Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition of KULR Technology Group, Inc. (“KULR”) and its wholly-owned subsidiary, KULR Technology Corporation (“KTC”) (collectively referred to as “KULR” or the “Company”) as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Quarterly Report. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Quarterly Report, and other factors that we may not know. There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K which was filed with the SEC on April 12, 2024, unless disclosed elsewhere in this Quarterly Report.
Overview
KULR Technology Group, Inc., through our wholly owned subsidiary KULR Technology Corporation, maintains expertise in three key technology domain areas: (1) energy storage systems and recycling, (2) thermal management solutions, and (3) rotary system vibration reduction. Historically, KULR, focused on thermal energy management solutions for space and Department of Defense (DoD) applications, with recent expansion into energy storage and vibration reduction markets as the logical next step. Combined, this energy management platform consists of high-performance thermal management technologies for batteries and electronics, AI-powered battery management and vibration mitigation software solutions, and reusable energy storage modules. Our mission is to advance and apply these technologies to make our world more sustainable by using less energy; using energy more efficiently; making energy consumption safer and cooler; using less materials to achieve these goals; and completing the circular economy through recycling.
Active government initiatives propelled by industry and regulatory tailwinds are increasing demand for energy storage, battery recycling and clean energy, resulting in an expanding total addressable market for KULR’s solutions. According to Precedence Research, global energy storage systems market is to grow from $210B in 2021 to $435B by 2030. Global lithium-ion battery recycling industry is to grow from $4.6B in 2021 to $22.8B by 2030, according to Market and Markets Research. Additionally, the domain driving the growth of KULR’s battery design and production capabilities is the private space exploration market sector, which requires highly custom, safe, and reliable energy storage systems, and is expected to reach $1,110.8B by 2030 according to CoherentMI. The Company’s disruptive technologies strive to fulfill an addressable $24 billion thermal management systems market (estimated based on market data projections published by Converged Markets stating that the thermal management systems market size was projected to grow to $24.8 billion by 2025). E-aviation growth and continued reliance on traditional aviation vehicles drives an aircraft maintenance market size that is expected to reach $127.2B by 2032, an increase from $82.7B in 2023, according to Precedence Research. KULR VIBE, the Company’s rotary system vibration reduction software, positions KULR to access this market area.
As companies and governments around the world pledge to meet net zero emissions over the next few decades, KULR is uniquely positioned to accelerate the adoption of clean energy solutions and sustainable products and facilitate the migration to a global circular economy. The Company’s goal is to provide total battery safety solutions for more efficient battery systems, increased sustainability, and end-of-life battery management, making KULR a key technology solutions provider in the migration to a global circular economy.
KULR ONE and KULR ONE Design Solutions (K1DS)
KULR’s primary technical domain that is shaping the future landscape of the Company is safe, high-performance energy storage solutions. To effectively support and provide energy storage solutions, a holistic approach is necessary. Batteries are an interdisciplinary technology which require:
(1) Multi-disciplinary expertise to address related electrical, thermal, mechanical, and electrochemical requirements,
(2) Cell supply access to top-tier OEMs,
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(3) Cell level testing capabilities to characterize performance, quality, and safety behavior at the cell level,
(4) Expertise in early concept design, modeling, and analysis,
(5) Rapid prototyping and production capabilities,
(6) Pack and system level thermal, mechanical, electrical, and abuse testing capabilities,
(7) Expertise in battery management, controls, and monitoring,
(8) Ability to support beginning of life to end of life requirements for transport and recycling.
To address the need for a holistic approach, KULR developed a battery product and service portfolio over the course of the last decade that provides products, safety testing services, modeling and analysis services, electrical testing services, transport and recycling packaging and logistics, and battery design solutions. Collectively, this is referred to as KULR ONE Design Solutions (K1-DS), which is actively leveraged by the Company to facilitate engagement with customers no matter the battery life cycle phase they are in.
