Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
001-40454
KULR TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
81-1004273
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
4863 Shawline Street, San Diego, California 92111
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: 408-663-5247
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
KULR
NYSE American LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 15, 2023, there were 118,782,666 shares outstanding.
KULR TECHNOLOGY GROUP, INC. AND SUBSIDIARY
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
1
Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022
2
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023
3
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022
4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022
5
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
27
Item 4. Controls and Procedures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
28
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits.
29
SIGNATURES
30
i
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30,
December 31,
2023
2022
(unaudited)
Assets
Current Assets:
Cash
$
1,320,651
10,333,563
Accounts receivable
2,588,650
1,542,118
Inventory
1,380,401
1,962,035
Inventory deposits
44,728
285,260
Prepaid expenses and other current assets
1,730,656
1,613,008
Total Current Assets
7,065,086
15,735,984
Property and equipment, net
5,471,965
3,193,041
Equipment deposits
1,537,656
3,514,937
Security deposits
65,536
60,441
Intangible assets, net
790,122
720,768
Right of use asset, net
256,346
328,941
Deferred financing costs
71,818
Total Assets
15,258,529
23,625,930
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
1,102,546
1,408,017
Accrued expenses and other current liabilities
2,894,875
2,142,277
Accrued issuable equity
293,749
227,956
Lease liability, current portion
242,078
223,645
Prepaid advance liability, net of discount, current portion
7,250,507
5,655,612
Deferred revenue
1,141
23,000
Total Current Liabilities
11,784,896
9,680,507
Lease liability, non-current portion
—
97,958
Prepaid advance liability, net of discount, non-current portion
3,196,678
Accrued interest, non-current
157,054
Total Liabilities
13,132,197
Commitments and contingencies (Note 12)
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 June 30, 2023 and December 31, 2022
Series B Convertible Preferred Stock, 31,000 shares designated; none issued and outstanding at June 30, 2023 and December 31, 2022
Series C Preferred Stock, 400 shares designated; none issued and outstanding at June 30, 2023 and December 31, 2022
Series D Preferred Stock, 650 shares designated; none issued and outstanding at June 30, 2023 and December 31, 2022
Common stock, $0.0001 par value, 500,000,000 shares authorized; 118,885,728 shares issued and 118,754,566 shares outstanding at June 30, 2023; 113,202,749 shares issued and 113,071,587 shares outstanding at December 31, 2022
11,889
11,320
Additional paid-in capital
59,289,857
53,372,673
Treasury stock, at cost; 131,162 shares held at June 30, 2023 and December 31, 2022
(296,222)
Accumulated deficit
(55,531,891)
(42,594,038)
Total Stockholders’ Equity
3,473,633
10,493,733
Total Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
For the Six Months Ended
Revenue
2,695,506
587,546
4,455,308
788,045
Cost of revenue
1,693,318
423,672
2,809,732
546,590
Gross Profit
1,002,188
163,874
1,645,576
241,455
Operating Expenses
Research and development
1,408,079
999,484
2,796,294
1,720,831
Selling, general, and administrative
5,591,516
4,326,162
11,107,407
7,861,085
Total Operating Expenses
6,999,595
5,325,646
13,903,701
9,581,916
Loss From Operations
(5,997,407)
(5,161,772)
(12,258,125)
(9,340,461)
Other (Expense) Income
Interest expense
(197,110)
(42,374)
(357,041)
(43,280)
Amortization of debt discount
(214,554)
(103,219)
(460,874)
Change in fair value of accrued issuable equity
74,079
52,680
138,187
95,720
Total Other Expense, net
(337,585)
(92,913)
(679,728)
(50,779)
Net Loss
(6,334,992)
(5,254,685)
(12,937,853)
(9,391,240)
Net Loss Per Share
- Basic and Diluted
(0.05)
(0.11)
(0.09)
Weighted Average Number of Common Shares Outstanding
115,380,700
104,545,799
114,133,873
103,537,473
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023
Additional
Total
Paid-In
Treasury Stock
Accumulated
Stockholders'
Shares
Amount
Capital
Deficit
Equity
Balance - January 1, 2023
113,202,749
131,162
Common stock issued for the repayment of prepaid advance liability and related interest accrual
3,153,036
315
3,750,653
3,750,968
Shares repurchased for payroll taxes and canceled
(175,000)
(17)
(229,232)
(229,249)
Stock-based compensation:
Restricted stock awards granted
1,848,508
185
(185)
Unvested restricted stock awards canceled
(75,000)
(8)
8
Common stock issued for services
5,500
6,819
6,820
Amortization of restricted common stock
765,100
Amortization of stock options
40,605
Net loss
(6,602,861)
Balance - March 31, 2023
117,959,793
11,796
57,706,441
(49,196,899)
8,225,116
925,935
93
715,565
715,658
823,540
44,311
Balance - June 30, 2023
118,885,728
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
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)
Common stock issued upon the exercise of warrants
70,143
87,672
87,679
Common stock issued upon the exercise of options
2,500
5,075
6,000
43,159
43,160
519,231
15,883
Amortization of market-based awards
730,048
(4,136,555)
Balance - March 31, 2022
104,870,715
10,487
40,913,190
(27,294,114)
13,189,835
Treasury stock issued upon the exercise of options
(46,305)
(33,000)
74,529
28,224
2,346,525
234
2,932,922
2,933,156
10,260
10,261
422,128
26,535
565,421
Balance - June 30, 2022
107,223,240
10,722
44,824,151
161,704
(365,199)
(32,548,799)
11,920,875
