Mr. Kurosaki started his business career at Intel Japan, thereafter, joining Western Digital Corporation (Nasdaq: WDC) as one of the earliest members of WDC’s Japanese division.
Joanna Massey serves as a member of the Company’s board of directors since June 7, 2021 and was appointed Lead Director on November 1, 2022. Dr. Massey is a public company Board Director and former Fortune 500 C-level communications executive. She helps companies expand market share and appeal to institutional investors by advising them on corporate governance, managing change, and navigating risk around environmental and social issues. In her board roles for public and private companies, Dr. Massey serves as Chair of Nominations & Governance, and she sits on the Audit, Compensation and M&A Committees. Dr. Massey has a PhD in psychology and 30 years of experience advising Chairmen and CEOs. She spent her operating career in the media and digital technology industries strategizing on global brand reputation management as Head of Communications at Condé Nast Entertainment and Senior Vice President of Corporate Communications at Lions Gate Entertainment (NYSE: LGF.A; LGF.B) and at The Hub Network, a joint venture between Discovery, Inc. (Nasdaq: WBD) and Hasbro, Inc. (Nasdaq: HAS). She also held Senior Vice President positions in communications and media relations at CBS Corporation and Viacom, Inc., now Paramount Global (Nasdaq: PARA). As a corporate communications executive, Dr. Massey managed integration during major M&A transactions at Lionsgate, CBS, and Discovery; corporate turnaround as Condé Nast pivoted from print to video; and crisis communications with consumers, employees, investors, regulators, and politicians. She is based in the United States and has international experience working with partners in Europe, the UK, China and India.
Board Composition
The Company’s directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. Officers are elected annually by the board of directors and serve at the discretion of the board.
Our board currently consists of four directors, Michael Mo, Dr. Timothy Knowles, Morio Kurosaki, and Joanna Massey. Mr. Kurosaki and Dr. Joanna Massey are “independent” as defined under the NYSE American rules (as discussed below).
Family Relationships
There are no family relationships between any director and executive officer.
Director Independence
Our board of directors has determined that Morio Kurosaki and Dr. Joanna Massey are “independent,” as defined under the NYSE American rules. For purposes of the NYSE American rules, an independent director means a person other than an executive officer or employee of our company or any other individual having a relationship which, in the opinion of our board of directors, would
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interfere with the exercise of independent judgment in carrying out the responsibilities of a director, subject to certain additional limitations.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Audit Committee
The members of our Audit Committee are Morio Kurosaki and Dr. Joanna Massey, with Mr. Kurosaki serving as the Chairperson. Each of Morio Kurosaki and Dr. Joanna Massey, is independent under the rules and regulations of the SEC and the listing standards of the NYSE American applicable to audit committee members. Our board of directors has determined that each of Morio Kurosaki and Dr. Joanna Massey qualify as an audit committee financial expert within the meaning of SEC regulations and meet the financial sophistication requirements of the NYSE American.
Our Audit Committee has the responsibility for, among other things, (i) selecting, retaining and overseeing our independent registered public accounting firm, (ii) obtaining and reviewing a report by independent auditors that describe the accounting firm’s internal quality control, and any materials issues or relationships that may impact the auditors, (iii) reviewing and discussing with the independent auditors standards and responsibilities, strategy, scope and timing of audits, any significant risks, and results, (iv) ensuring the integrity of the Company’s financial statements, (v) reviewing and discussing with the Company’s independent auditors any other matters required to be discussed by PCAOB Auditing Standard No. 1301, (vi) reviewing, approving and overseeing any transaction between the Company and any related person and any other potential conflict of interest situations, (vii) overseeing the Company’s internal audit department, (viii) reviewing, approving and overseeing related party transactions, and (ix) establishing and overseeing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters.
Compensation Committee
The members of our Compensation Committee are Morio Kurosaki and Dr. Joanna Massey, with Mr. Kurosaki and Dr. Massey serving as Co-Chairpersons. Our Compensation Committee has the responsibility for, among other things, (i) reviewing and approving the chief executive officer’s compensation based on an evaluation in light of corporate goals and objectives, (ii) reviewing and recommending to the Board the compensation of all other executive officers, (iii) reviewing and recommending to the Board incentive compensation plans and equity plans, (iv) reviewing and discussing with management the Company’s Compensation Discussion and Analysis and related information to be included in the annual report on Form 10-K and proxy statements, and (v) reviewing and recommending to the Board for approval procedures relating to Say on Pay Votes.
Nominating and Corporate Governance Committee
The members of our Nominating and Corporate Governance Committee are Morio Kurosaki and Dr. Joanna Massey, with Dr. Massey serving as the Chairperson. Our Nominating and Corporate Governance Committee has the responsibility relating to assisting the Board in, among other things, (i) identifying and screening individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors, (ii) recommending to the Board the approval of nominees for director, (ii) developing and recommending to our board of directors a set of corporate governance guidelines, and (iv) overseeing the evaluation of our board of director.
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics (the “Code”). The Code applies to all of our directors, officers and employees. We have made the Code available on our website https://www.kulrtechnology.com/governance-documents/. We intend to disclose future amendments to, or waivers of, our Code, as and to the extent required by SEC regulations, at the same location on our website identified above or in public filings.
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Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
●
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
●
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
●
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
●
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own more than 10% of the issued and outstanding shares of our common stock to file reports of initial ownership of common stock and other equity securities and subsequent changes in that ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, during the fiscal year ended December 31, 2022, our officers, directors and greater than 10% beneficial owners have complied with all applicable filing requirements of Section 16(a), except that a Form 4 for Timothy Ray Knowles was filed late, resulting in the late disclosure of one transaction in his spouse’s shares over which Mr. Knowles does not have direct voting or dispositive control.
Nomination Process
As of December 31, 2022, we did not affect any material changes to the procedures by which stockholders may recommend nominees to the Board of Directors. We do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors. The Board of Directors believes that, given the current stage of our development, a specific nominating policy would be premature and of little assistance until our operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and there is no specific process or procedure for evaluating such nominees. The Board of Directors assesses all candidates, whether submitted by management or stockholders, and makes recommendations for election or appointment.
A stockholder who wishes to communicate with the Board of Directors may do so by directing a written request addressed to our Chief Executive Officer at the address appearing on the face page of this annual report.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table sets forth all compensation earned in all capacities during the fiscal years ended December 31, 2022 and 2021 by (i) our principal executive officer, (ii) our two most highly compensated executive officers, other than our principal executive officer, who were serving as executive officers as of December 31, 2022 and whose total compensation for the 2022 fiscal year, as determined by Regulation S-K, Item 402, exceeded $100,000, (iii) a person who would have been included as one of our two most highly compensated executive officers, other than our principal executive officer, but for the fact that he was not serving as one of our executive officers as of December 31, 2022 (the individuals falling within categories (i), (ii) and (iii) are collectively referred to as the “Named Executive Officers”):
Stock
Option
Total
Name and Principal Position
Year
Salary
Bonus
Awards
Awards
Earned
Michael Mo
2022
$
306,159
$
—
$
1,443,000
$
—
$
1,749,159
(1)
Chief Executive Officer
2021
$
233,661
$
—
$
—
$
2,579,000
$
2,812,661
(2)
Keith Cochran
2022
$
268,563
$
—
$
1,337,000
$
—
$
1,605,563
(3)
President and Chief Operating Officer
2021
$
206,571
$
—
$
8,131,420
$
—
$
8,337,991
(4)
William Walker
2022
$
151,250
$
12,000
$
309,000
$
—
$
472,250
(5)
Chief Technology Officer
2021
$
—
$
—
$
—
$
—
$
—
(1)
Includes the incremental value of an equity modification for 1,500,000 shares of the Company’s common stock previously deemed to be earned upon achieving market capitalization milestones up to $4 billion, which will now vest in four equal increments over four years.
(2)
Includes an option for the purchase of up to 1,500,000 shares of the Company’s common stock at an exercise price of $2.60 per share, to be earned based upon achieving certain market capitalization milestones up to $4 billion. (This award was modified during 2022, see Note 1 above).
(3)
Includes the incremental value of an equity modification for 1,500,000 shares of the Company’s common stock previously deemed to be earned upon achieving market capitalization milestones up to $4 billion which will now vest in four equal increments over four years.
(4)
Includes 1,500,000 shares of the Company’s common stock to be earned based upon achieving certain market capitalization milestones up to $4 billion. (This award was modified during 2022, see Note 3 above). Also, includes 2,000,000 shares of the Company’s common stock which vests in four equal increments over four years, beginning in March of 2022.
(5)
Includes 150,000 shares of the Company’s common stock which vests in four equal increments over four years.
Employment Contracts; Termination of Employment and Change-in-Control Arrangements
We have not entered into employment agreements with our officers and directors and our Board of Directors has the sole discretion to pay salaries and incentive bonuses, including merit-based cash and equity bonuses.
On November 1, 2022, the Board, at the recommendation of the Compensation Committee, approved the following compensation for each of the following officers of the Company:
●
Dr. William Walker shall receive an annual salary of $210,000. In connection with his appointment, the Board granted Dr. Walker 100,000 shares of the Company’s common stock, which shall vest in four equal annual installments.
Equity Compensation Plans
On August 15 and November 5, 2018, the Board of Directors and a majority of the Company’s shareholders, respectively, approved the 2018 Equity Incentive Plan (the “2018 Plan”). Under the 2018 Plan, 15,000,000 shares of common stock of the Company 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 the Company’s common stock on the date of grant.
Compensation of Directors
On November 1, 2022, the Board of the Company appointed a Lead Independent Director (“Lead Director”) and a non-Lead Independent Director (“non-Lead Director”) of the Board, to hold office until the earlier of the expiration of the term of office of the
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director whom they have replaced, successors are duly elected and qualified, or the earlier of such director’s death, resignation, disqualification, or removal. Furthermore, the Lead Director will receive annual cash compensation equal to $150,000 upon their appointment and the non-Lead Independent Director (“non-Lead Director”) will receive annual cash compensation equal to $95,000. Additionally, all independent Board members will be granted 37,500 shares of common stock of which shares shall vest quarterly in 7,500 share installments with the first installment vesting December 31, 2022.
Outstanding Equity Awards at Fiscal Year-End
The following table discloses information regarding outstanding equity awards granted or accrued as of December 31, 2022, for our named executive officers.
Outstanding Equity Awards
Stock Awards
Number of Shares or Units of
Market Value of Units of
Stock that have not vested
Stock that have not vested
Name
(#)
($)
Michael Mo (Chief Executive Officer)
1,500,000
$
1,800,000
Keith Cochran (President and Chief Operating Officer)
3,000,000
3,600,000
Dr. William Walker (Chief Technology Officer)
150,000
180,000
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides the names and addresses of each person known to us who own more than 5% of the outstanding common stock as of the date of this annual report, and by our officers and directors. Except as otherwise indicated, all shares are owned directly. Unless otherwise indicated, the address of each of the persons shown is c/o KULR Technology Group, Inc., 4863 Shawline Street, San Diego, CA 92111.
Amount of
Beneficial
Percentage
Name of Beneficial Owner
Ownership
Ownership (1)
Michael Mo (2) - CEO and Chairman
20,651,539
18.1
%
Dr. Timothy Knowles (3) - Executive Technical Fellow and Secretary
16,370,360
14.4
%
Simon Westbrook (4) - CFO
120,000
*
Dr. William Walker (5) - CTO
—
*
Keith Cochran (6) – President and COO
773,495
*
Michael Carpenter - VP of Engineering
500,000
*
Morio Kurosaki (7) - Director
542,500
*
Dr. Joanna Massey (8) - Director
52,500
*
All directors and executive officers as a group (8 persons)
39,010,394
34.2
%
*
Less than 1%
(1)
The percent of class is based on 114,040,804 shares (of which 120,000 shares have not been issued), which excludes, as of December 31, 2022, 2,121,162 shares that do not vest within 60 days of March 28, 2023.
(2)
Consists of 19,251,539 shares held directly by Mr. Mo and 1,400,000 shares held jointly by Mr. Mo and his spouse, Linda Mo, and excludes shares held by Mr. Mo’s son Alexander Mo and shares held by Mr. Mo’s son Brandon Mo, over which shares Mr. Mo disclaims beneficial ownership, as Mr. Mo has no control over the dispositive or voting power over the shares and his sons no longer live in the same household as Mr. Mo. Does not include a restricted stock award of 1,500,000 shares of the Company’s common stock that does not vest within 60 days.