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Currently, the primary aspects of K1-DS utilized by industry are product sales of trigger cells and TRS, the safety testing methodologies, and the utilization of the K1-DS platform as a whole to develop customized energy storage solutions.
Internally, KULR has leveraged K1-DS to develop off the shelf KULR ONE architecture which represents a groundbreaking innovation that is driving the world’s transition to a more sustainable electrification economy. These revolutionary designs offer a unique combination of cutting-edge features, including unparalleled safety, exceptional performance, intelligent functionality, modular construction, reliability, and customizability. The KULR ONE battery packs have been engineered to meet the exacting demands of the world’s most demanding applications. As of now, the Company is focused on the KULR ONE Space for space exploration, the KULR ONE Guardian for military applications, and the KULR ONE Max for rack-style grid energy storage systems, also referred to as Battery Energy Storage Systems (BESS). These architectures collectively offer a comprehensive solution that addresses the critical need for safe and reliable energy storage in a wide range of industries, from aerospace and defense to electric vehicles and consumer electronics. One of the key features of the KULR ONE family of battery packs is the modularity and consistency of the architectures. This allows for greater flexibility as customers can easily adjust the size and configuration of the battery pack to suit their specific application requirements while still also benefitting from testing previously conducted by the KULR team for their specific architecture. In addition to offering exceptional performance and reliability, the KULR ONE battery packs are also designed with safety as a top priority. They incorporate state-of-the-art thermal management technology to prevent overheating and ensure safe operation even in the most challenging environments. Overall, the KULR ONE family of battery packs, depicted with the following picture, is at the forefront of the global drive towards sustainable electrification. With its unparalleled combination of safety, performance, intelligence, modularity, reliability, and customizability, KULR ONE is positioned to revolutionize the way we think about energy storage and powering the world’s most demanding applications.
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KULR VIBE Solution
During 2022, we acquired intellectual property from Vibetech International, LLC (“Vibetech”), which allows KULR to expand itself as a vertically integrated energy management company focused on sustainable energy solutions. For nearly twenty years, the primary application has been aviation. However, advances in measurement and computing technologies have allowed KULR VIBE to provide transformative and scalable solutions across transportation, renewable energy (wind farm), manufacturing, industrial, performance racing and autonomous aerial (drone) applications among others. KULR VIBE addresses one the most challenging issues with advanced machinery today; excessive energy robbing vibrations that are destructive to both the machinery and in many cases the operator. The KULR VIBE suite of technologies utilize proprietary sensor processes with advanced learning algorithms to both achieve precision balancing solutions, and successfully predict component failure based on its comprehensive database of vibration signatures. Its enhanced AI learning algorithms pinpoint areas where excess vibrations cause a loss of energy that can lead to system malfunctions, weakened performance, and maintenance issues.
This innovative technology can be utilized as a standalone solution or be paired with existing track and balance technology to facilitate vibration reduction, achieve increased energy production, and reduce mechanical failures thereby extending platform life. KULR VIBE recently balanced the motors and blades of a mission critical drone to demonstrate the benefits of the technology. The results were a 23% increase in battery life and a lift increase of 45%. Same motors, same blades, KULR VIBE optimized.
The KULR VIBE suite of products and services have provided vibration analysis and mitigation to global companies across multiple industries and sectors. According to Fact.MR, an insights-driven global market intelligence company, the global vibration motor market is forecasted to reach $24.1 billion by 2032.