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
460,874
103,219
Non-cash rent expense
123,749
102,905
Depreciation and amortization expense
862,086
88,548
(138,187)
(95,720)
Stock-based compensation
1,884,356
2,286,467
Changes in operating assets and liabilities:
(1,046,532)
(427,903)
581,634
(93,261)
240,532
(117,648)
(1,187,561)
(5,095)
(643,578)
(153,028)
1,029,513
(31,199)
Lease liability
(130,679)
(99,619)
(21,859)
(112,303)
Total Adjustments
3,079,166
380,545
Net Cash Used In Operating Activities
(9,858,687)
(9,010,695)
Cash Flows From Investing Activities:
Deposits for purchase of property and equipment
(567,332)
(429,008)
Purchases of property and equipment
(192,644)
(117,776)
Acquisition of intangible assets
(135,000)
Net Cash Used In Investing Activities
(894,976)
(546,784)
Cash Flows from Financing Activities:
Proceeds from prepaid advance liability
2,000,000
Financing costs of prepaid advance liability
(30,000)
Proceeds from notes payable (1)
4,750,000
Payment of issuance costs
(17,200)
Payment of financing costs incurred in connection with the SEPA
(72,800)
Repurchase of common stock
Proceeds from the exercise of options
Proceeds from the exercise of warrants
3,020,835
Net Cash Provided By Financing Activities
1,740,751
7,685,910
Net Decrease In Cash
(9,012,912)
(1,871,569)
Cash - Beginning of Period
14,863,301
Cash - End of Period
12,991,732
(1) Face value of $5,000,000, less $250,000 original issue discount.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
43,553
Taxes
Non-cash investing and financing activities:
Right of use asset for lease liability
51,154
143,640
Common stock held in treasury upon the vesting of restricted common stock
Treasury stock issued upon the exercise of stock options
Receivable recorded for pending cash deposit of stock option exercise proceeds
Original issue discount on prepaid advance liability
105,263
Common stock issued in satisfaction of prepaid advance liability and interest
4,466,626
Deposits applied to purchases of property and equipment
2,716,057
Additions to property and equipment included in accounts payable
166,663
Equipment deposits included in accounts payable
171,444
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization and Operations
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 United States 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2022 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on March 28, 2023. The accompanying condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements included in the Form 10-K.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Since the date of the Annual Report on Form 10-K for the year ended December 31, 2022, there have been no material changes to the Company’s significant accounting policies, except as disclosed in this note.
Going Concern and Management’s Liquidity Plans
As of June 30, 2023, the Company had cash of $1,320,651 and a working capital deficit of $4,719,810. For the six months ended June 30, 2023, the Company incurred a net loss of $12,937,853 and used cash in operations of $9,858,687.
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 these financial statements are issued. The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, since the Company’s inception we have had a history of recurring net losses from operations, recurring use of cash in operating activities and declining working capital.
Future cash requirements for our current liabilities include $3,939,449 for accounts payable and accrued expenses and $242,078 for future payments under operating leases. Further, pursuant to an agreement with Yorkville executed on August 16, 2023, $3,150,000 owed in connection with the Company’s prepaid advance liability must be paid by August 25, 2023, and three additional payments, each in the amount of $1,383,333, are to be paid on the last day of each of October 2023, November 2023, and December 2023. The Company has also committed to spend $807,515 related to capital expenditures for automation equipment, $500,000 in connection with an asset purchase agreement, and $441,192 for research and development. 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 condensed consolidated financial statements are issued.
Management’s plans to mitigate the factors which raise substantial doubt include (i) revenue growth, (ii) reducing operating expenses through careful cost management, (iii) raising additional funds through future financings, and (iv) negotiating an extension and/or conversion to equity of the Company’s prepaid advance liability (see Note 14 – Subsequent Events).
The Company’s ability to continue as a going concern is dependent upon its ability to successfully execute the aforementioned initiatives.
As of the date of the issuance of these financial statements, the Company has no additional commitments to obtain additional funding through future financings and there is no assurance that the Company will be able to successfully negotiate an extension of the prepaid advance liability repayments or its conversion to equity, or that the Company will be able to obtain additional funds on commercially acceptable terms, if at all. There is also 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.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that may be necessary should we be unable to continue as a going concern.
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 unaudited condensed consolidated financial statements include, but are not limited to, fair value calculations for 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.
Concentrations of Credit Risk
Balances that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash, accounts receivable, revenue and accounts payable.