(3)
Consists of 15,600,000 shares held directly by Mr. Knowles, 770,360 shares held by Mr. Knowles’ wife, Marianne Knight who maintains all voting and dispositive control over shares she owns, and excludes 1,500,000 shares held by Mr. Knowles’ daughter, Sonja Irene Knowles, over which shares Mr. Knowles disclaims beneficial ownership, as Mr. Knowles has no control over the dispositive or voting power over the shares and his daughter no longer lives in the same household as Mr. Knowles.
(4)
Consists of 120,000 shares that have been earned but not yet issued.
(5)
Does not include 150,000 restricted stock grants that do not vest within 60 days.
(6)
Does not include a restricted stock award of 1,000,000 shares of the Company’s common stock that does not vest within 60 days.
(7)
Consists of 20,000 vested shares of common stock granted by the Company, on June 7, 2021, the effective date of Mr. Kurosaki’s appointment as a director of the Company, 22,500 vested shares of common stock granted by the Company on November 1, 2022 (but excluding 15,000 shares that do no vest within 60 days), 400,000 shares of common stock acquired prior to being appointed
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director, and 100,000 shares held by IT-Farm Corporation, a Japanese venture and capital firm, of which Mr. Kurosaki is the founder and President.
(8)
Consists of 20,000 vested shares of common stock granted by the Company, on June 7, 2021, the effective date of Dr. Massey’s appointment as a director of the Company, 22,500 vested shares granted by the Company on November 1, 2022 (but excludes 15,000 shares that do not vest within 60 days), and 10,000 shares of common stock acquired in open market purchases.
Change in Control
We are not aware of any arrangement that might result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than as set forth below and compensation arrangements, including employment, and indemnification arrangements, discussed, there have been no transactions since January 1, 2021, in which the amount involved in the transaction exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets as at the year-end for the last two completed fiscal years, and to which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.
Other Transactions
None.
Director Independence
The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the NYSE American rules. Pursuant to these rules, a majority of our Board must be “independent directors” within the meaning of the NYSE American Rules, and all directors who sit on our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee must also be independent directors.
Our board of directors has determined that Morio Kurosaki and Dr. Joanna Massey are “independent,” as defined under the NYSE American rules. For purposes of the NYSE American rules, an independent director means a person other than an executive officer or employee of our company or any other individual having a relationship which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, subject to certain additional limitations.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed or expected to be billed to us for professional services rendered with respect to the fiscal years ended December 31, 2022 and 2021:
For the Fiscal Year Ended
December 31,
2022
2021
Audit Fees
$
208,060
$
155,530
Tax Fees
—
—
Total
$
208,060
$
155,530
Audit Fees
Audit fees consist of fees billed for services rendered by our independent auditors during the years ended December 31, 2022 and 2021 for the audit and review of our financial statements.
Tax Fees
Tax fees consist of fees billed for services rendered by our tax preparers during the years ended December 31, 2022 and 2021 in connection with the preparation and filing of our income tax returns.
Pre-Approval Policies
Our Audit Committee, has adopted a policy governing the pre-approval by the Board of Directors of all services, audit and non-audit, to be provided to our Company by our independent auditors. Under the policy, the Audit Committee has pre-approved the provision by our independent auditors of specific audit, audit related, tax and other non-audit services as being consistent with auditor independence. Requests or applications to provide services that require the specific pre-approval of the board of directors must be submitted to the Audit Committee by the independent auditors, and the independent auditors must advise the Audit Committee as to whether, in the independent auditor’s view, the request or application is consistent with the SEC’s rules on auditor independence.
The Audit Committee has considered the nature and amount of the fees billed by Marcum and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of Marcum.
36
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit
No.
Description
2.1
Share Exchange Agreement, dated June 8, 2017 (1)
3.1
Articles of Incorporation of the Company (2)
3.2
Bylaws of the Company (2)
3.3
Certificate of Incorporation of KULR Technology Corporation (3)
3.4
Amended and Restated Certificate of Incorporation of KULR Technology Corporation (3)
3.5
By-laws of KULR Technology Corporation (3)
3.6
Certificate of Designation of Series A Voting Preferred Stock, filed on June 6, 2017 (1)
3.7
Certificate of Amendment to the Certificate of Incorporation, effective August 30, 2018 (8)
3.8
Certificate of Designation of Series B Convertible Preferred Stock, filed on December 6, 2018 (9)
3.9
Certificate of Amendment to the Certificate of Incorporation, effective December 31, 2018 (10)
3.10
Certificate of Designation of Series C Convertible Preferred Stock, filed on August 19, 2019 (11)
3.11
Form of Certificate of Designation for Series D Convertible Preferred Stock (20)
4.1
Description of registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934*
10.1
License and Development Agreement, dated April 15, 2013 (3)
10.2
Consulting Agreement, dated April 15, 2013 (3)
10.3
Letter of Intent by and between the Company and E3 Enterprise, dated April 20, 2016 (4)
10.4
Letter of Intent by and between the Company and KULR Technology Corporation (5)
10.5
Patent Assignment Agreement, dated November 10, 2016 (3)
10.6
Promissory Note issued by KULR Technology Corporation, dated March 31, 2017 (6)
10.7
Promissory Note issued by KULR Technology Corporation, dated June 8, 2017 (1)
10.8
Consulting Agreement, dated March 15, 2018 (7)
10.9
2018 KULR Technology Group Equity Incentive Plan (12)
10.10
Securities Purchase Agreement dated April 2, 2019 (13)
10.11
Subscription Agreement, as supplemented, for Common Stock Offering (14)
10.12
Rescission and Termination Agreement dated July 5, 2019 (15)
10.13
Form of Subscription Agreement (16)
10.14
Form of Warrant (16)
10.15
Standby Equity Distribution Agreement dated February 27, 2020 (17)
37
Table of Contents
10.16
Note Purchase Agreement dated February 27, 2020 (17)
10.17
Promissory Note dated February 27, 2020 (17)
10.18
Note Purchase Agreement dated July 20, 2020 (18)
10.19
Promissory Note dated July 20, 2020 (18)
10.20
Form of Securities Purchase Agreement (19)
10.21
Form of Warrant (19)
10.22
Co-Placement Agency Agreement (19)
10.23
Form of Securities Purchase Agreement dated May 19. 2021 (20)
10.24
Form of Warrant (20)
10.25
Standby Equity Purchase Agreement, dated May 13, 2022, by and between KULR Technology Group, Inc. and YA II PN, Ltd. (21)
10.26
Note Purchase Agreement, dated May 13, 2022, by and between KULR Technology Group, Inc. and YA II PN, Ltd. (21)
10.27
Promissory Note, dated May 13, 2022 (21)
10.28
Amendment, dated June 3, 2022, to the Standby Equity Purchase Agreement by and between KULR Technology Group, Inc. and YA II PN, Ltd. (22)
10.29
Supplemental Agreement dated as of September 23, 2022 to the Standby Equity Purchase Agreement dated as of May 16, 2022 between KULR Technology Group, Inc. and YA II PN, LTD. (23)
10.30
Asset Purchase Agreement, effective as of October 6, 2022, by and among KULR Technology Group, Inc., Vibetech International, LLC, and Norman Serrano (24)
21.1
List of Subsidiaries (3)
23.1
Consent of Marcum LLP*
31.1
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
Inline XBRL Instance*
101.SCH
Inline XBRL Taxonomy Extension Schema*
101.CAL
Inline XBRL Taxonomy Extension Calculation*
101.DEF
Inline XBRL Taxonomy Extension Definition*
101.LAB
Inline XBRL Taxonomy Extension Labels*
101.PRE
Inline XBRL Taxonomy Extension Presentation*
38
Table of Contents
104
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)*
*
Filed herewith.
(1)
Previously filed as an exhibit to Form 8-K on June 12, 2017 and incorporated herein by this reference.
(2)
Previously filed as an exhibit on Form 10-12G on January 7, 2016 (File No.: 000-55564) and incorporated herein by this reference.
(3)
Previously filed as an exhibit to Form 8-K on June 19, 2017 and incorporated herein by this reference.
(4)
Previously filed on Form S-1 on June 28, 2016 (File No.: 333-212272) and incorporated herein by this reference.
(5)
Previously filed as an exhibit to Form 8-K on November 3, 2016 and incorporated herein by this reference.
(6)
Previously filed as an exhibit to Form 8-K on April 5, 2017 and incorporated herein by this reference.
(7)
Previously filed as an exhibit to Form 8-K on March 15, 2018 and incorporated herein by this reference.
(8)
Previously filed as an exhibit to Form 8-K on August 30, 2018 and incorporated herein by this reference.
(9)
Previously filed as an exhibit to Form 8-K on December 6, 2018 and incorporated herein by this reference.
(10)
Previously filed as an exhibit to Form 8-K on January 7, 2019 and incorporated herein by this reference.
(11)
Previously filed as an exhibit to Form 8-K on August 23, 2019 and incorporated herein by this reference.
(12)
Previously filed as an exhibit to Form S-8 on October 9, 2018 and incorporated herein by this reference.
(13)
Previously filed as an exhibit to Form 8-K on April 3, 2019 and incorporated herein by this reference.
(14)
Previously filed as an exhibit to Form 10-Q on May 14, 2019 and incorporated herein by this reference.
(15)
Previously filed as an exhibit to Form 8-K on July 5, 2019 and incorporated herein by this reference.
(16)
Previously filed as an exhibit to Form 8-K on December 5, 2019 and incorporated herein by this reference.
(17)
Previously filed as an exhibit to Form 8-K on March 4, 2020 and incorporated herein by this reference.
(18)
Previously filed as an exhibit to Form 8-K on July 21, 2020 and incorporated herein by this reference.
(19)
Previously filed as an exhibit to Form 8-K on December 31, 2020 and incorporated herein by this reference.
(20)
Previously filed as an exhibit to Form 8-K on May 20, 2021 and incorporated herein by this reference.
(21)
Previously filed as an exhibit to Form 8-K on May 16, 2022 and incorporated herein by this reference.
(22)
Previously filed as an exhibit to Form 8-K on June 3, 2022 and incorporated herein by this reference.
(23)
Previously filed as an exhibit to Form 8-K on September 23, 2022 and incorporated herein by this reference.
(24)
Previously filed as an exhibit to Form 8-K on October 6, 2022 and incorporated herein by this reference.
ITEM 16. FORM 10-K SUMMARY
None.
39
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 28, 2023
KULR Technology Group, Inc.
By:
/s/ Michael Mo
Michael Mo
Chief Executive Officer and Chairman
(Principal Executive Officer)
By:
/s/ Simon Westbrook
Simon Westbrook
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
By:
/s/ Michael Mo
Chief Executive Officer and Chairman
March 28, 2023
Michael Mo
By:
/s/ Timothy Knowles
Executive Technical Fellow and Director
March 28, 2023
Timothy Knowles
By:
/s/ Simon Westbrook
Chief Financial Officer
March 28, 2023
Simon Westbrook
By:
/s/ William Walker
Chief Technical Officer
March 28, 2023
William Walker
By:
/s/ Keith Cochran
Keith Cochran
President and Chief Operating Officer
March 28, 2023
By:
/s/ Joanna Massey
Joanna Massey
Lead Director
March 28, 2023
By:
/s/ Morio Kurosaki
Director
March 28, 2023
Morio Kurosaki
40
Table of Contents
Report of Independent Registered Public Accounting Firm (PCAOB ID: 688)
F-2
Consolidated Balance Sheets as of December 31, 2022 and 2021
F-4
Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021
F-5
Consolidated Statement of Changes in Stockholders’ Equity for the Year Ended December 31, 2022
F-6
Consolidated Statement of Changes in Stockholders’ Equity for the Year Ended December 31, 2021
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021
F-8
Notes to Consolidated Financial Statements
F-10
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
KULR Technology Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of KULR Technology Group, Inc. and Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audits matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Description of Matter No. 1
As disclosed in Note 3 to the December 31, 2022 consolidated financial statements, on October 5, 2022 the Company entered into an agreement to purchase all of the assets, including intellectual property, of Vibetech International, LLC (“Vibetech”) for consideration of $3,500,000, of which, $2,000,000 will be paid in cash, and $1,500,000 is to be paid in common stock. The Company also entered into an employment agreement with the owner of Vibetech for which significant amounts of the consideration paid are contingent and subject to claw back provisions tied to such employment.
We identified the Company’s accounting for the acquisition to be a critical audit matter as such accounting can be complex and require judgement on the part of management.