The Future is Energy + AI
We believe the future of KULR is Energy + AI. We are building our AI infrastructure on industry leading Nvidia and AMD semiconductor platforms, and they are hosted on a hybrid of private cloud and Microsoft Azure. As the world faces shortages of both technical expertise to design batteries and raw materials to build batteries, KULR aims to address this need with KULR ONE AI (K1AI). The Company is collecting large quantities of performance and safety test datasets for the most highly used commercial lithium-ion cells and combining that data with AI techniques to drive battery design and reduce engineering touch time to market. This product is to target the following markets:
● Aerospace and defense systems, such as CubeSat batteries meeting JSC 20793 safety requirements by NASA
● Power tools and industrial equipment
● High-performance electric vehicles
● Electric vertical take-off and landing (“eVOTL”)
● Electric micro-mobility vehicles
● Residential and commercial energy storage systems
Recent Developments
Liability Repayment
During the six months ended June 30, 2024, the Company issued 55,659,476 shares of common stock pursuant to SEPA Advance Notices submitted by the Company to Yorkville for aggregate proceeds of $15,173,357. Of the gross proceeds, $9,104,950 was retained by the Company to fund operations. The remaining proceeds were applied against the principal and interest owed in connection with the Prepaid Advance Liability and the Yorkville promissory note. The Prepaid Advance Liability and the related accrued interest was repaid in full during the first quarter of 2024, and the promissory note was repaid in full on May 28, 2024. The SEPA terminated June 1, 2024.
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At the Market Offering
On July 3, 2024, the Company entered into an At the Market Offering agreement (the “ATM”) with an agent (the “Agent”), pursuant to which the Company may, from time to time, sell shares of common stock for aggregate gross proceeds of up to $20,000,000 in “at the market” offerings through or to the Agent. Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of the sale, or as otherwise agreed with the Agent. The Agent will receive a commission from the Company of 3% of the gross proceeds of any shares of common stock sold pursuant to the ATM. During the period from July 3, 2024, through August 9, 2024, the Company issued a total of 4,953,867 shares of common stock pursuant to the ATM for aggregate proceeds of $1,416,940.
Merchant Cash Advance Agreement and Finder’s Warrants
On January 22, 2024, the Company entered into a merchant cash advance agreement (the “Cash Advance Agreement”) with a lender, pursuant to which the Company received $504,900 of cash (net of underwriting fees of $35,100), with the obligation to repay a total of $804,600 over thirty-two weekly payments of $25,143.75, beginning January 30, 2024. The Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts. On July 11, 2024, this merchant cash advance was repaid in full.
On February 26, 2024, the Company entered into a merchant cash advance agreement (the “Second Cash Advance Agreement”) with the lender mentioned above, pursuant to which the Company received $502,200 of cash (net of underwriting fees of $37,800), with the obligation to repay a total of $804,600 over thirty weekly payments of $26,820, beginning February 29, 2024. On July 11, 2024, the parties amended the agreement whereby the weekly repayment amount was reduced from $26,820 to $15,620 and the repayment due date was extended from September 27, 2024 to November 15, 2024. The Second Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts.
On July 11, 2024, the Company entered into a merchant cash advance agreement (the “Third Cash Advance Agreement”) whereby the Company received $758,850 of cash (net of underwriting fees of $40,000 and $201,150 used to pay the remaining balance of the first merchant cash advance), with the obligation to repay a total of $1,350,000 over forty-three weekly payments of $31,395, beginning July 18, 2024. The Third Cash Advance is secured by the Company’s accounts receivable and related cash receipts.
On April 4, 2024, the finder of the First and Second Cash Advance Agreements, a FINRA registered financial advisor, accepted certain of the Finder’s fee as warrants to purchase up to 81,788 shares (the “First Warrant”) and 108,389 shares (the “Second Warrant”), respectively, of the Company’s common stock, at an exercise price of $0.1852 per share under the First Warrant, and $0.139 per share under the Second Warrant, respectively. The First Warrant and the Second Warrant were exercisable immediately, and expire on January 22, 2027 and February 26, 2027, respectively.
Promissory Notes
On April 2, 2024, the Company entered into an agreement (the “Promissory Note”), with a lender (the “Lender”), pursuant to which the Lender purchased an unsecured promissory note with an initial principal amount of $500,000. The Company received cash proceeds of $440,000, resulting in a debt discount of $60,000, made up of an original issue discount of $50,000 and cash issuance costs of $10,000. The Promissory Note carries an annual interest rate of 0%, which shall increase to 15% in the event of default, and has a maturity date of October 2, 2024, after which all outstanding principal and accrued interest will become immediately due. This promissory note was repaid in full on May 28, 2024.
