KULR Technology Group, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc. (“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of and for the years ended December 31, 2023 and 2022 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included in Item 8 in this Annual Report. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in Item 1A “Risk Factors” in this Annual Report, and other factors that we may not know. Overview KULR Technology Group, Inc., through our wholly-owned subsidiary KULR Technology Corporation, develops and commercializes high-performance thermal management technologies for batteries, electronics, and other components across an array of battery-powered applications. For aerospace and Department of Defense (“DOD”) applications, our solutions target high performance applications in direct energy, hypersonic vehicles and satellite communications. For commercial applications, our main focus is a total solution to battery safety and sustainability by which we aim to mitigate the effects of thermal runaway propagation which has been known to cause random fires in lithium-ion (“Li-ion”) batteries. This total battery safety solution can be used for electric vehicles, energy storage, battery recycling transportation, cloud computing and 5G communication devices. Our proprietary core technology is a carbon fiber material that provides what we believe to be superior thermal conductivity and heat dissipation for an ultra-lightweight and pliable material. By leveraging our proprietary cooling solutions that have been developed through longstanding partnerships with advanced technology users like NASA, the Jet Propulsion Lab and others, our products and services make commercial battery powered products safer and electronics systems cooler and lighter. KULR’s business model continues to evolve from being a component supplier, to providing more design and testing services to our customers. The next step of evolution is to provide total system solutions to address market needs. In order to scale up as a systems provider more quickly and efficiently in (i) the Li-ion battery energy storage and recycling markets, (ii) battery cell design and safety testing, and (iii) advanced thermal management systems, such as hypersonic vehicles, KULR will actively seek partners for joint venture, technology licensing and other strategic partnership models. The goal is to leverage the Company’s thermal design technology expertise to create market leading products, which KULR will take to market directly to capture more value for KULR shareholders. We have not yet achieved profitability and expect to continue to incur cash outflows from operations, as a result, we will eventually need to generate significant revenues to achieve profitability. Until that time, we shall have to continue to raise cash, as and when required, through equity or debt financings. Recent Developments Annual Revenues The Company reported record annual revenues of $9.8 million for 2023, as compared to its previous revenues of $4.0 million for 2022. Liability Repayment Subsequent to December 31, 2023, the Company repaid in full all remaining principal and interest owed in connection with the prepaid advance liability. Equity Financing On September 15, 2023, the Company completed a public offering of 8,214,285 shares of common stock, priced at $0.35 per share, with gross proceeds of $2,875,000 less issuance costs of $588,230, for net proceeds of $2,286,770. On December 22, 2023, the Company completed a public offering of 5,175,000 shares of common stock, priced at $0.20 per share, with gross proceeds of $1,035,000 less issuance costs of $257,800, for net proceeds of $777,200. 24 Table of Contents Issuance of Non-Convertible Series A Voting Preferred Stock On January 26, 2024, the Board of Directors (“Board”) of the Company, following extensive strategic evaluation, including consultation with advisors, approved, authorized, and ratified the issuance of 730,000 shares of previously designated Non-convertible Series A Voting Preferred Stock to the Chairman and Chief Executive Officer of the Company, Michael Mo, subject to certain limitations as set forth below. The issuance of up to 1,000,000 shares of Non-convertible Series A Voting Preferred Stock was previously approved and authorized by a vote of the majority stockholders of the Company. The issuance is subject to the Board reserving the full and unequivocal right to revoke, rescind, transfer or otherwise cancel the issued Non-convertible Series A Voting Preferred Stock in the event Michael Mo is removed from any position with the Company or resigns from all positions with the Company. This conditional arrangement is designed to ensure that the voting power conferred by the Non-convertible Series A Voting Preferred Stock remains tied to the active leadership of the Company. This underscores the Board’s commitment to maintaining alignment with the long-term interests of the Company and its stockholders. The Independent Members of the Board have determined that the issuance represents a pivotal strategic move to reinforce and enhance the Company’s flexibility to optimize the Company’s negotiating position in any potential current and/or future engagements with commercial, financial, and/or strategic parties, and to provide defenses against potential hostile third-party actions. Appointment of Officers and Management Appointment of Vice President, Sales On January 16, 2023, the Company appointed a Vice President of Sales (the “VP of Sales”), and issued the VP of Sales 298,507 shares of restricted common stock. The restricted common stock had a grant date fair value of $400,000, and vests in four equal annual installments beginning January 16, 2024 based solely on continued service. The grant date fair value will be amortized ratably