F-2
Table of Contents
How We Addressed Matter No. 1 in Our Audit
Our audit procedures to address this critical audit matter included the following: (i) we examined the contractual purchase agreements between the Company and Vibetech, (ii) we evaluated the various assets acquired to ensure management’s accounting analysis was complete, (iii) we evaluated the terms and conditions of the employment agreement between the Company and the former owner of Vibetech, including the contingent consideration arrangement in which the payments are automatically forfeited if employment terminates, and (iv) we evaluated the Company’s conclusions that a single asset (the intellectual property) constituted the majority of the purchase price and should not be accounted for as a business combination. We also engaged the assistance of our firm’s internal valuation specialists in our overall testing procedures.
Description of Matter No. 2
As disclosed in Note 2 to the December 31, 2022 consolidated financial statements, the Company is required to evaluate its liquidity and ability to continue as a going concern for a period within one year after the date that the financial statements are issued. As disclosed, the Company concluded that matters existed that could indicate substantial doubt about its ability to continue as a going concern was probable as a result of its current working capital levels, history of operating and net losses, and cash used in operating and investing activities in 2022. The Company also disclosed its plans to alleviate the indicators that substantial doubt exists. We identified the Company’s evaluation of its liquidity and financial conditions to be a critical audit matter as such evaluation required significant estimates and judgment on the part of management.
How We Addressed Matter No. 2 in Our Audit
Our audit procedures to address this critical audit matter included the following: (i) we evaluated the Company’s future cash flow projections, which included examining future sources of revenue, comparing future cash outflows to historical amounts, and performing independent analytical procedures over the Company’s future cash flow projections, (ii) we reviewed and evaluated the Company’s plans for dealing with adverse conditions and events if liquidity was to become constrained in the future, (iii) we evaluated relevant transactions that transpired subsequent to December 31, 2022 that had an impact on the liquidity analysis, including recent capital raises and conversions of the prepaid advance liability, and (iv) we evaluated the Company’s contractual arrangement with the financial institution identified in Note 2, which included independently communicating with such financial institution regarding the arrangement and their ability and intent to continue to support the Company.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2018.
Los Angeles, CA
March 28, 2023
F-3
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
2022
2021
Assets
Current Assets:
Cash
$
10,333,563
$
14,863,301
Accounts receivable
1,542,118
136,326
Inventory
1,962,035
191,311
Inventory deposits
285,260
309,688
Prepaid expenses and other current assets
1,613,008
260,672
Total Current Assets
15,735,984
15,761,298
Property and equipment, net
3,193,041
374,475
Equipment deposits
3,514,937
2,153,950
Security deposits
60,441
58,941
Intangible assets, net
720,768
216,952
Right of use asset
328,941
665,687
Deferred financing costs
71,818
—
Total Assets
$
23,625,930
$
19,231,303
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$
1,408,017
$
454,507
Accrued expenses and other current liabilities
2,142,277
1,163,227
Accrued issuable equity
227,956
290,721
Lease liability, current portion
223,645
262,379
Loan payable
—
155,226
Prepaid advance liability, net of discount, current portion
5,655,612
—
Deferred revenue
23,000
132,303
Total Current Liabilities
9,680,507
2,458,363
Lease liability, non-current portion
97,958
407,898
Prepaid advance liability, net of discount, non-current portion
3,196,678
—
Accrued interest, non-current
157,054
—
Total Liabilities
13,132,197
2,866,261
Commitments and contingencies (Note 16)
Stockholders' Equity
Preferred stock, $ 0.0001 par value, 20,000,000 shares authorized;
Series A Preferred Stock, 1,000,000 shares designated; none issued and outstanding at December 31, 2022 and 2021
—
—
Series B Convertible Preferred Stock, 31,000 shares designated; none issued and outstanding at December 31, 2022 and 2021
—
—
Series C Preferred Stock, 400 shares designated; none issued and outstanding at December 31, 2022 and 2021
—
—
Series D Preferred Stock, 650 shares designated; none issued and outstanding at December 31, 2022 and 2021
—
—
Common stock, $ 0.0001 par value, 500,000,000 shares authorized; 113,202,749 and 113,071,587 shares issued and outstanding at December 31, 2022, respectively; 104,792,072 shares issued and outstanding at December 31, 2021
11,320
10,479
Treasury stock, at cost; 131,162 and 0 shares held at December 31, 2022 and December 31, 2021, respectively
( 296,222 )
—
Additional paid-in capital
53,372,673
39,512,122
Accumulated deficit
( 42,594,038 )
( 23,157,559 )
Total Stockholders' Equity
10,493,733
16,365,042
Total Liabilities and Stockholders' Equity
$
23,625,930
$
19,231,303
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
2022
2021
Revenue
$
3,994,634
$
2,412,868
Cost of revenue
1,630,527
1,102,038
Gross Profit
2,364,107
1,310,830
Operating Expenses
Research and development
3,977,563
1,662,183
Selling, general, and administrative
16,672,526
11,162,062
Total Operating Expenses
20,650,089
12,824,245
Loss From Operations
( 18,285,982 )
( 11,513,415 )
Other (Expense) Income
Interest expense
( 935,874 )
( 3,336 )
Gain on forgiveness of PPP loan and interest
158,675
—
Debt redemption costs
—
( 140,000 )
Amortization of debt discount
( 511,825 )
( 128,198 )
Loss on debt extinguishment
( 8,508 )
—
Change in fair value of accrued issuable equity
147,035
( 125,821 )
Loss on foreign currency transactions
—
( 381 )
Total Other Expense, net
( 1,150,497 )
( 397,736 )
Net Loss
( 19,436,479 )
( 11,911,151 )
Deemed dividend to Series D preferred stockholders
—
( 2,624,326 )
Net Loss Attributable to Common Stockholders
$
( 19,436,479 )
$
( 14,535,477 )
Net Loss Per Share - Basic and Diluted
$
( 0.18 )
$
( 0.15 )
Weighted Average Number of Common Shares Outstanding - Basic and Diluted
105,655,773
95,749,620
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2022
Additional
Total
Common Stock
Paid-In
Treasury Stock
Accumulated
Stockholders'
Shares
Amount
Capital
Shares
Amount
Deficit
Equity
Balance - January 1, 2022
104,792,072
$
10,479
$
39,512,122
—
$
—
$
( 23,157,559 )
$
16,365,042
Treasury stock held upon the vesting of restricted common stock
—
—
—
194,704
( 439,728 )
—
( 439,728 )
Treasury stock issued upon the exercise of options
—
—
( 95,124 )
( 63,542 )
143,506
—
48,382
Common stock issued upon the exercise of options
2,500
—
5,075
—
—
—
5,075
Common stock issued upon the exercise of warrants
2,416,668
242
3,020,594
—
—
—
3,020,836
Common stock issued pursuant to the SEPA and Supplemental SEPA agreements:
For cash, net of issuance costs (1)
160,782
16
249,002
—
—
—
249,018
In satisfaction of notes payable
94,458
9
149,991
—
—
—
150,000
For the repayment of prepaid advance liability
5,375,269
538
6,440,305
—
—
—
6,440,843
Stock-based compensation:
Restricted stock awards
310,000
31
( 31 )
—
—
—
—
Common stock issued for services
51,000
5
109,845
—
—
—
109,850
Amortization of restricted stock units
—
—
1,945,272
—
—
—
1,945,272
Amortization of stock options
—
—
103,220
—
—
—
103,220
Amortization of market-based award
—
—
1,932,402
—
—
—
1,932,402
Net loss
—
—
—
—
—
( 19,436,479 )
( 19,436,479 )
Balance - December 31, 2022
113,202,749
$
11,320
$
53,372,673
131,162
$
( 296,222 )
$
( 42,594,038 )
$
10,493,733
(1) Represents gross proceeds of $ 250,000 less $ 982 for amortization of deferred issuance costs.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2021
Series B Convertible
Series D Convertible
Additional
Total
Preferred Stock
Preferred Stock
Common Stock
Paid-In
Treasury Stock
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Shares
Amount
Deficit
Equity
Balance - January 1, 2021
13,972
$
1
—
$
—
89,908,600
$
8,991
$
17,355,968
—
$
—
$
( 11,246,408 )
$
6,118,552
Common stock issued upon the conversion of Series B Convertible Preferred Stock
( 13,972 )
( 1 )
—
—
698,600
70
( 69 )
—
—
—
—
Issuance of Series D Convertible Preferred Stock, common stock and warrants for cash (1)
—
—
650
—
1,300,000
130
6,134,870
—
—
—
6,135,000
Common stock issued upon the conversion of Series D Convertible Preferred Stock
—
—
( 650 )
—
3,170,730
317
( 317 )
—
—
—
—
Common stock issued upon the exercise of warrants
—
—
—
—
6,793,358
679
11,718,525
—
—
—
11,719,204
Common stock issued upon the exercise of options
—
—
—
—
184,784
18
121,848
—
—
—
121,866
Common stock issued as partial consideration for intangible asset
—
—
—
—
6,000
1
17,999
—
—
—
18,000
Stock-based compensation:
Common stock issued for services
—
—
—
—
170,000
17
376,892
—
—
—
376,909
Restricted common stock issued
—
—
—
—
2,677,744
268
( 268 )
—
—
—
—
Restricted common stock cancelled
—
—
—
—
( 117,744 )
( 12 )
12
—
—
—
—
Amortization of restricted common stock
—
—
—
—
—
—
1,606,578
—
—
—
1,606,578
Amortization of stock options
—
—
—
—
—
—
68,239
—
—
—
68,239
Amortization of market-based award
—
—
—
—
—
—
2,111,845
—
—
—
2,111,845
Net loss
—
—
—
—
—
—
—
—
—
( 11,911,151 )
( 11,911,151 )
Balance - December 31, 2021
—
$
—
—
$
—
104,792,072
$
10,479
$
39,512,122
—
$
—
$
( 23,157,559 )
$
16,365,042
(1)
Represents $ 6,500,000 of relative fair value of preferred stock issued, net of cash issuance costs of $ 365,000 .
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
2022
2021
Cash Flows From Operating Activities:
Net loss
$
( 19,436,479 )
$
( 11,911,151 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount
511,825
128,198
Non-cash lease expense
193,106
149,130
Depreciation and amortization expense
259,399
67,715
Non-cash interest expense
576,932
—
Gain on forgiveness of PPP loan and interest
( 158,675 )
—
Change in fair value of accrued issuable equity
( 147,035 )
125,821
Stock-based compensation
4,175,014
4,200,091
Bad debt expense
15,026
—
Loss on extinguishment of note payable
8,508
—
Changes in operating assets and liabilities:
Accounts receivable
( 1,420,818 )
( 80,834 )
Inventory
( 1,770,724 )
( 135,859 )
Prepaid expenses and other current assets
( 1,324,836 )
( 110,204 )
Inventory deposits
( 3,072 )
( 309,688 )
Security deposits
( 1,500 )
( 50,213 )
Accounts payable
658,715
385,342
Accrued expenses and other current liabilities
824,826
768,215
Lease liability
( 205,034 )
( 144,540 )
Deferred revenue
( 109,303 )
112,303
Total Adjustments
2,082,354
5,105,477
Net Cash Used In Operating Activities
( 17,354,125 )
( 6,805,674 )
Cash Flows From Investing Activities:
Deposits for purchase of property and equipment
( 1,421,432 )
( 2,153,950 )
Purchases of property and equipment
( 2,682,970 )
( 383,285 )
Acquisition of intangible assets
( 543,572 )
( 200,000 )
Net Cash Used In Investing Activities
( 4,647,974 )
( 2,737,235 )
Cash Flows from Financing Activities:
Proceeds from note payable (1)
4,750,000
—
Net proceeds from the SEPA
250,000
—
Net proceeds from the prepaid advance liability (2)
10,573,068
—
Issuance costs on prepaid advance liability
( 85,000 )
—
Payment of financing costs incurred in connection with the SEPA
( 72,800 )
—
Notes payable issuance costs
( 17,200 )
—
Payment of financing costs
—
( 365,000 )
Repayments of notes payable
( 1,000,000 )
( 2,450,000 )
Proceeds from the exercise of options
53,457
121,866
Proceeds from the exercise of warrants
3,020,836
11,719,204
Proceeds from sale of Series D Convertible Preferred Stock, common stock and warrants
—
6,500,000
Net Cash Provided By Financing Activities
17,472,361
15,526,070
Net (Decrease) Increase In Cash
( 4,529,738 )
5,983,161
Cash - Beginning of Year
14,863,301
8,880,140
Cash - End of Year
$
10,333,563
$
14,863,301
(1) Note payable face value of $ 5,000,000 , less $ 250,000 original issue discount.
(2) Consists of principal of $ 15,000,000 on prepaid advance liability, less $ 3,850,000 and $ 566,932 withheld to repay note payable and related interest and premiums, respectively, owed to same investor, and, $ 10,000 withheld for issuance costs.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the Years Ended
December 31,
2022
2021
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest
$
86,062
$
1,635
Taxes
$
—
$
—
Non-cash investing and financing activities:
Right of use asset for lease liability
$
—
$
814,817
Additions to property and equipment included in accounts payable
$
294,794
$
—
Beneficial conversion feature on Series D convertible preferred stock
$
—
$
2,624,326
Common stock issued upon the conversion of Series D convertible preferred stock
$
—
$
317
Common stock held in treasury upon the vesting of restricted common stock
$
439,728
$
—
Common stock issued upon the conversion of Series B convertible preferred stock
$
—
$
70
Common stock issued in satisfaction of accrued issuable equity
$
—
$
209,200
Prepaid advance for repayment of note payable
$
3,850,000
$
—
Original issue discount on prepaid advance liability
$
789,474
$
—
Common stock issued in satisfaction of note payable
$
150,000
$
—
Common stock issued in satisfaction of prepaid advance liability and interest
$
6,440,843
$
—
Deposits applied to purchase of property and equipment
$
60,445
$
—
Deferred financing costs charged to additional paid in capital
$
982
$
—
Common shares issued as partial consideration for intangible asset
$
—
$
18,000
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS AND RISKS AND UNCERTANTIES
Organization and Operations
KULR Technology Group, Inc. was incorporated on December 11, 2015 under the laws of the State of Delaware as KT High-Tech Marketing, Inc. Effective August 30, 2018, KT High-Tech Marketing, Inc. changed its name to KULR Technology Group, Inc.
KULR Technology Group, Inc., through its wholly-owned subsidiary, KULR Technology Corporation (collectively referred to as “KULR” or the “Company”), develops and commercializes high-performance thermal management technologies for electronics, batteries, and other components across a range of applications. Currently, the Company is focused on targeting both high performance aerospace and Department of Defense (“DOD”) applications, such as space exploration, satellite communications, and underwater vehicles, and applying them to mass market commercial applications, such as lithium-ion battery energy storage, electric vehicles, 5G communication, cloud computer infrastructure, consumer and industrial devices.
Risks and Uncertainties
In March 2020, the World Health Organization declared COVID-19, a novel strain coronavirus, a pandemic. 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. For example, in response to an outbreak of infection in Shanghai, beginning in March 2022, governmental authorities in China implemented a lockdown order in that city, significantly slowing economic and business activity in that region and adversely affecting our ability to import product material required to fulfill some customer commitments. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities and may take additional actions based on their recommendations and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers.
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 2023 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.
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.
On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. A statement by the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts. The standard deposit insurance amount is up to $250,000 per depositor, per insured bank, for each account ownership category. Although we do not have any funds deposited with the aforementioned banks that failed, we regularly maintain cash balances with other financial institutions in excess of the FDIC insurance limit. A failure of a depository institution to return deposits could impact access to our invested cash or cash equivalents and could adversely impact our operating liquidity and financial performance.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements of the Company include the accounts of KULR Technology Group, Inc. and its wholly-owned subsidiary, KULR Technology Corporation. All significant intercompany transactions have been eliminated in the consolidation. The
F-10
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Liquidity
During the year ended December 31, 2022, the Company incurred a net loss in the amount of $ 19,436,479 and used cash in operations of $ 17,354,125 . As of December 31, 2022, the Company had cash of $ 10,333,563 and working capital of $ 6,055,477 . During the year ended December 31, 2022, the Company generated net cash from financing activities of $ 17,472,361 , mainly from proceeds received from Prepaid Advances, the issuance of a note payable, shares of common stock, and from the exercise of options and warrants to purchase common stock.
The Company’s 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”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its 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 the Company’s ability to continue as a going concern could exist as the Company has a history of recurring net losses, recurring use of cash in operations and declining working capital. Despite these conditions, the Company has a successful track record of raising capital as needed and continues to have a positive, ongoing relationship with a financial institution that has provided access to capital and will continue to support KULR.
On May 13, 2022, the Company entered into a Standby Equity Purchase Agreement (the “SEPA”), which gives the Company the right, but not the obligation, to sell up to $ 50,000,000 of its shares of common stock to YA II PN, Ltd. (“Yorkville”) during the commitment period. Further, on September 23, 2022, the Company entered into the Supplemental SEPA, pursuant to which the Company may request advances (“Prepaid Advances”) up to an aggregate of $ 50,000,000 from Yorkville. Yorkville has the right to receive shares, and may select the timing and delivery of such shares, in an amount up to the balance of the Prepaid Advance in order to pay down the Prepaid Advance liability. During the year ended December 31, 2022, the Company received aggregate gross proceeds of $ 4,750,000 from a Promissory Note payable and received gross proceeds of $ 400,000 and $ 15,000,000 under the SEPA and the Supplemental SEPA, respectively (of which $ 150,000 and $ 3,850,000 , respectively, was used to repay the Promissory Note; see Note 12 – Notes Payable). The Company is not permitted to initiate additional sales of its common stock under the SEPA until the Prepaid Advance liability ($ 8,852,290 at December 31, 2022) is settled. Subsequent to December 31, 2022, the Company issued 3,153,036 shares of common stock, at purchase price per share ranging from $ 0.90 to $ 1.20 , in satisfaction of the Prepaid Advance Liability in the amount of $ 3,579,932 . See Note 10 – Prepaid Advance Liability and Note 15 – Stockholders’ Equity for additional information.
While no assurance can be provided that the Company will be successful in raising additional capital from Yorkville, as they are not obligated to advance funds to the Company 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, the Company believes it has 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 its above plans alleviate any potential substantial doubt about the entity’s ability to continue as a going concern. As of March 24, 2023, the Company’s cash balance was approximately $ 7.3 million.
F-11
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the financial statements. The Company’s significant estimates used in these financial statements include, but are not limited to, fair value calculations for intangible assets, equity securities, stock-based compensation and the valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates.
See Note 2 – Summary of Significant Accounting Policies, Stock-Based Compensation for additional discussion of the use of estimates in estimating the fair value of the Company’s common stock.
Treasury Stock
The Company records repurchases of its own common stock at cost. Repurchased common stock is presented as a reduction of equity in the consolidated balance sheets. Subsequent reissuances of treasury stock are accounted for on a weighted average cost basis. Gains resulting from differences between the cost of treasury stock and the re-issuance proceeds are credited to additional paid in capital. Losses resulting from differences between the cost of treasury stock and the re-issuance proceeds are debited to additional paid-in capital.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash and accounts receivable. The Company’s concentrations of credit risk also includes concentrations from key customers and vendors.
Cash Concentrations
A significant portion of the Company’s cash is held at one major financial institution. The Company has not experienced any losses in such accounts. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were uninsured balances of $ 9,833,541 and $ 14,363,301 as of December 31, 2022 and 2021, respectively.
Customer and Revenue Concentrations
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
Revenues
Account Receivables
For the Years Ended
December 31,
As of December 31,
2022
2021
2022
2021
Customer A
13
%
29
%
34
%
*
Customer B
*
*
*
34
%
Customer C
42
%
25
%
*
*
Customer D
*
30
%
*
42
%
Customer E
*
*
*
21
%
Customer F
32
%
*
61
%
*
Total
87
%
84
%
95
%
97
%
* Less than 10%
There is no assurance the Company will continue to receive significant revenues from any of these customers. Any reduction or delay in operating activity from any of the Company’s significant customers, or a delay or default in payment by any significant customer, or termination of agreements with significant customers, could materially harm the Company’s business and prospects. As a result of the Company’s significant customer concentrations, its gross profit and results from operations could fluctuate significantly due to changes
F-12
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in political, environmental, or economic conditions, or the loss of, reduction of business from, or less favorable terms with any of the Company’s significant customers.
Vendor Concentrations
Vendor concentrations are as follows for the years ended December 31, 2022 and 2021:
For the Years Ended
December 31,
2022
2021
Vendor A
*
*
Vendor B
*
14
%
0
%
14
%
*
Less than 10%
Accounts Receivable
Accounts receivable are carried at their contractual amounts, less an estimate for uncollectible amounts. As of December 31, 2022 and 2021, no allowances for uncollectible amounts were determined to be necessary. Management estimates the allowance for bad debts based on existing economic conditions, the financial conditions of the customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for bad debts only after all collection attempts have been exhausted.
Inventory
Inventory is comprised of carbon fiber velvet (“CFV”) thermal interface solutions and internal short circuit batteries, which are available for sale, as well as raw materials and work in process related primarily to the manufacture of safe cases. Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. The cost of inventory that is sold to third parties is included within cost of sales and the cost of inventory that is given as samples is included within operating expenses. The Company periodically reviews for slow-moving, excess or obsolete inventories. Products that are determined to be obsolete, if any, are written down to net realizable value. On occasion, the Company pays for inventory prior to receiving the goods. These payments are recorded as inventory deposits until the goods are received and these costs are included in the current asset section of the balance sheet. As of December 31, 2022 and 2021, inventory deposits were $ 285,260 and $ 309,688 , respectively. Finished goods inventory is held on-site at the San Diego, California location. Raw materials are held off-site with certain suppliers.
Inventory at December 31, 2022 and 2021 consisted of the following:
December 31,
December 31,
2022
2021
Raw materials
$
1,075,310
$
—
Work-in-process
2,977
—
Finished goods
883,748
191,311
Total inventory
$
1,962,035
$
191,311
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation which is recorded commencing at the in-service date using the straight-line method at rates sufficient to charge the cost of depreciable assets to operations over their estimated useful lives, which range from 3 to 7 years (see Note 5 – Property and Equipment for additional details). Leasehold improvements are amortized over the shorter of (a) the useful life of the asset; or (b) the remaining lease term. Maintenance and repairs are charged to operations as incurred. The Company capitalizes cost attributable to the betterment of property and equipment when such betterment extends the useful life of the assets. Vendor deposits toward the purchase of property and equipment are reflected as equipment deposits on the accompanying balance sheets.
F-13
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews for the impairment of long-lived assets annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying value.
Intangibles
Intangible assets are stated at fair value as of the date acquired, less accumulated amortization. Amortization is calculated based on the estimated useful lives of the assets, using the straight-line method or another method that more fairly represents the utilization of the assets, as follows:
Estimated Useful Life
Patent
17.3 years
Intellectual property
5.0 years
The Company periodically evaluates the remaining useful lives of our intangible assets to determine whether events or circumstances warrant a revision to the remaining periods of amortization. In the event that the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. If it is determined that an intangible asset has an indefinite useful life, that intangible asset would be subject to impairment testing annually or whenever events or circumstances indicate that its carrying value may not, based on future undiscounted cash flows or market factors, be recoverable. An impairment loss, the recorded amount of which would be based on the fair value of the intangible asset at the measurement date, would be recorded in the period in which the impairment determination was made.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The carrying amounts of the Company’s financial instruments, such as cash, accounts receivable, accrued expenses and other current liabilities, notes payable and loans payable approximate fair values due to the short-term nature of these instruments.
Preferred Stock
The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. The Company’s preferred shares are classified as stockholders’ equity because they are not subject to mandatory redemption, which would result in liability classified instruments measured at fair value, and because they are not conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) which would result in temporary equity classified instruments.
F-14
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Instruments
The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the FASB ASC. The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.
If the instrument is determined not to be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the market price of the Company’s common stock as of the commitment date to the effective conversion price of the instrument.
Accrued Issuable Equity
The Company records accrued issuable equity when it is contractually obligated to issue shares and there has been a delay in the issuance of such shares. Accrued issuable equity is recorded and carried at fair value with changes in its fair value recognized in the Company’s consolidated statements of operations. Once the underlying shares of common stock are issued, the accrued issuable equity is reclassified to equity as of the share issuance date at the then current fair market value of the common stock.
Deferred Financing Costs
Deferred financing costs, which primarily consist of direct, incremental professional fees incurred in connection with a debt or equity financing, are capitalized as deferred financing costs (a non-current asset) on the balance sheet. Once the financing closes, the Company reclassifies such costs as either discounts to notes payable or as a reduction of proceeds received from equity transactions so that such costs are recorded as a reduction of additional paid-in capital. If the completion of a contemplated financing was deemed to be no longer probable, the related deferred offering costs would be charged to general and administrative expense in the consolidated financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The following five steps are applied to achieve that core principle:
●
Step 1: Identify the contract with the customer;
●
Step 2: Identify the performance obligations in the contract;
●
Step 3: Determine the transaction price;
●
Step 4: Allocate the transaction price to the performance obligations in the contract; and
●
Step 5: Recognize revenue when the company satisfies a performance obligation.
The Company recognizes revenue primarily from the following different types of contracts:
●
Product sales – Revenue is recognized at the point in time the customer obtains control of the goods and the Company satisfies its performance obligation, which is generally at the time it ships the product to the customer.
●
Contract services – Revenue is recognized at the point in time that the Company satisfies its performance obligation under the contract, which is generally at the time the services are fulfilled and/or accepted by the customer.
F-15
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s revenue recognized in its consolidated statements of operations:
For the Years Ended
December 31,
2022
2021
Product sales
$
2,643,325
$
1,495,328
Contract services
1,351,309
917,540
Total revenue
$
3,994,634
$
2,412,868
As of December 31, 2022 and 2021, the Company had $ 23,000 and $ 132,303 of deferred revenue, respectively, from contracts with customers. The contract liabilities represent payments 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.
Deferred Labor Costs
As of December 31, 2022 and 2021, the Company had $ 34,402 and $ 84,324 , respectively, of deferred labor costs, which is included in prepaid expenses and other current assets in the Company’s consolidated balance sheets. Deferred labor costs represent costs incurred to fulfill the Company’s contract service revenue. The Company will recognize the deferred labor costs as cost of revenues at the point in time that the Company satisfies its performance obligation under the respective contract, which is generally at the time the services are fulfilled and/or accepted by the customer.
Shipping and Handling Costs
Amounts billed to a customer in a sales transaction related to shipping and handling are recorded as revenue. Costs incurred for shipping and handling are included as cost of revenues on the accompanying consolidated statements of operations.
Research and Development
Research and development include expenses incurred in connection with the research and development 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.
Advertising Costs
Advertising costs are expensed in the period incurred. Advertising costs charged to operations for the years ended December 31, 2022 and 2021 were $ 874,398 and $ 145,025 , respectively, and are included in selling, general and administrative in the consolidated statements of operations.
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award since the fair value of the award is more readily determinable than the value of the services. The fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an award, the Company generally issues new shares of common stock out of its authorized shares, but may issue treasury stock, when available.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period.
F-16
Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the computation of basic and diluted net loss per common share:
For the Twelve Months Ended
December 31,
2022
2021
Numerator:
Net loss
$
( 19,436,479 )
$
( 11,911,151 )
Deemed dividend to Series D preferred stockholders
—
( 2,624,326 )
Net loss attributable to common stockholders
$
( 19,436,479 )
$
( 14,535,477 )
Denominator (weighted average quantities):
Common shares issued
107,683,574
97,708,080
Less: Treasury shares purchased
( 125,015 )
—
Less: Unvested restricted shares
( 2,005,109 )
( 2,037,897 )
Add: Accrued issuable equity
102,323
79,437
Denominator for basic and diluted net loss per share
105,655,773
95,749,620
Basic and diluted net loss per common share
$
( 0.18 )
$
( 0.15 )
The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
December 31,
2022
2021
Unvested restricted stock
5,042,500
2,590,000
Unvested market -based equity awards
—
3,000,000
Options
640,216
405,216
Warrants
2,524,410
2,594,553
Total
8,207,126
8,589,769
The table above does not include shares to be issued in satisfaction of the remaining prepaid advance liability (see Note 10 – Prepaid Advance Liability).
Operating Leases
The Company leases properties under operating leases. For leases in effect upon adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” at January 1, 2020 and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the right-of-use asset.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.
The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
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Table of Contents
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2022 and 2021. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses in the consolidated statements of operations.
Reclassifications
Certain prior period balances have been reclassified in order to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.
Subsequent Events
The Company has evaluated subsequent events through the date which the consolidated financial statements were issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2020-02 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The Company will be required to adopt the provisions of this ASU on January 1, 2023, with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. ASU 2020-06 requires entities to provide expanded disclosures about the terms and features of convertible instruments and amends certain guidance in ASC 260, Earnings per Share, relating to the computation of earnings per share for convertible instruments and contracts in an entity’s own equity. The guidance becomes effective for the Company on January 1, 2024, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 effective January 1, 2021 and its adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU 2020-10 “Codification Improvements”, which improves consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The Company adopted ASU 2020-10 effective January 1, 2022 and its adoption did not have a material impact on its condensed consolidated financial statements.
On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company adopted ASU 2021-04 effective January 1, 2022 and its adoption did not have a material impact on its condensed consolidated financial statements.
NOTE 3 – ASSET PURCHASE
On October 6, 2022 (the “Asset Purchase Date”), KULR Technology Group, Inc. (the “Company”) entered into an agreement (the “Asset Purchase Agreement”) with a seller (the “Seller”), pursuant to which the Company purchased all of the assets, including intellectual property, of the Seller (the “Acquired Assets”) for consideration of $ 3,500,000 (the “Total Consideration”), of which, $ 2,000,000 (the “Cash Consideration”) will be paid in cash, and the Company will issue shares of common stock with an aggregate fair value of $ 1,500,000 , valued as of the Asset Purchase Date (the “Equity Consideration”).
The Asset Purchase Agreement includes customary representations, warranties and covenants of the Company and the Seller. The Purchase Agreement also contains post-closing indemnification provisions pursuant to which the parties have agreed to indemnify each other against losses resulting from certain events, including breaches of representations and warranties, covenants and certain other matters.
The Company paid $ 1,000,000 of the Cash Consideration on October 6, 2022. The remaining Cash Consideration will be paid in two equal installments of $ 500,000 on each of April 5, 2023 and October 5, 2023 . In addition to total consideration, the seller has been employed by the Company and will receive an annual salary of $ 216,000 . If the Seller terminates his employment with the Company less than four years after the Asset Purchase Date for reasons other than severe health problems or other extenuating circumstances that would render the Seller unable to perform his employment obligations, the Seller is required to pay back to the Company a pro rata portion of the Cash Consideration (the “Clawback”), based upon the length of the Seller’s employment as percentage of the four year employment requirement. A partial year is considered a full year for purposes of calculating the Clawback amount.
The Company will issue the Equity Consideration in four equal installments of 279,852 common shares, valued as of the Asset Purchase Date at $ 1.34 per share, on the following dates: (i) October 5, 2023, (ii) October 5, 2024, (iii) October 5, 2025, and (iv) October 5, 2026, provided that the Seller has not terminated his employment with the Company as of the date of payment.
All of the Equity Consideration is contingent upon the continued employment of the Seller; further, 75 % of the Cash Consideration is subject to Clawback, based on the term of the Seller’s employment by the Company. As such, an aggregate of $ 3,000,000 of the Total Consideration is accounted for as compensation, which will be recognized on a pro rata basis over the employment term requirement. The remaining $ 500,000 of Total Consideration is accounted for as consideration for the Acquired Assets.
Management determined that the remaining $ 500,000 of consideration attributable to fair value of the Acquired Assets was concentrated into a single identifiable asset, namely, intellectual property. As a result, this transaction was accounted for as an asset acquisition.
The Company incurred legal costs in connection with the execution of the Asset Purchase Agreement, in the aggregate amount of $ 43,572 . The total cost of the intellectual property acquired of $ 543,572 is included in intangible assets on the accompanying consolidated balance sheet and is being amortized over its estimated useful life of 5 years (see Note 6 – Intangible Assets for additional details).
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2022 and 2021, prepaid expenses and other current assets consisted of the following:
As of December 31,
2022
2021
Vendor receivables
$
368,069
$
—
Deferred labor costs
34,402
84,324
Insurance
12,776
69,925
Professional fees
25,787
65,118
Other
84,120
31,074
Research and development
62,329
—
Dues and subscriptions
75,889
—
Compensation costs
375,000
—
Marketing and sponsorships
574,636
10,231
Total prepaid expenses
$
1,613,008
$
260,672
NOTE 5 - PROPERTY AND EQUIPMENT
As of December 31, 2022 and 2021, property and equipment consisted of the following:
December 31,
2022
2021
Estimated Useful Life
Construction in progress (1)
$
1,428,217
$
—
Machinery & equipment
1,374,293
72,392
5 - 7 years
Leasehold improvements
345,709
339,422
Lesser of the useful life of the asset or remaining life of the lease
Computer equipment
152,699
47,503
3 years
Software
127,193
18,714
3 years
Research and development equipment
100,939
12,810
3 years
Furniture and fixtures
6,968
6,968
5 years
3,536,018
497,809
Less: accumulated depreciation
( 342,977 )
( 123,334 )
Property and equipment, net
$
3,193,041
$
374,475
(1) Consists primarily of $ 1,198,733 for the construction of an automation facility and $ 184,484 for the construction of the mezzanine.
Depreciation expense amounted to $ 219,643 and $ 66,667 , respectively, for the years ended December 31, 2022 and 2021, respectively, which is included in selling, general and administrative and research and development expenses in the consolidated statements of operations.
NOTE 6 - INTANGIBLE ASSETS
The Company’s intangible assets consist of the following:
December 31,
2022
2021
Patent
$
218,000
$
218,000
Intellectual property
543,572
—
761,572
218,000
Less: accumulated amortization
( 40,804 )
( 1,048 )
Intangible assets, net
$
720,768
$
216,952
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2021, the Company acquired a patent for consideration of $ 218,000 . This long-lived intangible asset has a useful life of approximately 17.3 years and is being amortized on a straight-line basis and tested for impairment on an annual basis.
On October 5, 2022 the Company acquired intellectual property with an aggregate cost of $ 543,572 (see Note 3 - Asset Purchase). This long-lived intangible asset has a useful life of 5 years and is being amortized on a straight-line basis and tested for impairment on an annual basis.
During the years ended December 31, 2022 and 2021, the Company recognized amortization expense related to intangible assets of $ 39,756 and $ 1,048 , respectively. As of December 31, 2022, the Company had no impairments of its intangible assets.
The weighted average remaining amortization period of the Company’s intangible assets is 8.0 years. Future amortization of intangible asset is as follows:
For the Years Ended December 31, 2022
2023
$
121,293
2024
121,293
2025
121,293
2026
121,293
2027
94,114
Thereafter
141,482
$
720,768
NOTE 7 - EQUIPMENT DEPOSITS
The Company entered into agreements with third party contractors for the design and build of a battery packaging and inspection automation system, and automated robotic tending system. As of December 31, 2022 and 2021, the Company had outstanding deposits of $ 3,514,937 and $ 2,153,950 , respectively, in connection with these agreements.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2022 and 2021, accrued expenses and other current liabilities consisted of the following:
As of December 31,
2022
2021
Professional fees
$
1,180,000
$
418,154
Payroll and vacation
464,453
302,101
Research and development
196,409
146,158
Subscriptions
65,000
—
Inventory
58,804
—
Accrued cost of sales
—
128,500
Board compensation
122,500
45,680
Marketing and advertising fees
3,999
37,810
Legal fees
2,000
—
Other
49,112
84,824
Total accrued expenses and other current liabilities
2,142,277
1,163,227
Add: Accrued interest, non-current
157,054
—
Total accrued expenses and other current liabilities
$
2,299,331
$
1,163,227
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - ACCRUED ISSUABLE EQUITY
A summary of the accrued issuable equity activity during the year ended December 31, 2022, is presented below:
As of December 31,
2022
2021
Beginning balance
$
290,721
$
128,380
Grant date value of share obligations
176,270
245,720
Cancellation of accrued issuable equity
( 92,000 )
—
Shares issued in satisfaction of accrued issuable equity
—
( 209,200 )
Mark-to-market
( 147,035 )
125,821
Ending balance
$
227,956
$
290,721
During the years ended December 31, 2022 and 2021, the Company entered into certain contractual arrangements for consulting services in exchange for a fixed number of shares of common stock of the Company. On the respective dates the contracts were entered into, the estimated fair value of the shares to be issued was an aggregate of $ 176,270 and $ 245,720 , respectively.
On October 5, 2022, the Company entered into an Asset Purchase Agreement (See Note 3, Asset Purchase), pursuant to which the Company agreed to issue 279,851 shares of common stock on each of the four anniversaries following the Asset Purchase Date, provided that the Seller has not terminated his employment with the Company as of the date of payment. Since all of the Equity Consideration is contingent upon the employment of the Seller, the grant date value of the accrued issuable shares will be accounted for as compensation expense, and will be recognized on a pro rata basis over the four-year employment requirement. As of December 31, 2022, the Company has accrued for the issuance of 69,963 shares of common stock, with an aggregate grant date value of $ 93,750 .
During the year ended December 31, 2021, the Company settled certain of its accrued issuable equity obligations through the issuance of an aggregate of 100,000 of its shares with an aggregate fair value of $ 209,200 , remeasured as of the date of settlement.
During the year ended December 31, 2022, the Company cancelled certain of its accrued issuable equity obligations of an aggregate of 33,333 of its shares, respectively, with an aggregate fair value of $ 92,000 , respectively, due to a reduction in investor relation services.
During the years ended December 31, 2022 and 2021, the Company recorded gains (losses) in the aggregate amount of $ 147,035 and ($ 125,821 ), respectively, related to the change in fair value of accrued issuable equity (see Note 13 – Stockholders’ Equity, Stock-Based Compensation for additional details). The fair value of the accrued but unissued shares as of December 31, 2022 and 2021 was $ 227,956 and $ 290,721 , respectively.
NOTE 10 – PREPAID ADVANCE LIABILITY
The Company’s prepaid advance liability consists of the following:
Original Issue
Prepaid Advance
Discount
Debt Discount
Net
Current portion
$
5,750,000
$
302,579
$
( 396,967 )
$
5,655,612
Non-current portion
3,250,000
171,052
( 224,374 )
3,196,678
Total prepaid advance liability
$
9,000,000
$
473,631
$
( 621,341 )
$
8,852,290
On September 23, 2022, the Company entered into a Supplemental Agreement (the “Supplemental Agreement”) to its Standby Equity Purchase Agreement (the “SEPA”) with Yorkville. Under the Supplemental Agreement, the Company may from time-to-time request advances of up to $ 15,000,000 (each, a “Prepaid Advance”) from Yorkville with a limitation on the aggregate amount of such advances of $ 50,000,000 . At any time that there is a balance outstanding under a Prepaid Advance, the Company is not permitted to deliver Advance Notices (as defined in Note 11, Stockholders’ Equity) under the SEPA.
Each Prepaid Advance matures 12 months after the date of the closing of such advance (the “Prepaid Advance Date”), and accrues interest at 10 % per annum, subject to an increase to 15 % per annum upon events of default as defined. Any Prepaid Advance balance that remains outstanding at maturity must be repaid in cash.
F-22
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of the Supplemental Agreement, Yorkville has the right to receive shares to pay down Prepaid Advances, 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 at a price equal to the lower of (a) 135 % of the volume weighted average price (“VWAP”) of the Company’s common stock on the day immediately prior the closing of the Prepaid Advance, or (b) 95 % of the lowest VWAP during the three days immediately prior to the Investor Notice.
The Company may prepay amounts owed for a Prepaid Advance in cash, provided that the Company gives Yorkville 10 days ’ notice of its intent to repay in cash (the “Prepayment Notice”) and provided that the daily VWAP of the Company’s common stock on the date of Prepayment Notice is not less than $ 0.75 . The prepayment amount will be delivered on the 11th trading day after the Prepayment Notice, such that Yorkville has 10 days to deliver an Investor Notice with respect to the outstanding Prepaid Advance. The prepayment amount will be equal to the amount of Prepaid Advance to be repaid, plus all accrued and unpaid interest owed on the Prepaid Advance, as well as a payment premium equal to 5 % of the principal amount being repaid.
Upon the occurrence of certain triggering events, as defined, the Company may be required to make monthly repayments of amounts outstanding under a Prepaid Advance, with each monthly repayment to be in an amount equal to the sum of (x) $ 3.0 million, (y) 5 % (the “Payment Premium”) in respect of such amount, and (z) all outstanding accrued and unpaid interest in respect of such Prepaid Advance as of each payment date.
On September 23, 2022, the Company recorded an initial Prepaid Advance liability in the amount of $ 15,789,474 , which consisted of $ 15,000,000 of gross cash proceeds (the “Initial Advance”), plus an original issue discount of $ 789,474 . Of the $ 15,000,000 Initial Advance amount, $ 3,850,000 was used to repay amounts due under a Note Purchase Agreement with Yorkville. The Company incurred $ 85,000 of legal and professional fees in connection with its entry into the Supplemental Agreement. The original issue discount and legal and professional fees incurred were recorded as a debt discount, which will be amortized ratably over the term of the Initial Advance.
As of December 31, 2022, the Company has issued 5,375,269 shares of common stock as partial repayment of the Initial Advance principal in the amount of $ 6,000,000 and premium and interest in the amount of $ 315,843 and $ 125,000 , respectively. The balance of Prepaid Advance Liability as of December 31, 2022 is $ 8,852,290 , which consists of the remaining Initial Advance balance of $ 9,000,000 , plus $ 473,631 original issue discount on the remaining Initial Advance balance, net of unamortized debt discount of $ 621,341 .
During the year ended December 31, 2022, the Company recorded interest expense in the amount of $ 282,054 and recorded amortization of debt discount in the amount of $ 253,133 in connection with the Prepaid Advance liability.
Subsequent to December 31, 2022, the Company issued 3,153,036 shares of common stock in satisfaction of the Initial Advance liability in the amount of $ 3,250,000 and interest accrued through March 2023 in the amount of $ 329,932 (see Note 17, Subsequent Events). As a result, $ 3,196,678 of Prepaid Advance Liability at December 31, 2022 (consisting of $ 3,250,000 of Initial Advance balance, plus $ 171,052 original issue discount, less $ 224,374 of unamortized debt discount) as well as $ 157,054 of accrued interest payable as of December 31, 2022, are classified as a non-current liability on the accompanying consolidated balance sheet.
NOTE 11 – LEASES
The Company leases office space in San Diego, California. The lease, as amended, provided for monthly rental payments of $ 5,127 , and the lease term expired on June 30, 2021. Subsequent to the expiration of the lease term, the Company entered into a verbal agreement with the landlord to continue occupying the space on a month-to-month basis until the Company eventually moved out in October 2021. The Company evaluated this operating lease and determined that the short-term exemption available under ASC 842 applied since the lease term is less than 12 months and the lease does not include a purchase option whose exercise is reasonably certain. Since the short-term exemption applies, lease payments are recognized as an expense and no right of use asset or lease liability was recorded related to this lease.
On April 5, 2021, the Company entered into a new lease agreement for office space in San Diego, California, effective June 1, 2021. The initial lease term is three years and there is an option to renew for an additional five years . Management does not expect to exercise its option to renew. Monthly rental payments under the new lease begin at $ 23,787 , which is comprised of $ 18,518 of base rent plus
F-23
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ 5,268 of common area maintenance fees, with annual escalation of 3.5 %. The Company paid a security deposit of $ 50,213 in connection with the new lease agreement.
The Company determined that the value of the lease liability and the related right-of-use asset at inception was $ 814,817 , using an estimated incremental borrowing rate of 5 % based on information available at the commencement date of the lease.
During the years ended December 31, 2022 and 2021, operating lease expense was $ 231,116 and $ 223,548 respectively. As of December 31, 2022, the Company does not have any financing leases.
Maturities of lease liabilities as of December 31, 2022 were as follows:
Maturity Year
Amount
2023
234,694
2024
99,187
Total lease payments
333,881
Less: Imputed interest
( 12,278 )
Present value of lease liabilities
321,603
Less: current portion
( 223,645 )
Lease liabilities, non-current portion
$
97,958
Supplemental cash flow information related to the lease was as follows:
For the Years Ended
December 31,
2022
2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating lease
$
205,034
$
144,540
Right-of-use asset obtained in exchange for lease obligations
Operating lease
$
—
$
814,817
NOTE 12 – NOTES PAYABLE
During the year ended December 31, 2021, the Company repaid principal on notes payable (the 2021 Notes Payable) to Yorkville in the aggregate amount of $ 2,450,000 , such that the balance on the notes payable was $ 0 at December 31, 2021. The Company paid debt redemption costs in the aggregate amount of $ 140,000 , which were recognized as expense during the year ended December 31, 2021 (see Note 15 – Stockholders’ Equity for additional details).
The Company recorded amortization expense related to the debt discount on the 2021 Notes Payable of $ 128,198 during the year ended December 31, 2021.
On May 13, 2022, the Company entered into a note purchase agreement with Yorkville, pursuant to which Yorkville purchased a full recourse promissory note with an initial principal amount equal to $ 5,000,000 (the “Promissory Note”) for net cash proceeds of $ 4,750,000 . The Promissory Note included an original issue discount of $ 250,000 , which represents the difference between the principal amount of the Promissory Notes and the proceeds received. The Company also incurred a structuring fee of $ 10,000 , and legal fees of $ 7,200 in connection with the Promissory Note. The original issue discount, along with structuring fees were recorded as a debt discount to be amortized over the term of the Note using the effective interest rate method. The Promissory Note carries an interest rate of 10 % per annum. As of December 31, 2022, the Company had fully repaid the principal and interest due in the amounts of $ 5,000,000 and $ 165,493 , respectively, of which $ 3,850,000 and $ 0 , respectively, were paid from the proceeds of the Initial Advance (see Note 10 - Prepaid Advance Liability).
During the year ended December 31, 2022, the Company recorded (i) interest expense related to the Promissory Note in the amount $ 650,493 , which included $ 165,493 of stated interest, a 10 % payment premium in the amount of $ 385,000 and a late payment premium in the amount of $ 100,000 , (ii) amortization of debt discount in the amount of $ 258,692 , and (iii) a gain on the extinguishment of debt in the amount of $ 8,508 , which represented the unamortized portion of debt discount on the date that the debt was extinguished.
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity related to the Promissory Note during the year ended December 31, 2022.
Notes
Debt
Payable
Discount
Total
Balance, January 1, 2022
$
—
$
—
—
Proceeds from promissory note
5,000,000
( 250,000 )
4,750,000
Debt discount
—
( 17,200 )
( 17,200 )
Repayments in cash
( 4,850,000 )
—
( 4,850,000 )
Repayments in shares of common stock
( 150,000 )
—
( 150,000 )
Amortization of debt discount
—
258,692
258,692
Loss on debt extinguishment
—
8,508
8,508
Outstanding, December 31, 2022
$
—
$
—
$
—
NOTE 13 – LOAN PAYABLE
On April 27, 2020, the Company received $ 155,226 of cash proceeds pursuant to an unsecured loan (the “PPP” Loan) provided in connection with the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (“CARES Act”). The PPP Loan, along with interest accrued in the amount of $ 3,449 was forgiven on July 18, 2022, and the Company recorded a gain on the forgiveness of the loan in the aggregate amount of $ 158,675 , which is reflected in other income on the accompanying statements of operations.
The Company recorded interest expense of $ 825 and $ 1,701 during the years ended December 31, 2022 and 2021, respectively.
NOTE 14 - INCOME TAXES
The income tax provision for the years ended December 31, 2022 and 2021 consists of the following:
For the Years Ended
December 31,
2022
2021
Federal:
Current
$
—
$
—
Deferred
( 3,967,600 )
( 2,359,473 )
State and local:
Current
—
—
Deferred
( 1,133,600 )
( 996,095 )
( 5,101,200 )
( 3,355,568 )
Change in valuation allowance
5,101,200
3,355,568
Income tax provision
$
—
$
—
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
For the Years Ended
December 31,
2022
2021
Tax benefit at federal statutory rate
( 21.0 )
%
( 21.0 )
%
State income taxes, net of federal benefit
( 6.0 )
%
( 6.0 )
%
Permanent differences
( 0.1 )
%
( 1.0 )
%
Other and prior year true-ups
0.9
%
0.0
%
Change in valuation allowance
26.2
%
28.0
%
Effective income tax rate
0.0
%
0.0
%
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KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has determined that a valuation allowance for the entire net deferred tax asset is required. A valuation allowance is required if, based on the weight of evidence, it is more likely than not that some or the entire portion of the deferred tax asset will not be realized. After consideration of all the evidence, management has determined that a full valuation allowance is necessary to reduce the deferred tax asset to zero.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below:
For the Years Ended
December 31,
2022
2021
Deferred Tax Assets (Liabilities):
Net operating loss carryforwards
$
9,078,972
$
4,978,331
Research and development credit carryforwards
101,422
270,188
Capitalized research and development costs
953,675
—
Stock-based compensation
1,587,800
981,067
Property and equipment
( 382,819 )
—
Debt Discount
( 16,384 )
—
Accruals and other
63,580
55,460
Gross deferred tax assets
11,386,246
6,285,046
Valuation allowance
( 11,386,246 )
( 6,285,046 )
Deferred tax asset, net of valuation allowance
$
—
$
—
Changes in valuation allowance
$
5,101,200
$
3,355,568
At December 31, 2022 and 2021, the Company had federal net operating loss carry forwards of approximately $ 33.7 million and $ 18.6 million, respectively. At December 31, 2022, approximately $ 3.4 million of federal net operating losses will expire from 2033 to 2037 , and approximately $ 30.3 million will have no expiration. At December 31, 2022 and 2021, the Company had state net operating loss carry forwards of approximately $ 33.6 and $ 18.1 million, respectively, which will begin to expire in 2024.
The net operating loss carryovers may be subject to annual limitations under Internal Revenue Code Section 382, and similar state provisions, should there be a greater than 50% ownership change as determined under the applicable income tax regulations. The amount of the limitation would be determined based on the value of the company immediately prior to the ownership change and subsequent ownership changes could further impact the amount of the annual limitation. An ownership change pursuant to Section 382 may have occurred in the past or could happen in the future, such that the NOLs available for utilization could be significantly limited.
The Company files federal and state (California) tax returns which are subject to audit for the years ending on or after December 31, 2019. No tax audits were commenced or were in process during the years ended December 31, 2022 and 2021.
NOTE 15 - STOCKHOLDERS’ EQUITY
Authorized Capital
The Company is authorized to issue 500,000,000 shares of common stock, par value of $ 0.0001 per share, and 20,000,000 shares of preferred stock, par value of $ 0.0001 per share. The holders of the Company’s common stock are entitled to one vote per share. The preferred stock is designated as follows: 1,000,000 shares designated as Series A Preferred Stock, 31,000 shares designated as Series B Convertible Preferred Stock, 400 shares designated as Series C Preferred Stock, and 650 shares designated as Series D Convertible Preferred Stock.
Equity Incentive Plan
On August 15 and November 5, 2018, the Board of Directors and a majority of the Company’s shareholders, respectively, approved the 2018 Equity Incentive Plan (the “2018 Plan”). Under the 2018 Plan, 15,000,000 shares of common stock of the Company 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
its affiliates. The 2018 Plan requires the exercise price of stock options to be not less than the fair value of the Company’s common stock on the date of grant. As of December 31, 2022, there were 10,174,005 shares available for issuance under the 2018 Plan.
Standby Equity Purchase Agreement
On May 13, 2022, the Company entered into the SEPA with Yorkville. Pursuant to the SEPA, the Company has the right, but not the obligation, to sell to Yorkville up to an aggregate of $ 50,000,000 of its shares of common stock, par value $ 0.0001 per share, at the Company’s request any time during the commitment period commencing on May 13, 2022 and terminating on the first day of the month following the 24-month anniversary of the SEPA.
Each sale (an “Advance”) that the Company requests under the SEPA (via an “Advance Notice”) may be for a number of shares of common stock with an aggregate value of up to $ 5,000,000 . Shares are sold under the SEPA at 98.0 % of the average of the VWAPs during each of the three consecutive trading days commencing on the trading day following the Company’s submission of an Advance Notice to Yorkville. Advances are subject to certain limitations, including that Yorkville will not purchase any shares that would result in it owning more than 4.99% of the Company’s outstanding common stock at the time of an Advance, or more than the amount of shares registered under the registration statement in effect at the time of the Advance. Further, the aggregate amount of shares purchased under the SEPA (as defined) cannot exceed 19.9% of the Company’s outstanding common stock as of the date of the SEPA.
Through December 31, 2022, the Company issued Advance Notices to for the issuance of 255,240 shares of common stock valued at $ 399,018 pursuant to the SEPA, of which 94,458 shares valued at issuance at $ 150,000 , were issued in satisfaction of Notes Payable to Yorkville.
On September 23, 2022, the Company entered into the Supplemental Agreement to the SEPA and received a Prepaid Advance in the amount of $ 15,000,000 pursuant to the Supplemental Agreement (see Note 10 – Prepaid Advance Liability). At any time that there is a balance outstanding under a Prepaid Advance, the Company is not permitted to deliver Advance Notices under the SEPA.
Series A Preferred Stock
Each record holder of Series A Preferred Stock shall have the right to vote on any matter with holders of the Company’s common stock and other securities entitled to vote, if any, voting together as one class. Each record holder of Series A Preferred Stock is entitled to one-hundred votes per share of Series A Preferred Stock held by such holder.
The Series A Preferred Stock is not convertible into any series or class of stock of the Company. In addition, holders of the Series A Preferred Stock shall not be entitled to receive dividends, nor do they have a right to distribution from the assets of the Company in the event of any liquidation, dissolution, or winding up of the Company.
On November 5, 2018, the Company received a written consent of the majority of the stockholders to issue 1,000,000 shares of the Company’s Series A Preferred Stock to Mr. Mo, if necessary, as a measure to protect the Company from an uninvited takeover. As of the date of filing, the shares of Series A Preferred Stock have not been issued.
Series B Convertible Preferred Stock
Holders of shares of Series B Convertible Preferred Stock are not entitled to voting rights or dividend rights. The Series B Convertible Preferred Stock does not contain any redemption provisions or other provisions requiring cash settlement within control of the holder. Series B Convertible Preferred Stock is senior in liquidation preference to common stock. Each share of Series B Convertible Preferred Stock, after 181 days after issuance and without the payment of additional consideration, is convertible at the option of the holder into fifty ( 50 ) fully paid and non-assessable shares of common stock. It was determined that the embedded conversion option is clearly and closely related to the equity host, therefore it is not bifurcated and not accounted for as a derivative.
During the year ended December 31, 2021, the Company issued an aggregate of 698,600 shares of common stock upon the conversion of 13,972 shares of Series B Preferred stock, after which no Series B Convertible Preferred Stock remained outstanding.
There are no Series B Convertible shares available to issue at December 31, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C Convertible Preferred Stock
Series C Convertible Preferred Stock is senior in liquidation preference to the Company’s common stock for an amount equal to the stated value per share of $ 10,000 (“Stated Value”). Holders of shares of Series C Convertible Preferred Stock shall vote on an as-if-converted-to-common-stock basis with the common stockholders. Holders of shares of Series C Convertible Preferred Stock are entitled to receive dividends when, as and if declared by the Board of Directors, at an annual rate of twelve percent ( 12 )% beginning one year after each share’s issuance. The Company may elect to redeem all or part of each share of Series C Convertible Preferred Stock for the Stated Value.
There are no Series C Convertible shares outstanding or available to issue at December 31, 2022.
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 at the closing of the Offering. The closing of the Offering occurred on May 20, 2021. In connection with the closing of the financing, the Company repaid in full its aggregate remaining notes payable obligation of $ 1,400,000 .
The Series D Preferred have a fixed conversion price of $ 2.05 , are convertible into an aggregate of 3,170,730 shares of common stock and have the right to vote on an as-converted basis. Holders of the Series D Preferred shall be entitled to receive cumulative dividends annually at an annual rate equal to ten percent ( 10 %). Dividends shall be payable in cash or, at the option of the holder of the Series D Preferred, converted into shares of common stock as provided in the certificate of designation for the Series D Preferred. Provided that the shares of common stock issuable upon conversion of the Series D Preferred is registered pursuant to an effective registration statement, the Company shall have the option, but not the obligation, to redeem, in cash, all or part of the Series D Preferred.
The Company determined that the Series D Preferred was permanent equity given that there was no redemption provision at the holder’s option and it was determined that the conversion option was clearly and closely related to the equity host, so it didn’t need to be bifurcated. The Company further determined that the $ 10,000 cash structuring fee, debt redemption costs of $ 140,000 , and the remaining notes payable obligation of $ 1,400,000 paid to the investor, would be accounted for as a reduction of the $ 6,500,000 of gross proceeds. The remaining proceeds of $ 6,490,000 were allocated on a relative fair value basis to the Series D Preferred ($ 3,875,675 ), the commitment shares ($ 1,339,582 ) and the Warrant ($ 1,274,743 ). The Company used the Black-Scholes option pricing model to determine the fair value of the Warrant using the following assumptions: exercise price of $ 2.50 per share, market price of $ 2.05 per share, expected term of 1.0 year, volatility of 142 % and a risk-free interest rate of 0.05 %. Finally, the Company determined that the Series D Preferred had a beneficial conversion feature equal to $ 2,624,326 which is a deemed dividend and represents an adjustment to the numerator in the loss per share calculation. The cash issuance costs of $ 365,000 (inclusive of the $ 10,000 cash structuring fee) were charged to additional paid-in-capital.
On June 17, 2021, all of the outstanding shares of Series D Preferred were converted into 3,170,730 shares of common stock, after which no Series D Convertible Preferred Stock remained outstanding.
There are no Series D Convertible shares available at December 31, 2022.
Common Stock
During the year ended December 31, 2021, the Company issued an aggregate of 170,000 shares of immediately vested common stock with a grant date value of $ 376,909 for legal and consulting services and issued 6,000 shares with a grant date value of $ 18,000 related to the acquisition of an intangible asset during the year ended December 31, 2021.
During the year ended December 31, 2021, KULR issued an aggregate of 184,784 shares of common stock upon the exercise of options.
During the year ended December 31, 2021, KULR issued an aggregate of 6,793,358 shares of our common stock upon the exercise of warrants.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2022, the Company issued an aggregate of 51,000 shares of immediately vested common stock with a grant date value of $ 109,850 for legal and consulting services.
During the year ended December 31, 2022, the Company issued an aggregate of 2,416,668 shares of common stock upon the exercise of warrants pursuant to which the Company received an aggregate of $ 3,020,835 of gross proceeds.
Treasury Stock
Pursuant to the exercise of options, the Company transferred 63,542 shares that were held in treasury for an aggregate of $ 48,382 gross proceeds. As of December 31, 2022, the Company has 131,162 shares held in treasury valued at their cost of $ 296,222 . During the year ended December 31, 2022, the company withheld 194,704 shares valued at $ 439,728 for employee income tax withholding obligations in connection with the vesting of restricted common stock during the period.
Warrants
A summary of warrants activity during the year ended December 31, 2022 is presented below:
Weighted
Weighted
Average
Average
Number of
Exercise
Remaining
Intrinsic
Warrants
Price
Term (Yrs)
Value
Outstanding, January 1, 2022
2,594,553
$
1.25
Issued
2,346,525
1.00
Exercised
( 2,416,668 )
( 1.25 )
Expired
—
—
Forfeited
—
—
Outstanding, December 31, 2022
2,524,410
$
1.02
3.0
$
492,770
Exercisable, December 31, 2022
2,524,410
$
1.02
3.0
$
492,770
A summary of outstanding and exercisable warrants as of December 31, 2022 is presented below:
Warrants Outstanding
Warrants Exercisable
Weighted
Outstanding
Average
Exercisable
Exercise
Number of
Remaining Life
Number of
Price
Warrants
In Years
Warrants
$
1.25
177,885
3.0
177,885
$
1.00
2,346,525
3.0
2,346,525
2,524,410
3.0
2,524,410
Stock-Based Compensation
During the years ended December 31, 2022 and 2021, the Company recognized stock-based compensation expense of $ 4,175,014 and $ 4,200,091 , respectively, related to restricted common stock, warrants and stock options, of which $ 4,136,494 and $ 4,171,241 , respectively are included within selling, general and administrative expenses, and $ 38,520 and $ 28,850 , respectively are included within research and development expenses on the consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information related to stock-based compensation for the years ended December 31, 2022 and 2021:
For the Years Ended
December 31,
2022
2021
Common stock issued for services
$
109,850
$
167,710
Accrued issuable equity (common stock)
84,270
245,719
Amortization of stock options
103,220
68,239
Amortization of market-based awards
1,932,402
2,111,845
Amortization of restricted stock units
1,945,272
1,606,578
Total
$
4,175,014
$
4,200,091
Stock Options
A summary of options activity (excluding market-based option awards) during the year ended December 31, 2022 is presented below:
Weighted
Weighted
Average
Average
Number of
Exercise
Remaining
Intrinsic
Options
Price
Term (Yrs)
Value
Outstanding, January 1, 2022
405,216
$
2.29
Granted
330,000
1.71
Exercised
( 66,042 )
0.71
Expired
—
—
Forfeited
( 28,958 )
1.49
Outstanding, December 31, 2022
640,216
$
1.72
3.6
$
60,767
Exercisable, December 31, 2022
199,174
$
1.43
2.1
$
58,476
The following table presents information related to stock options (excluding market-based option awards) as of December 31, 2022:
Options Outstanding
Options Exercisable
Weighted
Outstanding
Average
Exercisable
Exercise
Number of
Remaining Life
Number of
Price
Options
In Years
Options
$ 0.66
110,486
1.0
106,320
$ 1.28 - $ 1.50
140,000
—
—
$ 1.55 - $ 1.99
90,000
3.4
5,208
$ 2.05 - $ 2.44
299,730
3.4
87,646
640,216
2.1
199,174
For the years ended December 31, 2022 and 2021, the weighted average grant date fair value per share of options was $ 1.23 and $ 0.80 , respectively.
The Company has computed the fair value of stock options granted using the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company used the following assumptions:
For the Years Ended
December 31,
2022
2021
Risk free interest rate
1.18 % - 4.54
%
0.20 % - 0.85
%
Expected term (years)
3.5 - 3.9
2.5 - 3.5
Expected volatility
104 % - 116
%
93 % - 109
%
Expected dividends
0
%
0
%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option forfeitures are accounted for at the time of occurrence. The expected term used is the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. The Company does not yet have a trading history to support its historical volatility calculations. Accordingly, the Company is utilizing an expected volatility figure based on a review of the historical volatility of comparable entities over a period of time equivalent to the expected life of the instrument being valued. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
As of December 31, 2022, there was $ 442,199 of unrecognized stock-based compensation expense related to the above stock options, which will be recognized over the weighted average remaining vesting period of 3.1 years.
Market-Based Awards and Exchange for Restricted Stock Units
On March 1, 2021, in connection with the appointment of the Company’s Chief Operating Officer (the “COO”), the COO became eligible to receive of up to 1,500,000 shares of the Company’s common stock which would be earned based upon achieving certain market capitalization milestones up to $ 4 billion (the “Market-based RSU Award”). The grant date value of this award of $ 2,911,420 was determined using a Monte Carlo valuation model for market-based vesting awards, and was amortizable over each of the tranches’ prospective derived service period.
On June 10, 2021, the Chief Executive Officer (the “CEO”) received an option for the purchase of up to 1,500,000 shares of the Company’s common stock at an exercise price of $ 2.60 per share (the “Market-based Option Award”, and together with the Market-based RSU Award, the “Market-based Awards”), which would be earned based upon achieving certain market capitalization milestones up to $ 4 billion. The grant date value of this award of $ 2,579,000 was determined using a Monte Carlo valuation model for market-based vesting awards, and was amortizable over each of the tranches’ prospective derived service period.
On November 1, 2022 (the “Modification Date”), the Board approved the termination of the Market-Based Awards and approved the grant of 1,500,000 restricted stock units (the “RSUs”) with a grant date fair value of $ 3,075,000 , to each of the COO and CEO (the “Grantees”). The grant date value was determined using the stock price per share immediately preceding the Board approval of the grant. The RSUs will vest in four equal installments over the course of four years in accordance with the following schedule:
Number of
Restricted Stock
Vesting Date
Units That Vest
November 1, 2023
750,000
November 1, 2024
750,000
November 1, 2025
750,000
November 1, 2026
750,000
The exchange of RSUs for the Market-based Awards was accounted for as a modification of stock awards; as such, the amortizable value of the RSUs was determined to be $ 4,226,175 , which represents the unrecognized grant-date fair value of the Market-based awards of $ 1,446,175 , plus $ 2,780,000 representing the incremental fair value of the RSUs over the fair value of the Market Based Awards at the modification date.
The following assumptions were used in applying the Monte Carlo valuation model to the Company’s market-based awards on each of the measurement dates described above.
November 1,
March 1,
June 10,
2022
2021
2021
Risk free interest rate
4.33
%
0.71
%
0.73
%
Expected volatility
100.0
%
98.9
%
98.5
%
Expected dividend yield
0
%
0
%
0
%
Expected term
3.3 years
2.1 years
2.2 years
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Restricted Common Stock
The following table presents information related to restricted stock awards and restricted stock units (excluding Market-Based RSU Awards) as of December 31, 2022:
Weighted Average
Shares of Restricted
Grant Date
Common Stock
Fair Value
Non-vested balance, January 1, 2022
2,590,000
$
2.52
Granted
3,310,000
2.05
Vested
( 857,500 )
2.38
Canceled
—
—
Non-vested shares, December 31, 2022
5,042,500
$
2.23
During the year ended December 31, 2021, KULR issued as incentive shares to its employees, an aggregate of 2,677,744 shares of our restricted common stock, of which, 117,744 shares were subsequently cancelled.
As of December 31, 2022, there was $ 7,813,665 of unrecognized stock-based compensation expense related to restricted stock that will be recognized over the weighted average remaining vesting period of 3.1 years.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Patent License Agreement
On March 21, 2018, the Company entered into an agreement with the National Renewable Energy Laboratory (“NREL”) granting the Company an exclusive license to commercialize its patented Internal Short Circuit technology. The agreement is effective for as long as the licensed patents are enforceable, subject to certain early termination provisions specified in the agreement. In consideration, the Company agreed to pay to NREL the following: (i) a cash payment of $ 12,000 payable over one year, (ii) royalties ranging from 1.5 % to 3.75 % on the net sales price of the licensed products, as defined in the agreement, with minimum annual royalty payments ranging from $ 0 to $ 7,500 . In addition, the Company shall use commercially reasonable efforts to bring the licensed products to market through a commercialization program that requires that certain milestones be met, as specified in the agreement. During the years ended December 31, 2022 and 2021, the Company recorded royalty expense of $ 6,304 and $ 2,558 , respectively, which were included within cost of revenues.
Technology Development and Sponsorship Agreement
On March 31, 2021, the Company entered into a multi-year technology development and sponsorship agreement, pursuant to which the Company has committed to spend an aggregate of $ 900,000 in sponsorship fees, payable in three installments, of which $ 250,000 was paid on April 1, 2021, $ 300,000 was paid on January 31, 2022, and $ 350,000 is due during the first quarter of 2023. Payments under this agreement are initially recorded as a prepaid expense and are then amortized over the performance period. During the years ended December 31, 2022 and 2021, $ 300,000 and $ 250,000 , respectively, of sponsorship fees expense were recognized related to this agreement.
In addition, the Company has committed to paying an aggregate of $ 750,000 related to technology co-development fees, which is to be paid in three equal installments. As of December 31, 2022, the co-development technologies had not been agreed to and no portion of the technology co-development fees has been paid.
On December 16, 2021, the Company entered into a one-year sponsorship agreement (the “Second Sponsorship Agreement”) which provides the Company with the right to display its name and logo during certain events during the period from January 1, 2022 through December 31, 2022. During the year ended December 31, 2022, the Company recorded $ 1,350,000 of sponsorship fees expense related to this agreement.
On June 15, 2022, the Company amended the Second Sponsorship Agreement to extend the term through December 31, 2023. The agreement provides the Company with the right to publicize and highlight the sponsorship and display its name and logo during certain events and use digital marketing and social media platforms throughout the 2023 calendar year. The Company has committed to pay an aggregate of $ 1,450,000 in sponsorship fees in three installments, of which $ 500,000 was paid in July 2022, $ 475,000 was paid in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 2023, and $ 475,000 is payable in April 2023. As of December 31, 2022, $ 500,000 is included in prepaid expenses (see Note 4 - Prepaid Expenses and Other Current Assets) and will be amortized over the performance period of January 1, 2023 to December 31, 2023 using the straight-line method.
Research and Development Agreements
On April 5, 2021, the Company entered into a two-year research and development agreement to develop high-areal-capacity battery electrodes to increase the energy density of batteries. Pursuant to the terms of the agreement, the Company has committed to spend an aggregate amount of $ 580,375 , payable in eight quarterly installments of $ 72,547 . During the years ended December 31, 2022 and 2021, $ 290,188 and $ 217,641 , respectively, of research and development expense was recognized related to this agreement.
On August 18, 2021, the Company entered into a multi-year research and development agreement for a solid-state rechargeable battery, pursuant to which the Company has committed to spend an aggregate amount of $ 592,196 in eight quarterly payments of $ 74,025 . During the years ended December 31, 2022 and 2021, $ 296,100 and $ 123,375 , respectively, of research and development expense was recognized related to this agreement.
Consulting Agreement
On September 30, 2020, the Company entered into a 2-year consulting agreement with a contractor to provide services as an Advisory Board Member related to government and defense acquisitions in exchange for 60,000 shares of restricted common stock. Pursuant to the consulting agreement, the shares are subject to the Company’s claw back, based upon the satisfaction of meeting general performance parameters. As of December 31, 2022, the grant date fair value of the common stock was recognized as stock-based compensation expense ratably over the vesting period.
During the years ended December 31, 2022 and 2021, $ 25,545 and $ 46,455 of expense was recognized as stock-based compensation under this agreement. See Note 15 – Stockholders’ Equity for additional details.
Election of Directors and Appointment of Certain Officers
On November 1, 2022, the Board of the Company appointed a Lead Independent Director (“Lead Director”) and a non-Lead Independent Director (“non-Lead Director”) of the Board, to hold office until the earlier of the expiration of the term of office of the director whom they have replaced, successors are duly elected and qualified, or the earlier of such director’s death, resignation, disqualification, or removal. Furthermore, the Lead Director will receive annual cash compensation equal to $ 150,000 upon their appointment and the non-Lead Independent Director (“non-Lead Director”) will receive annual cash compensation equal to $ 95,000 . Additionally, all independent Board members will be granted 37,500 shares of common stock of which shares shall vest quarterly in 7,500 share installments with the first installment vesting December 31, 2022.
On March 16, 2022, the Company hired an individual to serve as the Director of Engineering. Effective November 1, 2022, the Company appointed this individual as Chief Technology Officer (the “CTO”) of the Company, upon which the Company issued 100,000 shares of restricted common stock with an aggregate grant date value of $ 205,000 , which shall vest in four equal annual installments beginning November 1, 2023.
NOTE 17 - SUBSEQUENT EVENTS
Prepaid Advance Liability
Subsequent to December 31, 2022, the Company issued 3,153,036 shares of common stock, at purchase prices per share ranging from $ 0.90 to $ 1.20 , pursuant to Investor Notices submitted by Yorkville for aggregate proceeds of $ 3,579,932 . The proceeds were applied against the principal and interest due for Initial Advance in the aggregate amounts of $ 3,250,000 and $ 329,932 , respectively. As of March 28, 2023, the remaining balance on the Initial Advance is $ 5,750,000 . See Note 10 – Prepaid Advance Liability for additional information.
On March 10, 2023, the Company and Yorkville agreed and closed on a second Prepaid Advance for $ 2,000,000 (the “Second Advance”). Interest accrues on the outstanding balance of each Prepaid Advance at an annual rate of 10 %, subject to an increase to 15 % upon events of default as defined.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease
On January 18, 2023, the Company entered into a new lease agreement for office space in Webster, Texas. The initial lease term is twelve months and thirteen days . Monthly rental payments under the new lease are $ 5,047 , which is comprised of $ 4,245 of base rent plus $ 802 of common area maintenance fees.
The Company determined that the value of the lease liability and the related right-of-use asset at inception was $ 51,154 , using an estimated incremental borrowing rate of 5 %.
Patent License Agreement
During February 2023, the Company entered into a licensing agreement whereby the Company obtained an exclusive license to commercialize its patented Format Fractional Thermal Runaway Calorimeter. The agreement is effective for as long as the licensed patents are enforceable, subject to certain early termination provisions specified in the agreement. In consideration, the Company agreed to pay the following: (i) a cash payment of $ 60,000 payable upon the execution of this agreement, (ii) royalties of 5.5 % on the net sales price of royalty-based products, and services for each accounting period, as defined in the agreement, with minimum annual royalty payments of $ 20,000 for each accounting period. In addition, the Company shall establish: (a) that a market for the licensed invention has been created, and to the extent practicable, that a market has been created in the United States; (b) that it is being utilized; (c) that its benefits are, to the extent permitted by law or Government regulations, available to the public on reasonable terms; and (d) that market demand, at least in the United States, shall be reasonably met.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.