On April 9, 2024, the Company entered into a note purchase agreement pursuant to which the Company issued an unsecured promissory note with an initial principal amount of $200,000 and which matures on the first anniversary of its issuance. The Company received cash proceeds of $200,000. The promissory note 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.
Change in Compensation of CEO
Effective May 23, 2024, the Compensation Committee of the Board of Directors of the Company unanimously approved a change to the compensation payable to Michael Mo, the Chief Executive Officer (“CEO”). Consistent with the Company’s continued efforts to reduce its cash consumption, the CEO has voluntarily agreed to a reduction in the cash component of his annual compensation by
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approximately 33% or $112,345. In lieu of the reduced cash compensation, the CEO will receive restricted stock units of the Company for 286,230 shares of common stock that will vest after one year. This adjustment will aid the Company’s efforts in reducing its cash consumption, where such cash can be redirected towards other critical business needs and strategic initiatives. This step also aligns the CEO compensation more closely with the performance of the Company and the interest of its stockholders.
Resignation of Director
Effective April 15, 2024, Mr. Morio Kurosaki resigned as a director and all other positions of the Board. Mr. Kurosaki’s decision to resign is due to his other professional obligations and not due to any disagreement with the Company, the Board or any member of the Company’s management. Mr. Kurosaki served as the Chair of the Audit Committee and as a member of the Compensation Committee, and the Nominating & Corporate Governance Committee of the Board. On April 12, 2024, on the disinterested recommendation of the Compensation Committee, the Board unanimously approved and authorized the issuance of immediately vested equity compensation equal to 15,000 shares that are due and payable pursuant to his year-to-date services through the effective date of resignation.
Appointment of New Director
Effective April 15, 2024, upon the joint recommendation of the Nominating & Corporate Governance Committee and the Compensation Committee, the Board appointed Donna Haley Grier as a director of the Board to hold office until the earlier of the expiration of the term of office, a successor is duly elected and qualified, or the time of her death, resignation, disqualification, or removal. Ms. Grier was also appointed as the chair (and financial expert) of the Audit Committee of the Board, member of the Compensation Committee of the Board, and a member of the Nominating & Corporate Governance Committee of the Board. Ms. Grier will receive cash compensation equal to $17,500 per quarter and was granted 140,000 restricted stock units of the Company’s common stock, of which 35,000 shares vest each quarter, beginning on June 30, 2024.
Director Compensation
On April 12, 2024, on the disinterested recommendation of the Compensation Committee, the Board unanimously approved equity compensation grants to Dr. Joanna Massey issuable under the Company’s 2018 Equity Incentive Plan equal to (i) 15,000 immediately vested shares in connection with her year-to-date services through March 31, 2024; and (ii) 140,000 restricted stock units of the Company’s common stock, of which 35,000 shares vest each quarter, beginning on June 30, 2024.
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 of the 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.
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 the
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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, which the Company has not taken the required action to effect this reverse split; (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 approximately in aggregate of 55.72% of ownership percentage of the voting stock 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 our Annual Report on Form 10-K which was filed with the SEC on April 12, 2024, 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.
Compliance with NYSE American Continued Listing Requirements
On December 20, 2023, the Company received a notice of noncompliance (the “Stockholders’ Equity Notice”) from NYSE Regulation (“NYSE”) stating that it is not in compliance with Section 1003(a)(i) in the NYSE American Company Guide (the “Company Guide”) since the Company reported stockholders’ equity of $1,200,172 on September 30, 2023, and losses from continuing operations and/or net losses in its five most recent fiscal years. Section 1003(a)(iii) of the Company Guide requires a listed company to have stockholders’ equity of $6 million or more if the listed company has reported losses from continuing operations and/or net losses in its five most recent fiscal years.