over the vesting period. In addition, the Company committed to a one-year guaranteed commission of $200,000, payable in four quarterly installments as well as a severance package of $250,000 and one-year of family health insurance if the VP of Sales is terminated without cause (as defined) within one year of hire. Appointment of Chief Financial Officer On March 31, 2023, the Company appointed a Chief Financial Officer (the “CFO”) and issued the CFO 1,500,000 shares of restricted stock. The restricted common stock had an aggregate grant date fair value of $1,380,000, and vests in five equal annual installments beginning March 31, 2024 based solely on continued service. Management Equity Incentive Grants On July 12, 2023, the Board unanimously approved an equity grant to the Chief Technology Officer, of 350,000 shares of restricted common stock. The restricted common stock had a grant date fair value of $266,000 and vests in four equal annual installments beginning on July 12, 2024. Merchant Cash Advance Agreement On January 22, 2024, the Company entered into a merchant cash advance agreement (the “Cash Advance Agreement”) whereby the Company received $504,900 of cash (net of underwriting fees of $35,100) and paid finder’s fees in cash of $21,600 and finder’s fees to be issued in equity with an aggregate value of $16,200, with the obligation to repay a total of $804,600 over thirty-two weekly payments of $25,143.75, beginning January 30, 2024. On February 26, 2024, the parties added an addendum to the agreement for an early payoff discount whereby the Company will owe $756,000 if paid by March 22, 2024, or $783,000 if paid by April 22, 2024. On February 26, 2024, the Company entered into a merchant cash advance agreement (the “Second Cash Advance Agreement”) with the lender mentioned above, whereby the Company received $502,200 of cash (net of underwriting fees of $37,800) and paid finder’s fees in cash of $21,600 and finder’s fees to be issued in equity with an aggregate value of $16,200, with the obligation to repay a total of $804,600 over thirty weekly payments of $26,820, beginning February 29, 2024. Recent Shareholder Vote by Majority Written Consent On February 9, 2024, the shareholders of the Company, acted by way of majority written consent (in lieu of a special meeting of stockholders) to approve resolutions authorizing the Company’s Board of Directors to take the following actions: (1) to issue shares of Common Stock to current or future engagements with commercial or strategic parties, which may result in issuances of over 20% of 25 Table of Contents the issued and outstanding shares of Common Stock; (2) to amend the Company’s Bylaws to decrease the number of shares of Common Stock needed to establish a quorum for meetings of stock holders to thirty-three-and-one-third percent (33 1/3 %) of the outstanding voting securities of the Company; (3) to amend the Certificate of Incorporation of the Company to effect a reverse split within a ratio range between 1-for-2 and 1-for-80; (4) to issue shares of common stock, in connection with an existing financing facility, which may result in the potential issuance of over 20% of the issued and outstanding shares. The resolution was approved by shareholders holding in aggregate of 55.72% of outstanding shares as of February 9, 2024. Risks Associated with Ongoing Conflicts 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. Additionally, we do not have operations or material net sales in Israel or Gaza and we currently do not expect the recent hostilities in that region to have a material impact on our business. We cannot predict how the events described above will evolve. If the events continue for a significant period of time or expand to other countries, and depending on the ultimate outcomes of these conflicts, which remain uncertain, they could heighten certain risks disclosed in Item 1A in this Form 10-K, including, but not limited to, adverse effects on macroeconomic conditions, including increased inflation, constraints on the availability of commodities, supply chain disruption and decreased business spending; cyber-incidents; disruptions to our or our business partners’ global technology infrastructure, including through cyber-attack or cyber-intrusion; adverse changes in international trade policies and relations; claims, litigation and regulatory enforcement; our ability to implement and execute our business strategy; terrorist activities; our exposure to foreign currency fluctuations; reputational risk; and constraints, volatility, or disruption in the capital markets, any of which could have a material adverse effect on our business, results of operations, cash flows and financial condition. Executive Officers Effective as of August 4, 2023, Dr. Timothy Knowles resigned from the Board of Directors, as well as any other position that he occupied with the Company. Consolidated Results of Operations Year Ended December 31, 2023 Compared With Year Ended December 31, 2022 Revenue Our revenues consisted of the following types: ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended ​ ​ December 31, ​ ​ 2023 2022 Revenues Recognized at a Point in Time: ​ ​ ​ ​ ​ ​ Product sales ​ $ 6,903,988 ​ $ 2,643,325 Contract services ​ 1,167,391 ​ 1,351,309 Total ​ ​ 8,071,379 ​ ​ 3,994,634 Revenues Recognized Over Time: ​ ​ ​ ​ ​ ​ Contract services ​ ​ 1,758,787 ​ ​ — Total Revenues ​ $ 9,830,166 ​ $ 3,994,634 ​ For the years ended December 31, 2023 and 2022, we generated $9,830,166 and $3,994,634 of revenue from 53 and 36 customers, respectively, representing an increase of $5,835,532, or 146%. Revenue from product sales during the year ended December 31, 2023 increased by $4,260,663 or 161% compared to the year ended December 31, 2022, reflecting the growth in the number of customers of 39 in 2023 from 33 in 2022. Product sales during these periods include sales of our component product, carbon fiber velvet (“CFV”) thermal management solution, internal short circuit (“ISC”) battery cells and devices, patented TRS technology, and thermal fiber thermal interface (“FTI”) materials. 