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 $820,651 and $12,491,732 as of June 30, 2023 and 2022, 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
Accounts Receivable
As of
Customer A
46
%
56
63
42
48
61
Customer B
17
*
10
18
Customer C
Customer D
19
20
Customer E
11
Customer F
12
Customer G
34
83
84
73
86
95
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 of operations could fluctuate significantly due to changes 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 purchase concentrations are as follows for the three and six months ended June 30, 2023 and 2022, respectively:
Vendor A
65
Vendor B
51
Vendor C
Vendor D
16
14
26
68
The Company capitalizes inventory costs associated with products when future commercialization is considered probable, and a future economic benefit is expected to be realized. These costs consist of finished goods, raw materials, manufacturing-related costs, transportation and freight, and other indirect overhead costs.
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 using 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
9
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. Finished goods inventory is held on-site at the Company’s San Diego, California location. Certain raw materials are held off-site with our contract manufacturers.
Inventory at June 30, 2023 and December 31, 2022 was comprised of the following:
Raw materials
348,217
1,075,310
Work-in-process
2,977
Finished goods
1,032,184
883,748
Total inventory
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:
The Company recognizes revenue primarily from the following different types of contracts:
The following table summarizes the Company’s revenue recognized in its condensed consolidated statements of operations:
Product sales
1,957,370
557,664
3,586,628
730,263
Contract services
738,136
29,882
868,680
57,782
Total revenue
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. The Company expects to satisfy the remaining performance obligations and recognize the revenue related to its deferred revenue balance within the next twelve months. During the three and six months ended June 30, 2023 and 2022, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
As of June 30, 2023 and December 31, 2022, the Company had $41,261 and $34,402 of deferred labor and other costs, respectively, which is included in prepaid expenses and other current assets in the Company’s unaudited condensed consolidated balance sheets. Deferred labor and other costs represent costs to fulfill the Company’s contract revenue. The Company will recognize the deferred labor and other costs as cost of revenues at the point in time that the Company recognizes the related revenue, which is generally at the time the services are provided and/or the product/service is accepted by the customer.
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.
The following table presents the computation of basic and diluted net loss per common share:
Numerator:
Net loss attributable to common stockholders
Denominator (weighted average quantities):
Common shares issued
118,617,860
106,509,943
116,846,331
105,740,017
Less: Treasury shares purchased
(131,162)
(161,704)
Less: Unvested restricted shares
(3,240,679)
(2,019,011)
(2,708,655)
(2,187,514)
Add: Accrued issuable equity
134,681
216,571
127,359
146,674
Denominator for basic and diluted net loss per share
Basic and diluted net loss per common share
The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
Prepaid advance (1)
10,168,469
Unvested restricted stock awards
3,116,008
1,957,500
Unvested market-based equity awards
3,000,000
Restricted stock units
Options
795,216
482,216
Warrants
2,524,410
19,604,103
7,964,126
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Since June 2016, the FASB issued clarifying updates to the new standard including changing the effective date for smaller reporting companies. The guidance is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU on January 1, 2023, using the modified retrospective approach and it did not have a material impact on its condensed consolidated financial statements.
NOTE 3 ASSET ACQUISITION
On May 4, 2023 (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, primarily intellectual property, of the Seller (the “Acquired Assets”) for consideration of $75,000 (the “Total Consideration”), which was paid in cash on May 11, 2023. In addition, the seller has been employed by the Company.
The Asset Purchase Agreement includes customary representations, warranties and covenants of the Company and the Seller. The Asset 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 determined that the transaction should be accounted for as an asset acquisition because substantially all of the fair value of the Acquired Assets is concentrated in a single asset. The total cost of the intellectual property acquired of $75,000 is included in intangible assets on the accompanying condensed consolidated balance sheet and is being amortized over its estimated useful life of 5 years.
NOTE 4 INVENTORY DEPOSITS
Inventory deposits consists of amounts paid in advance to vendors to secure future deliveries of specific finished goods and raw materials which will be received and sold in future periods.
As of June 30, 2023 and December 31,2022, the Company had outstanding inventory deposits of $44,728 and $285,260, respectively.
NOTE 5 PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of June 30, 2023 and December 31, 2022, prepaid expenses and other current assets consisted of the following:
Marketing and sponsorships
710,341
574,636
Compensation costs
625,000
375,000
Dues and subscriptions
163,528
75,889
Conferences and seminars
44,418
Deferred expenses
41,261
34,402
Professional fees
37,764
25,787
Insurance
41,223
12,776
Vendor receivables
24,183
368,069
62,329
Other
42,938
84,120
Total prepaid expenses and other current assets
Prepaid marketing and sponsorships shown in the table above, as of June 30, 2023, includes $658,333 of prepaid marketing expenses pursuant to certain sponsorship agreements which will be amortized over the respective service periods of the agreements.
NOTE 6 EQUIPMENT DEPOSITS
The Company entered into agreements with third party contractors for facility improvements, the design and build of a battery packaging and inspection automation system, and automated robotic tending system.
As of June 30, 2023 and December 31,2022, the Company had outstanding deposits of $1,537,656 and $3,514,937, respectively, in connection with these agreements. The decrease is due to equipment being transferred to property and equipment upon completion by third party contractors.
NOTE 7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of June 30, 2023 and December 31, 2022, accrued expenses and other current liabilities consisted of the following:
1,361,000
1,180,000
Payroll and vacation
738,640
464,453
436,619
196,409
107,039
58,804
Board compensation
122,500
Marketing and advertising fees
3,999
Legal fees
2,000
Subscriptions
65,000
251,577
49,112
Total accrued expenses and other current liabilities
Add: Accrued interest, non-current
2,299,331
13
NOTE 8 ACCRUED ISSUABLE EQUITY
A summary of the accrued issuable equity activity during the six months ended June 30, 2023 is presented below:
June 30, 2023
Beginning Balance
Additions
203,980
Mark-to market
Ending Balance
During the six months ended June 30, 2023, the Company entered into certain contractual arrangements for 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 $203,980.
The Company recorded gains in the aggregate amount of $74,079 and $138,187 during the three and six months ended June 30, 2023, respectively, and recorded gains in the aggregate amount of $52,680 and $95,720 during the three and six months ended June 30, 2022, respectively, related to changes in the 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 June 30, 2023 was $293,749, based on Level 1 inputs, which consist of quoted prices for the Company’s common stock in active markets.
NOTE 9 PREPAID ADVANCE LIABILITY
The Company’s prepaid advance liability consists of the following:
Gross Amount of
Original
Less:
Prepaid Advance
Issue
Debt
Liability,
Liability
Discount
net of discount
Balance, December 31, 2022
9,000,000
473,631
(621,341)
8,852,290
Proceeds from prepaid advance
Original issue discount on prepaid advance
(105,263)
Repayments in shares of common stock
(3,850,000)
(182,657)
(4,032,657)
Outstanding, June 30, 2023
7,150,000
396,237
(295,730)
On September 23, 2022, the Company entered into a Supplemental Agreement (the “Supplemental Agreement”) to its Standby Equity Purchase Agreement (the “SEPA”) with YA II PN, Ltd. (“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 13, 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.
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.
On March 10, 2023, the Company and Yorkville agreed and closed on a second Prepaid Advance (the “Second Advance”). The Company recorded additional prepaid advance liability in the amount of $2,105,263, which consisted of $2,000,000 cash proceeds received, plus an original issue discount of $105,263. 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.
During the six months ended June 30, 2023, the Company issued 4,078,971 shares of common stock, at purchase prices per share ranging from $0.57 to $1.20, pursuant to Investor Notices submitted by Yorkville for aggregate proceeds of $4,466,626. The proceeds were applied against the principal and interest due for the Initial Advance in the aggregate amounts of $4,032,656 and $433,970, respectively. As of June 30, 2023, the gross principal balance on the Prepaid Advance liability is $7,546,237, which consists of Initial Advance and Second Advance of $5,440,974 and $2,105,263, respectively, including the original issue discount of $290,974 and $105,263, respectively.
During the three and six months ended June 30, 2023, the Company recorded interest expense in the amount of $197,110 and $357,041, respectively, and recorded amortization of debt discount in the amount of $214,554 and $460,874, respectively, in connection with the Prepaid Advance liability.
See Note 14 – Subsequent Events, Repayment Agreement for additional information related to the prepaid advance liability.
NOTE 10 LEASES
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%.
The Company also leases office space in San Diego, California pursuant to an operating lease which expires May 31, 2024. As of June 30, 2023, the Company does not have any financing leases.
During the three and six months ended June 30, 2023, operating lease expense was $65,873 and $131,746, respectively. During the three and six months ended June 30, 2022, operating lease expense was $57,849 and $131,930, respectively.
Maturities of lease liabilities as of June 30, 2023 were as follows:
For the period from July 1, 2023 through December 31, 2023
144,494
2024
103,432
Total future minimum lease payments
247,926
Less: amount representing imputed interest
(5,848)
Present value of lease liabilities
Less: current portion
(242,078)
Lease liabilities, non current portion
15
Supplemental cash flow information related to the leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating activities
130,678
Right-of-use assets obtained in exchange for lease obligations
Operating leases
Weighted Average Remaining Lease Term (Years)
0.88
years
Weighted Average Discount Rate
5.0
NOTE 11 RELATED PARTY TRANSACTIONS
Effective August 26, 2022, the Company entered into an eight-month consulting agreement with the father of the Company’s Chief Technology Officer (the “Related Consultant”), which shall automatically renew for an additional four months unless otherwise terminated. During the three and six months ended June 30, 2023, expense recognized for services provided by the Related Consultant was $16,755 and $27,210, respectively are included within selling, general and administrative expenses on the unaudited condensed consolidated statements of operations. No related party expense was recognized during the six months ended June 30, 2022.
As of June 30, 2023 and December 31, 2022, the Company did not have material accounts payable outstanding with related parties.
NOTE 12 COMMITMENTS AND CONTINGENCIES
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 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 (which was capitalized as an intangible asset and will be amortized over its useful life), and (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.
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 an individual to serve as Chief Financial Officer (the “CFO”) of the Company, 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.
NOTE 13 STOCKHOLDERS’ EQUITY
Standby Equity Purchase Agreement (“SEPA”) and Supplemental SEPA
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. There were no issuances under the SEPA during the three and six months ended June 30, 2023.
See Note 9 – Prepaid Advance Liability, for details related to a supplemental agreement to the SEPA.
During the six months ended June 30, 2023, the Company issued an aggregate of 5,500 shares of immediately vested common stock with a grant date value of $6,820 for legal services.
Stock Options
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 range of weighted average assumptions:
For The Three Months Ended
For The Six Months Ended
Risk free interest rate
4.07% - 4.52%
2.28% - 2.94%
3.92% - 4.52%
1.18% - 2.94%
Expected term (years)
3.5
3.8 - 3.9
3.5 - 3.9
Expected volatility
107%
116%
105% - 107%
Expected dividends
0%
For the three and six months ended June 30, 2023, the weighted average grant date fair value per share of options was $0.48 and $0.74, respectively, compared to $2.97 and $1.47, respectively, for the three and six months ended June 30, 2022.
A summary of options activity during the six months ended June 30, 2023 is presented below:
Weighted
Average
Number of
Exercise
Remaining
Intrinsic
Price
Term (Yrs)
Value
Outstanding, January 1, 2023
640,216
1.72
Granted
165,000
1.09
Exercised
Expired
Forfeited
(10,000)
2.08
1.58
3.4
Exercisable, June 30, 2023
254,591
2.0
The following table presents information related to stock options as of June 30, 2023:
Options Outstanding
Options Exercisable
Range of
Outstanding
Exercisable
Remaining Term
Prices
In Years
$0.66 - $0.99
165,486
0.6
108,820
$1.21 - $1.50
250,000
3.9
$1.55 - $1.99
90,000
11,458
$2.05 - $2.44
289,730
3.1
131,813
As of June 30, 2023, there was $476,124 of unrecognized stock-based compensation expense related to the above stock options, which will be recognized over the weighted average remaining vesting period of 3.0 years.
Restricted Stock Awards
The following table presents information related to restricted stock awards as of June 30, 2023:
Shares of
Weighted Average
Restricted
Grant Date
Fair Value
Non-vested RSAs, January 1, 2023
2,042,500
2.50
1.00
Vested
(700,000)
2.43
Non-vested RSAs, June 30, 2023
1.64
On March 31, 2021, the Company granted 2,000,000 restricted shares of common stock to the Company’s President and Chief Operating Officer. The restricted shares vest in four (4) equal annual installments, the first installment of which vested on March 1, 2023. On March 31, 2023, and effective as of March 1, 2023, the Company withheld and cancelled 175,000 shares of its common stock to satisfy an aggregate of $229,249 of payroll tax withholdings and remittance obligations in connection with vesting of 500,000 shares of restricted stock, resulting in a net settlement of 325,000 shares. The withholding and cancellation of the 175,000 shares represented a retirement of shares at a price per share equal to $1.31, the closing price per share of our common stock on the trading day prior to the March 1, 2023, the effective date of the share cancellation.
As of June 30, 2023, there was $8,009,225 of unrecognized stock-based compensation expense related to restricted stock awards that will be recognized over the weighted average remaining vesting period of 2.91 years.
Restricted Stock Units
The following table presents information related to restricted stock units (“RSUs”) as of June 30, 2023:
Shares of Restricted
Common
Stock
Non-vested RSUs, January 1, 2023
2.05
Non-vested RSUs, June 30, 2023
As of June 30, 2023, there was $3,510,072 of unrecognized stock-based compensation expense related to restricted stock units that will be recognized over the weighted average remaining vesting period of 3.3 years.
Stock-Based Compensation
During the three and six months ended June 30, 2023, the Company recognized stock-based compensation expense of $964,201 and $1,884,356, respectively, related to restricted common stock, warrants and stock options, of which $927,375 and $1,831,370, respectively are included within selling, general and administrative expenses, and $36,826 and $52,986, respectively are included within research and development expenses on the unaudited condensed consolidated statements of operations.
During the three and six months ended June 30, 2022, the Company recognized stock-based compensation expense of $1,043,545 and $2,286,467, respectively, related to restricted common stock, warrants and stock options, of which $1,033,851 and $2,268,665, respectively are included within selling, general and administrative expenses, and $9,694 and $17,802, respectively are included within research and development expenses in the unaudited condensed consolidated statements of operations.
The following table presents information related to stock-based compensation for the three and six months ended June 30, 2023 and 2022:
Common stock for services
53,421
Accrued issuable equity (common stock)
96,350
19,200
(46,200)
84,916
42,418
1,295,469
Amortization of restricted stock awards and units
1,588,640
941,359
964,201
1,043,545
NOTE 14 SUBSEQUENT EVENTS
Restricted Stock Award
On July 12, 2023, the Company granted an award for 350,000 shares of restricted common stock with an aggregate grant date value of $266,000, which shall vest in four equal annual installments beginning July 12, 2024.
Director Resignation
As disclosed in a Form 8-K filed with the SEC on August 7, 2023, on August 4, 2023, Dr. Timothy Knowles resigned from the Board of Directors of the Company, as well as his role as Executive Technical Fellow. Dr. Knowles’ resignation is a result of his decision to retire.
Repayment Agreement
On August 16, 2023 the Company entered into an agreement with Yorkville (the “Repayment Agreement”), pursuant to which, if the Company closes a financing in excess of $15,000,000, 105% of the outstanding principal amount of the prepaid advance liability (see Note 9 – Prepaid Advance Liability) and all accrued related interest will be paid to Yorkville, and the SEPA and the Supplemental Agreement will be automatically terminated. If the prepaid advance liability has not been paid in full by the payment dates cited below, then:
a)
on or before the earlier of August 25, 2023 or the date of the closing of any financing by the Company, the Company will pay to Yorkville a sum equal to (i) principal in the amount $3,000,000, (ii) a payment premium in the amount of $150,000, and (iii) all accrued interest outstanding on such payment (the “August Repayment”).
b)
On the last day of each of October 2023, November 2023 and December 2023, the Company will pay to Yorkville a cash sum equal to (i) principal in the amount of $1,383,333; (ii) a payment premium equal to 5% of each principal payment, and (iii) all accrued interest outstanding on such payment (each amount, a “Repayment”).
Provided that each Repayment is timely received, Yorkville agrees not to submit Investor Notices to the Company. If the August Repayment is not received on a timely basis, Yorkville may submit Investor Notices to the Company pursuant to the terms of the Supplemental Agreement. If the August Repayment is submitted on a timely basis, but subsequent Repayments are not received on a timely basis, Yorkville may submit Investor Notices for an aggregate amount up to the missed payment(s) amount.
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 and for the three and six months ended June 30, 2023 and 2022 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 March 28, 2023.
Overview
KULR Technology Group develops and commercializes an energy management platform to accelerate the global transition to a sustainable electrification economy. 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 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.
KULR ONE and KULR ONE Design Solutions (K1DS)
The KULR ONE family of battery packs represent 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. They 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 its modular design. This allows for greater flexibility as customers can easily adjust the size and configuration of the battery pack to suit their specific application requirements. The intelligent functionality of the KULR ONE packs also allows for real-time monitoring and optimization of battery performance, ensuring optimal efficiency and longevity. 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 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.
KULR’s holistic suite of battery safety and thermal energy management products and services include: Passive Propagation Resistant (“PPR”) design and testing, Internal Short Circuit (“ISC”) trigger cells, Fractional Thermal Runaway Calorimeter (“FTRC”) testing and an AI-powered CellCheckTM battery management system. The following picture illustrates the different products and services offered by KULR in this holistic approach.
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
22
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 estimated at $6.5 billion in 2023 and is forecast to reach $24.1 billion by 2032, growing at a Compounded Annual Growth Rate (“CAGR”) of 14.1% during 2023-2032.
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 in supply of raw materials to produce enough Li-ion batteries to power everything from EV’s to smartphones, KULR is developing a modular battery storage architecture that can be used across multiple applications with real-time monitoring by AI-powered CellCheckTM. This product is to target the following markets:
Recent Developments
Asset Acquisition
On May 4, 2023 (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, primarily intellectual property, of the Seller (the “Acquired Assets”) for consideration of $75,000 (the “Total Consideration”), which was paid in cash on May 11, 2023.
Effective as of March 31, 2023, Shawn Canter was appointed Chief Financial Officer of the Company. In connection with his appointment, Mr. Canter was granted 1,500,000 shares of the Company’s common stock, which shall vest in five (5) equal annual installments based solely on continued service.
23
Financing Activities
On March 10, 2023, the Company received gross proceeds of $2,000,000 as a prepaid advance (the “Second Prepaid Advance”) pursuant to a supplemental agreement (the “Supplemental Agreement”) to its Standby Equity Purchase Agreement (the “SEPA”). The Second Prepaid Advance matures on March 10, 2024. 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.
Please refer to Note 9 – Prepaid Advance Liability and Note 13 – Stockholders’ Equity, Standby Purchase Agreement “SEPA” and Supplemental SEPA, in the accompanying condensed consolidated financial statements of this quarterly report on Form 10-Q for additional details regarding the SEPA and Supplemental SEPA.
Results of Operations
Three and Six Months Ended June 30, 2023 Compared With Three and Six Months Ended June 30, 2022
Our revenues consisted of the following types:
For the three months ended June 30, 2023 and 2022, we generated $2,695,506 and $587,546 of revenues from 19 and 12 customers, respectively, representing an increase of $2,107,960, or 359%. For the six months ended June, 2023 and 2022, we generated $4,455,308 and $788,045 of revenues from 29 and 16 customers, respectively, representing an increase of $3,667,263, or 465%.
Revenue from product sales during the three months ended June 30, 2023 increased by $1,399,706 or 251% compared to the three months ended June 30, 2022. Revenue from product sales during the six months ended June 30, 2023 increased by $2,856,365 or 391% compared to the six months ended June 30, 2022. Product sales during the three and six months ended June 30, 2023 included sales of our component product, internal short circuit (“ISC”) battery cells and devices, and patented Thermal Runway Shield (“TRS”) technology.
Revenue from contract services during the three months ended June 30, 2023 increased by $708,254 or 2370% compared to the three months ended June 30, 2022. Four contracts received during the second quarter of 2023 generated $689,744 of service revenues. Revenue from contract services during the six months ended June 30, 2023 increased by $810,898 or 1403% compared to the six months ended June 30, 2022. Eight contracts received during the six months of 2023 generated $805,904 of service revenues. Our service revenues include certain research and development contracts and onsite engineering services.
Our customers and prospective customers are large organizations with multiple levels of management, controls/procedures, and contract evaluation/authorization. Furthermore, our solutions are new and do not necessarily fit into pre-existing patterns of purchase commitment. Accordingly, the business activity cycle between expression of initial customer interest to shipping, acceptance and billing can be lengthy and unpredictable, 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 expenses directly related to product sales and research contract services.
Product mix plays an important part in our reported average margins for any period. Also, we are introducing new products at an early stage in our development cycle and the margins earned can vary significantly between periods, customers and products due to the learning process, customer negotiating strengths, and product mix.
24
For the three months ended June 30, 2023 and 2022, cost of revenue was $1,693,318 and $423,672, respectively, representing an increase of $1,269,646 or 300%. The increase corresponds to the increase in our revenue during the period, and consisted primarily of $1,076,003 of costs incurred to procure customized finished goods and component materials for a new product line, an increase of $116,533 in depreciation expense due to revenue generating equipment placed in service, and increased labor costs of $54,609. The gross margin percentage was 37% and 28% for the three months ended June 30, 2023 and 2022, respectively.
For the six months ended June 30, 2023 and 2022, cost of revenue was $2,809,732 and $546,590, respectively, representing an increase of $2,263,142 or 414%. The increase corresponds to the increase in our revenue during the period, and consisted primarily of $1,984,380 of costs incurred to procure customized finished goods and component materials for a new product line, an increase of $148,411 in depreciation expense due to revenue generating equipment placed in service, and increased labor costs of $99,127. The gross margin percentage was 37% and 31% for the six months ended June 30, 2023 and 2022, respectively.
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, 3D engineering for a rechargeable battery and non-cash stock-based compensation expenses. Research and development expenses are charged to operations as incurred.
For the three months ended June 30, 2023 and 2022, R&D expenses were $1,408,079 and $999,484, respectively, representing an increase of $408,595 or 41%. The increase during 2023 was comprised primarily of $518,908 related to planned increases in headcount in order to build future capacity, partially offset by a reduction in R&D costs of $158,500 related to a decline in outsourced R&D costs.
For the six months ended June 30, 2023 and 2022, R&D expenses were $2,796,294 and $1,720,831, respectively, representing an increase of $1,075,463 or 62%. The increase during 2023 was comprised primarily of $1,079,372 related to planned increases in headcount in order to build future capacity, rent expense of $30,782 for a new facility for R&D initiatives designed to build future revenue growth, partially offset by a reduction in R&D costs related to a decline in outsourced R&D costs.
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 cash and stock-based compensation, payroll taxes and other benefits, consulting fees, registration fees, office expenses, rent expense, directors and officers insurance, travel and entertainment, marketing and advertising, and filing fees.
For the three months ended June 30, 2023 and 2022, selling, general and administrative expenses were $5,591,516 and $4,326,162, respectively, representing an increase of $1,265,354, or 29%. The increase is primarily due to increases in labor costs of $442,414, depreciation expense of $400,842 due to the completion of automation equipment and enhancements to the facility, consulting fees of $251,626, travel costs of $180,699 for conferences and customer visits to build future revenue growth, costs related to the acquisition of vibration technology of $125,000, partially offset by a decrease in marketing and advertising expenses of $184,501, and a decrease of $106,475 in stock-based compensation.
For the six months ended June 30, 2023 and 2022, selling, general and administrative expenses were $11,107,407 and $7,861,085, respectively, representing an increase of $3,246,322, or 41%. The increase is primarily due to increases in labor costs of $1,449,895, depreciation expense of $599,817 due to the completion of automation equipment and enhancements to the facility, consulting fees of $462,391, marketing and advertising expenses of $342,906, $316,817 related to travel and conferences to build future revenue growth, costs related to the acquisition of vibration technology of $250,000, partially offset by a decrease of $437,294 in stock-based compensation.
Other Income (Expense)
For the three months ended June 30, 2023 and 2022, other expense, net was $337,585 and $92,913, respectively, representing an increase of $244,672, or 263%. The change is primarily attributable to an additional $154,736 for interest recorded in connection with the Prepaid Advance, an additional $111,335 for amortization of debt discount in connection with the Prepaid Advance, partially offset by a $21,399 change in the fair value of accrued issuable equity.
25
For the six months ended June 30, 2023 and 2022, other expense, net was $679,728 and $50,779, respectively, representing an increase of $628,949 or 1239%. The change is primarily attributable to an additional $357,655 for amortization of debt discount in connection with the Prepaid Advance, an additional $313,761 for interest recorded in connection with the Prepaid Advance, partially offset by a $42,467 decrease in the change in fair value of accrued issuable equity.
Liquidity and Capital Resources
As of June 30, 2023 and December 2022, we had cash balances of $1,320,651 and $10,333,563, respectively, and working capital (deficit) of $(4,719,810) and $6,055,477, respectively.
For the six months ended June 30, 2023 and 2022, cash used in operating activities was $9,858,687 and $9,010,695, respectively. Our cash used in operations 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. Our cash used in operations for the six months ended June 30, 2022 was primarily attributable to our net loss of $9,391,240, adjusted for non-cash expenses in the aggregate amount of $2,485,419, as well as $2,104,874 of net cash used to fund changes in the levels of operating assets and liabilities.
For the six months ended June 30, 2023 and 2022, cash used in investing activities was $894,976 and $546,784, respectively. Cash used in investing activities during the six months ended June 30, 2023 included $567,332 related to deposits for property and equipment, $192,644 related to purchases of property and equipment and $135,000 for the acquisition of intangible assets. Cash used in investing activities during the six months ended June 30, 2022 was related to deposits paid for equipment of $429,008 and purchases of property and equipment of $117,776.
For the six months ended June 30, 2023 and 2022, cash provided by financing activities was $1,740,751 and $7,685,910, respectively. 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. Cash provided by financing activities during the six months ended June 30, 2022 was from a promissory note of $4,750,000, proceeds from the exercise of warrants of $3,020,835 and proceeds from the exercise of options of $5,075, partially offset by issuance costs related to the note payable and deferred financing costs related to the SEPA for $17,200 and $72,800, respectively.
Future cash requirements for our current liabilities include $7,546,237 for the Prepaid Advances (if the holder does not convert the liability into shares of common stock), $3,939,449 for accounts payable and accrued expenses and $242,078 for future payments under operating leases. The Company has also committed to spend $807,515 related to capital expenditures for automation equipment, $500,000 in connection with an asset purchase agreement, and $441,192 for research and development. There are no cash requirements for long-term liabilities as of June 30, 2023. The Company intends to meet these cash requirements from its current cash balance, proceeds from future financing activites and from future revenues.
Our primary source of liquidity has historically been cash generated from equity and debt offerings. Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), we have the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. We have a history of recurring net losses, recurring use of cash in operations and declining working capital. As of the date of these financial statements, we have no commitments to obtain additional funding and current obligations come due in September 2023. Pursuant to an agreement with Yorkville executed on August 16, 2023, $3,150,000 owed in connection with our prepaid advance liability must be paid by August 25, 2023, and three additional payments, each in the amount of $1,383,333, are to be paid on the last day of each of October 2023, November 2023, and December 2023. As of the date of these financial statements, we have no commitments to obtain additional funding. These factors raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that may be necessary should we be unable to continue as a going concern. Our continuance as a going concern is dependent upon our ability to obtain additional operating capital and ultimately achieve revenue growth and attain profitability.
Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q 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.
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
For a description of our critical accounting estimates, see Critical Accounting Estimates in Item 7 of our Annual Report on Form 10-K which was filed with the SEC on March 28, 2023. There have been no changes to these critical accounting estimates since the Form 10-K was filed.
Recent Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies of our unaudited condensed consolidated financial statements included within this Quarterly Report for a summary of recently adopted accounting pronouncements.
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our management, with the participation of our principal executive officer and principal financial officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the reasonable assurance level.
During the year ended December 31, 2021, our management identified a material weakness in our internal control over financial reporting which continued to exist as of June 30, 2023. We did not design or maintain effective controls to ensure that there is an independent review and approval of electronic payments (wires, EFT’s, ACH’s and credit card payments). During May 2023, we implemented preventative controls around the electronic payment process to ensure proper segregation of duties. Such controls require being in place for a full reporting quarter to evaluate effectiveness. As such, we expect the material weakness will be remediated as of September 30, 2023, although no assurance can be given that this will be the outcome.
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 June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as described above.
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.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
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 March 28, 2023, except as follows.
We might not be able to continue as a going concern, which would likely cause our stockholders to lose most or all of their investment.
Our financial statements have been prepared under the assumption that we would continue as a going concern. However, we have concluded that there is substantial doubt about our ability to continue as a going concern, because without additional sources of funding, our cash at June 30, 2023 is not sufficient for us to operate as a going concern for a period of at least one year from the date that the financial statements included in this Quarterly Report on Form 10-Q are issued. Management’s plans concerning these matters, including our need to raise additional capital, are described in Note 2 – Summary of Significant Accounting Policies – Going Concern of our financial statements included within this Quarterly Report on Form 10-Q, however, management cannot assure you that its plans will be successful. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit No.
Description
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
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*
104
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)*
Filed herewith.
**
Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: August 16, 2023
By:
/s/ Michael Mo
Michael Mo
Chief Executive Officer
(Principal Executive Officer)
/s/ Shawn Canter
Shawn Canter
Chief Financial Officer
(Principal Financial and Accounting Officer)