As required by the Stockholders’ Equity Notice, on January 19, 2024, the Company submitted a plan (the “Plan”) to NYSE advising of actions it has taken or will take to regain compliance with the continued listing standards by June 20, 2025. NYSE staff will review the Company periodically for compliance with the initiatives outlined in the Plan. If the Company is not in compliance with the continued listing standards by June 20, 2025, or if the Company does not make progress consistent with the Plan during the Plan period, NYSE staff will initiate delisting proceedings as appropriate.
On March 5, 2024, the Company received a notification from the NYSE that the Company’s plan to regain compliance with Section 1003 (a)(iii) of the Company Guide was accepted and so long as the Company meets its interim objectives, the Company will have until June 20, 2025, to regain compliance with the minimum stockholders’ equity requirement.
On February 12, 2024, the Company received a notice letter (the “Letter”) from NYSE stating that it is not in compliance with Section 1003(f)(v) of the Company Guide since the Company’s securities were trading at an average of less than $0.20 per share for 30 days. However, on May 1, 2024, the Company received a notification from the NYSE stating that the Company had regained compliance with Section 1003 (f) (v) of the Company Guide given the increase in the trading price of the Company’s securities.
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Results of Operations
Three and Six Months Ended June 30, 2024, Compared With Three and Six Months Ended June 30, 2023
Revenue
Our revenues consisted of the following contract types:
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2024
2023
2024
2023
Product sales
$
1,134,769
$
1,957,370
$
1,749,862
$
3,586,628
Contract services
1,297,236
738,136
2,431,247
868,680
Total Revenue
$
2,432,005
$
2,695,506
$
4,181,109
$
4,455,308
For the three months ended June 30, 2024 and 2023, we generated $2,432,005 and $2,695,506 of revenues from 27 and 19 customers, respectively, representing a decrease of $263,501, or 10%. For the six months ended June 30, 2024 and 2023, we generated $4,181,109 and $4,455,308 of revenues from 48 and 29 customers, respectively, representing a decrease of $274,199, or 6%.
Revenue from product sales during the three months ended June 30, 2024, decreased by $822,601 or 42% compared to the three months ended June 30, 2023. Product sales include the sales of our component product, internal short circuit (“ISC”) battery cells and devices, and patented TRS technology. We had 15 product sales customers in the second quarter of 2024, compared with 12 in the second quarter of 2023. The decline in product revenue can be attributed to several expected second quarter 2024 orders, which management now expects to receive in the second half of 2024. We can provide no assurance as to when we will receive the expected orders.
Revenue from product sales during the six months ended June 30, 2024, decreased by $1,836,766 or 51% compared to the six months ended June 30, 2023. We had 36 product sales customers in the first six months of 2024, compared with 22 in the first six months of 2023. The decline in product sales can be attributed to several expected first half 2024 orders, which management now expects to receive in the second half of 2024. We can provide no assurance as to when we will receive the expected orders.
Revenue from contract services during the three months ended June 30, 2024, increased by $559,100 or 76% compared to the three months ended June 30, 2023. Service revenues include certain research and development contracts and onsite engineering services. We had 14 contract services customers in the second quarter of 2024, compared with 7 in the second quarter of 2023. One large contract received during the second quarter of 2024 generated $460,000 of service revenues, while $217,689 of service revenues previously deferred, were also recognized during the three months ended June 30, 2024.
Revenue from contract services during the six months ended June 30, 2024, increased by $1,562,567 or 180% compared to the six months ended June 30, 2023. We had 21 contract services customers in the first six months of 2024, compared with 11 in the first six months of 2023. Five large contracts received during 2024 generated $1,113,871 of service revenues, while $529,880 of service revenues deferred at December 31, 2023 were recognized in the first six months of 2024.
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, Gross Profit and Gross Profit Margin
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, the margins earned can vary significantly between periods, customers, products and services due to the learning process, customer negotiating strengths, and product mix, among other factors.