26 Table of Contents Revenue from contract services during the year ended December 31, 2023 increased by $1,574,869 or 117% compared to the year ended December 31, 2022. The increase in revenue for the year ended December 31, 2023 is primarily due to growth in customers of 17 in 2023 from 14 in 2022. This work includes unique engineering design and testing projects customized for specific customers. Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitments. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy, unpredictable, and lumpy, which can influence the timing, consistency and reporting of sales growth. Cost of Revenue Cost of revenue consisted of the cost of our products as well as labor and production overhead expenses directly related to product sales or research contract services. Product mix plays an important part in our reported average margins for any period. Because we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between periods, customers, products and services due to the learning process, customer negotiating strengths, and product mix. For the years ended December 31, 2023 and 2022, cost of revenues was $6,164,310 and $1,630,527, respectively, representing an increase of $4,533,783, or 278%. The increase was primarily due to the increased number of customers and revenue during 2023, and the resultant cost increases from additional headcount and materials, and depreciation of automation equipment placed in service during 2023. Additionally, there was a $0.3 million write down of our inventory to net realizable value. The gross margin percentage was 37% in 2023, compared with 59% in 2022. The margin on product sales was 26% and 44% for the years ended December 31, 2023 and 2022, respectively. The margin on contract services was 63% and 89% for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, the Company had depreciation expense for new automation equipment and increased costs related to finished goods manufactured internally. In addition, the Company recorded an inventory write down that represented 2% of the related revenue. Research and Development Research and development (“R&D”) includes expenses incurred in connection with the R&D of our CFV thermal management solution, high-areal-capacity battery electrodes, and 3D engineering for a rechargeable battery, including non-cash stock-based compensation expenses. Research and development expenses are charged to operations as incurred. For the years ended December 31, 2023 and 2022, R&D expenses were $6,195,400 and $4,196,313, respectively, representing an increase of $1,999,087 or 48%. The increase is primarily comprised of $1,980,948 related to planned increases in headcount in order to build future capacity, amortization of prepaid cash consideration related to the Vibetech asset purchase agreement of $375,000, stock-based compensation for equity awards of $142,684 and rent expense of $79,831 for a new facility for R&D initiatives designed to build future revenue growth, partially offset by a reduction in outsourced R&D costs of $649,492. We expect that our R&D expenses will increase as we expand our future operations. Selling, General and Administrative Selling, general and administrative expenses consisted primarily of stock-based compensation, marketing and advertising, salaries, payroll taxes and other benefits, Board compensation, accounting and tax, consulting fees, travel and entertainment, rent expense, office expenses, and legal and professional fees. For the years ended December 31, 2023 and 2022, selling, general and administrative expenses were $19,882,402 and $16,453,776, respectively, an increase of $3,428,626, or 21%. The increase is primarily due to increases in labor costs of $1,564,020, depreciation and amortization expense of $1,512,509 due to expansion of our facility and equipment placed in service during 2023, consulting fees to build future revenue growth of $546,880, software license and utility fees of $350,689, and costs to attend conferences and seminars of $119,897, partially offset by a decrease in stock-based compensation of $814,965. Other (Expense) Income For the years ended December 31, 2023 and 2022, other expenses, net, were $1,281,610 and $1,150,497, respectively, representing an increase of $131,113 or 11%. The increase is primarily attributable to an increase in the amortization of debt discount 27 Table of Contents of $218,405 associated with the prepaid advance liability, and a $158,675 decline in PPP loan forgiveness, partially offset by a $217,454 decrease in a cash repayment premium recorded in satisfaction of a note payable in September 2022. Liquidity and Capital Resources As of December 31, 2023 and 2022, we had cash balances of $1,194,764 and $10,333,563, respectively, and working capital (deficit) of $(2,994,753) and $6,055,477, respectively. For the years ended December 31, 2023 and 2022, cash used in operating activities was $11,965,388 and $17,354,125, respectively. Our cash used in operations for the year ended December 31, 2023 was primarily attributable to our net loss of $23,693,556, adjusted for non-cash expenses in the aggregate amount of $6,841,828, as well as $4,886,340 of net cash generated by changes in the levels of operating assets and liabilities. Our cash used in operations for the year ended December 31, 2022 was primarily attributable to our net loss of $19,436,479, adjusted for non-cash expenses in the aggregate amount of $5,434,100, as well as $3,351,746 of net cash used to fund changes in the levels of