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For the three months ended June 30, 2024 and 2023, cost of revenues was $1,859,377 and $1,693,318, respectively, representing an increase of $166,059 or 10%. For the three months ended June 30, 2024 and 2023, gross profit was $572,628 and $1,002,188, respectively, a decline of $429,560 or 43%. Our gross profit margins were 24% and 37%, during the three months ended June 30, 2024 and 2023, respectively. The decrease in the current period profit margin was primarily due to (a) approximately $350,000 of labor and materials costs in the current period associated with a specific project which had no corresponding current period revenue; and (b) an approximately $80,000 increase in quarterly depreciation expense for revenue generating equipment that was put into service during the last month of the quarter ended March 31, 2023.
For the six months ended June 30, 2024 and 2023, cost of revenues was $3,097,692 and $2,809,732, respectively, representing an increase of $287,960 or 10%. For the six months ended June 30, 2024 and 2023, gross profit was $1,083,417 and $1,645,576, respectively, a decline of $562,159 or 34%. Our gross profit margins were 26% and 37%, during the six months ended June 30, 2024 and June 30, 2023, respectively. The decrease in the current period profit margin was primarily due to (a) approximately $600,000 of labor and materials costs in the current period associated with a specific project which had no corresponding current period revenue; and (b) an approximately $250,000 increase in quarterly depreciation expense for revenue generating equipment that was put into service during the last month of the quarter ended March 31, 2023.
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 three months ended June 30, 2024 and 2023, R&D expenses were $1,305,186 and $1,924,138, respectively, representing a decrease of $618,952 or 32%. The decrease was comprised primarily of $488,017 of labor costs allocated to cost of revenue due to the increase in service revenue, $171,905 related to a planned decrease in R&D consulting services to conserve cash and an $81,737 decrease in stock-based compensation, partially offset by an increase in building related expenses of approximately $149,000 for the facility in Texas.
For the six months ended June 30, 2024 and 2023, R&D expenses were $2,259,811 and $3,729,153, respectively, representing a decrease of $1,469,342 or 39%. The decrease was comprised primarily of $1,018,387 of labor costs allocated to cost of revenue due to the increase in service revenue, $599,351 related to a planned decrease in R&D consulting services to conserve cash, partially offset by an increase in building related expenses of approximately $190,000 for the facility in Texas.
We expect that our R&D expenses will increase as we expand our future operations and as our cash position improves.
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 three months ended June 30, 2024 and 2023, selling, general and administrative expenses were $4,594,500 and $5,158,030, respectively, representing a decrease of $563,530 or 11%. The decrease is primarily due to a planned decrease in outsourced professional services of $533,052, a decrease of $56,538 for stock-based compensation, partially offset by an increase in building expenses of $53,254.
For the six months ended June 30, 2024 and 2023, selling, general and administrative expenses were $8,807,401 and $10,257,121, respectively, representing a decrease of $1,449,720 or 14%. The decrease is primarily due to a planned decrease in outsourced professional services of $1,106,778, a decrease in labor costs of $236,725 due to the workforce reduction in December of 2023 and a decrease of $48,412 for stock-based compensation.
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Other (Expense) Income
For the three months ended June 30, 2024 and 2023, other expense, net, was a net expense of $563,470 and $255,012, respectively, representing an increase of $308,458, or 121%. The change is primarily attributable to an increase of $312,644 for amortization of debt discount in connection with the Prepaid Advance Liability and notes payable, an increase of $159,389 for the change in fair value of accrued issuable equity, partially offset by a decrease in interest recorded in connection with the Prepaid Advance Liability of $163,576.
For the six months ended June 30, 2024 and 2023, other expense, net, was a net expense of $915,609 and $597,155, respectively, representing an increase of $318,454, or 53%. The change is primarily attributable to an increase of $241,402 for amortization of debt discount in connection with the Prepaid Advance Liability and notes payable, an increase of $236,499 for the change in fair value of accrued issuable equity and $31,358 related to a 2024 loss on the extinguishment of debt related to the Prepaid Advance Liability, partially offset by a decrease of $190,805 in interest recorded in connection with the Prepaid Advance Liability.
Liquidity and Capital Resources
As of June 30, 2024 and December 2023, we had cash balances of $1,016,943 and $1,194,764, respectively, and a working capital deficit of $2,381,478 and $2,994,753, respectively.
For the six months ended June 30, 2024 and 2023, net cash used in operating activities was $9,198,453 and $9,858,687, respectively. Our net cash used in operating activities for the six months ended June 30, 2024, was primarily attributable to our net loss of $10,899,404, adjusted for non-cash expenses in the aggregate amount of $3,970,681, plus $2,269,730 of net cash used to fund changes in the levels of operating assets and liabilities. Our net cash used in operating activities for the six months ended June 30, 2023, was primarily attributable to our net loss of $12,937,853, adjusted for non-cash expenses in the aggregate amount of $3,192,878, as well as $113,712 of net cash used to fund changes in the levels of operating assets and liabilities.
For the six months ended June 30, 2024 and 2023, net cash used in investing activities was $163,023 and $894,976, respectively. Net cash used in investing activities during the six months ended June 30, 2024, was related to purchases of property and equipment. Net cash used in investing activities during the six months ended June 30, 2023, included $759,976 related to purchases of property and equipment and $135,000 for the acquisition of intangible assets.
For the six months ended June 30, 2024 and 2023, net cash provided by financing activities was $9,183,655 and $1,740,751, respectively. Net cash provided by financing activities during the six months ended June 30, 2024, was due to proceeds from SEPA Advance Notices totaling $9,104,950, and net proceeds from notes payable totaling $1,730,000, partially offset by notes payable repayments of $1,525,195 and issuance costs on notes payable of $126,100. Net cash provided by financing activities during the six months ended June 30, 2023, was from proceeds from the second prepaid advance of $2,000,000, partially offset by $229,249 for the repurchase of common stock to pay tax on behalf of an employee for vested shares of restricted common stock and $30,000 for financing costs associated with the prepaid advance.
Future cash requirements for our current liabilities as of June 30, 2024, include $4,811,565 for accounts payable and accrued expenses, $784,006 for notes payable and $487,369 for operating leases.
Future cash requirements for long-term liabilities as of June 30, 2024, include $1,059,898 for operating leases, and $250,000 for notes payable.
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 April 2, 2024, the Company received cash proceeds of $440,000 related to an unsecured 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 has a maturity date of October 2, 2024. This note was fully repaid on May 28, 2024. See Note 9 – Notes Payable for additional information.
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On April 9, 2024, the Company received cash proceeds of $200,000 related to an unsecured 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 9 – Notes Payable – for additional information.
Subsequent to June 30, 2024, the Company entered into an At the Market Offering agreement (the “ATM”) to raise up to $20,000,000 through sales of the Company’s common stock. During the period from July 3, 2024, through August 9, 2024, the Company has sold 4,953,867 shares of common stock pursuant to this offering, with gross proceeds of $1,416,940.
On July 11, 2024, the Company entered into a third merchant cash advance agreement (the “Third Cash Advance Agreement”) with a lender, pursuant to which the Company received $758,850 of cash (net of underwriting fees of $40,000 and $201,150 used to pay the remaining balance of the first merchant cash advance), with the obligation to repay a total of $1,350,000 over forty-three weekly payments of $31,395, beginning July 18, 2024. The Third Cash Advance Agreement is secured by the Company’s accounts receivable and related cash receipts. In addition, on July 11, 2024, the Company fully repaid the balance on the first cash advance ($201,150) and amended the Second Cash Advance to reduce the weekly repayment amount from $26,820 to $15,620 and extend the repayment period from September 27, 2024 to November 15, 2024.
As of the date of the issuance of these consolidated financial statements, the Company has no additional commitments to obtain additional funding through future debt or equity financings, and there is no assurance that the Company will be able to obtain additional funds on commercially acceptable terms, if at all. Further, there is no assurance that the amount of funds the Company might raise will enable the Company to complete its development initiatives or attain profitable operations. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.
Our unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
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 condensed 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 in the notes to our financial statements.
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.
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ITEM 3. 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.
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.