operating assets and liabilities. For the years ended December 31, 2023 and 2022, cash used in investing activities was $1,046,113 and $4,647,974, respectively. Cash used in investing activities during the year ended December 31, 2023 was related to deposits paid for purchases of property and equipment of $644,963, purchases of property and equipment of $266,150, and an acquisition of intangible assets of $135,000. Cash used in investing activities during the year ended December 31, 2022 was related to purchases of property and equipment of $2,682,970, deposits paid for purchases of property and equipment of $1,421,432 and acquisition of intangible assets of $543,572. For the years ended December 31, 2023 and 2022, cash provided by financing activities was $3,872,702 and $17,472,361, respectively. Financing activities during the year ended December 31, 2023 consisted primarily of $3,227,702 for equity financing, net of issuance costs and the repurchase of common stock, $2,220,000 for debt financing, net of issuance costs and $1,575,000 for debt repayments. Financing activities for the year ended December 31, 2022 consisted primarily of $15,220,868 for debt financing, net of issuance costs, $3,074,293 for the exercise of warrants and stock options, $1,000,000 for debt repayments and $177,200 for equity financing. As of December 31, 2023, future cash requirements for our current liabilities include $6,232,888 for accounts payable and accrued expenses, $1,609,200 for merchant cash advances, $1,323,963 for capital expenditures and $102,186 for future payments under operating leases. Future cash requirements for long-term liabilities include $250,000 for promissory notes. These factors raise substantial doubt about the Company’s ability to meet its obligations as they become due within the twelve months from the date these consolidated financial statements are issued. Subsequent to December 31, 2023, the Company repaid in full the remaining balance of the prepaid advance liability, classified in the non-current liabilities section of our consolidated balance sheets. As of the filing date of this Form 10-K, there is no balance due on the prepaid advance. We intend to meet the rest of these cash requirements from our current cash balance, proceeds from the SEPA, proceeds from future financing activities and from future revenues, but the Company can provide no assurance that these initiatives will be successful. Our primary source of liquidity has historically been cash generated from equity and debt offerings. Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. We have a history of recurring net losses, recurring use of cash in operations and declining working capital. On December 20, 2023, we received a Stockholders’ Equity Notice stating we are not in compliance with Section 1003(a)(iii) of the Company Guide since we reported stockholders’ equity of $1,200,172 at September 30, 2023, and losses from continuing operations and/or net losses in our five most recent fiscal years. On February 12, 2024, we received a Letter from NYSE stating we are not in compliance with Section 1003(f)(v) of the Company guide since our securities were trading at an average of less than $0.20 per share for 30 days. Subsequent to December 31, 2023, the Company issued 40,276,430 shares of common stock, at purchase prices per share ranging from $0.13 to $0.41, pursuant to Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $8,326,457. Of the gross proceeds, $2,610,650 was retained by the Company to help fund operations. The remaining proceeds were applied against the remaining principal and accrued interest owed in connection with the Prepaid Advance Liability. 28 Table of Contents During the first quarter of 2024, the Company entered into two agreements whereby the Company received $1,007,100 of cash (net of underwriting fees of $72,900) with the obligation to repay a total of $1,609,200 over a total of thirty-two weekly payments. See Note 18 – Subsequent Events – Merchant Cash Advance Agreement for additional details. On January 9, 2024, the Company announced that it had completed a reduction of its total workforce of approximately 15% in an effort to allocate its resources to key business priorities to focus on improving the profitability of commercial customer engagements. On April 2, 2024, the Company received cash proceeds of $440,000 related to a Promissory Note comprised of an initial principal amount of $500,000 and discount of $60,000. The Promissory Note carries an annual interest rate of 0% and increases to 15% in the event of default, and shall be repaid in cash representing all outstanding principal and accrued and unpaid interest due on October 2, 2024, as defined by the terms of the agreement. See Note 18 – Subsequent Events – Promissory Notes for additional information. On April 9, 2024, the Company received cash proceeds of $200,000 related to a Promissory Note which matures on the first anniversary of its issuance and carries an annual interest rate of 16%. In the event the promissory note is prepaid within 9 months of its issuance, the holder is entitled to the repayment of principal and cash payment of interest equal to 12% of the prepayment amount. See Note 18 – Subsequent Events – Promissory Notes for additional information. Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above. Recently Issued Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements included within Item 8 of this Annual Report for a summary of recently issued and adopted accounting pronouncements. ​ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item. ​ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See “Index to Consolidated Financial Statements” which appears on page F-1 of this Annual Report on Form 10-K. ​ 29 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ​