KULR Technology Group Inc

AMEX:KULR

Earnings Call Transcript 2024-Q3

[Stuart Smith]

Good afternoon, everyone, and welcome to the KULR Technology Group Third Quarter 2024 Earnings Call. I'm your moderator for the call Stuart Smith, and I will be joined on the call today by the CEO of KULR Technology Group, Michael Mo, and the CFO of the company, Shawn Canter. The call will consist of opening statements from both Michael Mo and Shawn Canter, followed by a Q&A session that covers the questions that have been sent in prior to today's call from shareholders via e-mail and on social media.

But before the call can begin, please listen to the following safe harbor statement. This call does not constitute an offer to sell or solicitation of offers to buy any securities of any entity. This call contains certain forward-looking statements based on the company's current expectations, forecasts and assumptions that involve risks and uncertainties. Forward-looking statements made on this call are based on information available to management as of the date hereof. The company's actual results may differ materially from those stated or implied in such forward-looking statements due to risks and uncertainties associated with their business, which include risk factors disclosed in the company's Form 10-K filed with the Securities and Exchange Commission on April 12, 2024, as may be amended or supplemented by other results the company files with the Securities and Exchange Commission from time to time.

Forward-looking statements include statements regarding the company's expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, should and would or similar words. All forecasts are provided by management on this call are based on the information available at this time, and management expects that internal projections and expectations may change over time. In addition, the forecasts are entirely on management's best estimate of their future financial performance given the company's current contracts, current backlog of opportunities and conversations with new and existing customers about their products and services.

The company assumes no obligation to update the information included on this call, whether as a result of new information, future events or otherwise. Now with that, I will turn the call over to the Chief Executive Officer of the company, Michael Mo. Michael, the call is yours.

[Michael Mo, executive]

Thank you, Stuart. This is Michael Mo. Thanks to everyone for joining us today. I'd like to go over some of the financial and operational highlights. In Q3 2024, we achieved record revenue of approximately $3.19 million. Total paying customers for the quarter increased 83%. Engineering Service revenue increased 22%. Engineering service revenue customers increased 143%. Product revenue customers increased 54%. We're able to achieve all these growth numbers while reducing the operating expenses by 38% year-over-year.

We're achieving more with less by streaming our operations, building out technology platforms that can scale quickly and increase in productivity with automation and AI-enhanced tools. Our team members are working very hard to achieve these goals. In August, we officially designated our facility in Webster, Texas is our new headquarter. We hosted our first open house at this facility a couple of weeks ago and achieved overwhelming support from our customers, partners and local government officials. We're committed to continue our investment in the talent and capabilities in our headquarter in Texas. These investments are important to drive revenue growth by providing comprehensive, in-house product and service solutions that span the entire life cycle of battery design, testing, hurdle typing and bonding production all under one roof.

We're living in exciting times because we are now at the cross-section of 3 multigenerational megatrends and technology. First, the privatization of the space economy, and NASA's mission to go back to the moon is feeling tremendous growth in the space economy for the next 10 years. It's expected to grow to $1.8 trillion. We believe that [ KULR ] space battery will participate in a $6 billion space battery market and be a big growth driver for us. AI is driving insatiable appetite for energy. A ChatGPT search cost 10x more energy than the Google search. AI data center power consumption is expected to grow over 160% over the next few years.

Now you're hearing that we're going to nuclear to power these AI data centers from Microsoft, Google, Oracle and others. 40% of data center power consumption is for cooling of the chips and equipment. We expect to lower this energy consumption with our KULR 0 technology by removing vibration including fans, KULR enables the fans to consume less power, make less noise and less log. There are over 1 billion and sold in the world every year. Our mission is to make every fan a perfectly balanced fan to save energy. The transition electrification is powered by battery and renewable energy. We believe our KULR platform and the CVC platforms are going to contribute to this transition and be big growth drivers for us.

The space battery market is expected to reach $6.35 billion by 2030, up from $3.67 billion in 2022. The acceleration of new space companies and the sustained growth of established players are contributing to a space economy projected to surpass $1.8 trillion by 2030. A big part of this growing market is its reliance on small satellites, cube sets, satellite constellations and private space stations. And these products demand commercial off-the-shelf median batteries that are cost-effective and can be customized quickly and ready for flight applications. At KULR, we are well positioned to serve that market with our KULR space battery products available at 100, 200 and 400-watt hours. They are ready to be configured to meet the customer needs quickly and they're ready to meet the new NASSA-GSC-20793 safety certification requirement for crew space missions. We're very excited about starting volume production for customers in 2025.

In Q3, we expanded our development contract for Army devcom to over $2.4 million. Building on the momentum of this ongoing partnership, the Army will expand the development of additional prototypes and comprehensive environmental qualification testing in accordance to mill standard [ A10. ] This expanded contract underscores quarter's commitment to advancing the performance and reliability of silicon any lithium on battery cells under the most demanding conditions. These prototypes will undergo rigorous testing to ensure that the increased energy density does not compromise safety and reliability in active duty environments. This country also aligns with KULR's long-term strategy of forming strong partnerships to develop technologies that enhance the energy efficiency and resiliency in mission-critical military applications.

Success in these efforts only reinforces KULR's role as a key contributor to mission readiness in defense and aerospace sectors. As many of our long-time shareholders know, we come from a long heritage of providing thermal technologies to defense and space applications. In many cases, we're the sole source provider for critical components for missile programs. For example, our face change material Heating is designed to manage extreme thermal loads generally during mission-critical maneuvers, helping maintain optimum performance and reliability within the missiles electronic systems. At KULR, we'll commit to continuing the advancement of our thermal management product platforms to serve our DoD customers.

KULR One Air is going to be another revenue driver for us next year. President Elect just announced his advanced their mobility policy push that will accelerate the development and adoption of eVito in electric air mobility in the United States. We already work with some of the largest EV to electric playing companies as well as some of the key battery cell providers in this market. H55, for example, is already in production with KULR's pantera runway shoe technology inside the battery pack, which is the first one to receive European IASA certification. We have strong partnerships with cell makers such as Ambros and Monica on the new high-energy battery sales and to work with FAA to create an ecosystem of partners and customer to speed up the development, testing and certification process. Our goal is to make KULR One Air the industry standard platform for electric aviation.

Speaking of industry standards, we're working hard to establish KULR Safex platform to be the industry standard for safe battery storage and transportation. To create that ecosystem, we're working with OEM customers, regulators, buy fighters and insurance companies to serve all stakeholders. During our open house, we hosted many firefighters and first responders. We had a live test of a 3.4 kilowatt-hour battery pack in our safe case for the Fire Department of New York for their demo. The safe case performed flawlessly. In addition, we hosted an insurance industry panel for the safe case with the insurance experts, customers and firefighter to discuss the risk and solutions. We're very excited to work with insurance companies to make safeties available to their customers and lower the insurance premium for the customers by reducing the verified risk for all parties. AI demand exponentially more computing power and energy consumption, so does the need for cooling of these systems.

For air cooling, and performance is critical to drive enough airflow to include the latest AI GPUs. Fan performance is limited by vibration and roller speed. So we developed KULR Xero Vibe to virtually eliminate all vibrations in including fan to make them run smoother, consume less energy, produce less noise and last longer. We believe this is a game-changer technology as coding fans are critical to run the modern data center and cryptomining server farms. We announced a multimillion dollar licensing deal for quarter 0 technology in Q3. It is the first IP licensing deal of its kind for KULR, highlighting a pivotal expansion in our business model to be more scalable and achieve higher margins. We'll explore more licensing deals with different applications across geographic regions. Research firm Gartner predicts that the spending on data center systems will reach $318 billion this year up 34% from a year earlier.

In 2025, [indiscernible] data center spending growing 15.5% to $367 billion. We're excited about this growth as well as our KULR Business to explore other new applications such as electric aviation and winter turbine to make them more energy efficient and last long. When we put all these products and services together, we're building a new energy management platform for space, electrification and AI economy. We've been on this technology development and business model path for many years. And now we're starting to see the pieces fitting together and achieve the flywheel fact. It's taking a long time because these things are hard to do by themselves. And when you do it all together as a small company like KULR, it gets harder. But we're making great progress, thanks to our very talented engineering team in the market is getting to know us better, thanks to our sales and marketing team.

We have a multipronged business model to serve our customers. As we continue to grow our customer base and provide them with more design and testing services, all in-house, we're advancing these customers towards production phase where we'll see their revenue growth accelerate. Combined that with IP licensing business, we can achieve a scalable business model with high gross margin profile. I'm a believer of AI nd I think it's going to fundamentally change everything we do much faster than we realized. So we must think about it and plan for it so that the future of KULR can benefit from it. We're looking at AI to stream or streamline our operations and increase productivity on all fronts of our business. Software development is definitely an area where we benefit from AI. Platforms such as Google's Gemini-powered Alpha CO2 can dramatically lower the cost of software development is speed up development time. We'll also integrate more AI and machine learning capabilities into KULR battery platform and KULR Vibe system to power the next-generation AI data centers.

Personally, I'm a believer of the new AI agent powered Industrial Revolution 4.0. We're building our products and services to be ready to power the physical to digital world interface layer of AI agents. More to come on that in 2025. Next, Shawn Canter will discuss financial highlights. Shawn?

[Shawn Canter, executive]

Thanks, Mike. You can see the financial results from our third quarter in our Form 10-Q, which is now online. Let's cover some key highlights. Topics worth noting include a record revenue quarter, gross margins up meaningfully Operating expense is down, a continued trend of expanding our paying customer base, which contributes to a shrinking customer concentration and KULR's balance sheet continues to get stronger. Let's start with our income statement and revenue. In the third quarter, KULR set a new revenue record. Revenue was approximately $3.2 million. This is about 5% higher than the same period last year, which was itself then a record revenue quarter. Product revenue was approximately $765,000 which was down 60% from the same period last year.

Some of this decline can be attributed to the nature of the timing of how the end markets we serve, place orders. Some is the impact of previously mentioned delayed yet expected orders in 2024 from a significant customer from 2023. Currently, our sales team expects orders from that customer to resume in 2025. Service revenue was approximately $1.4 million in the third quarter, up 22% from the same period last year. As we have mentioned in the past, as our service business grows, management believes the product business should follow. And of course, KULR signed its first revenue generating license agreement in the third quarter for over $1 million in revenue. We are excited about this business model and hope to be able to announce similar type of deals in the coming quarters.

Gross margin for the third quarter was 71% versus 44% in the same period last year. Even without the positive impact on gross margin from the KULR Zero Vibe license deal that we signed in the third quarter, gross margin would have been 57%. Comparing the third quarter with the same quarter last year, R&D costs came down 32%. SG&A costs came down 41% and total operating expenses down by about 38%. Earnings per share for the third quarter was a $0.01 loss. This is an improvement of about 80% from the same period last year. Now let's spend a moment on customers. KULR had 33 total paying customers for the third quarter, up 83% from the same period last year. Total paying product customers #20, up about 54% from the same quarter last year and KULR had 17 total paying service customers. up 143% from the same period last year.

As we broaden our customer base, reliance on any one customer should be mitigated. A few points on our balance sheet now. Compared to the end of 2023, our balance sheet has improved materially. Cash plus accounts receivable are up 71%. Total assets are up 14% and total liabilities are down 45%. While the cash used in operating plus investing activities did go up a little about 7% in the 9 months ending third quarter this year versus last year. This is largely due to increased accounts receivable, which we anticipate becoming cash upon collection and a significant decrease in accounts payable which enhances vendor relations, reduces debt and indicates a stronger, less risky balance sheet. Back to you, Stuart.

[Stuart Smith]

Well, thank you for that, Sean. And now, as previously mentioned, we will begin the question-and-answer portion of today's call. And here's our first question. KULR's business is focused on high-performance thermal management for batteries and electronics. Can you provide updates on any upcoming product launches or significant innovations we should expect in 2025?

[Michael Mo, executive]

Yes, Stuart, I'll take that. I think we've given quite a bit of a good update on all the significant product developments and innovations coming in 2025. from KULR One space, KULR Guardian, KULR [indiscernible] As well as our KULR's platform for servers and potentially wind farm turbine -- that all -- these are all products and technology developments that are going to drive our growth in 2 -- and equally exciting to me is how to explore new business models with customers with these products that we'll be looking for more licensing deals around different applications and also geographic regions. For the [indiscernible] products as we work closer with insurance companies, maybe there's a subscription model to explore for our products, we will have to see in 2025.

[Stuart Smith]

All right. Next question. Operating expenses particularly research and development and general administrative expenses remain high. What steps are you taking to optimize these costs without compromising product development?

[Shawn Canter, executive]

Thanks, Stuart. It's Shawn. I'll take that one. Focusing on our investments continues to be important to us. You'll note our operating expenses are down 38% than they were in the third quarter last year. we've reduced R&D down 32% and SG&A down 42%. We remain diligent in looking for areas to streamline our processes to take our costs down. We're vigilant looking for large or small cost savings wherever we can find them because over the course of time, even small savings will add up to larger savings.

[Stuart Smith]

All right, Shawn. Next question. Given the global supply chain disruptions, how is KULR ensuring the continued supply of key materials and managing vendor relationships to avoid future shortages or delays?

[Shawn Canter, executive]

Stuart, it's Shawn. I think I'll take that one, too. This is an important topic given the current state of affairs in the world. One we definitely are thinking about. It's important to note our vendor concentration has gone down with respect to vendors that represent 10% or more of inventory for the third quarter of this year versus last year, we went down from 25% to 0% this quarter. So we are diversifying and reducing our risk. Our great supply chain team is always thinking about this topic and tries to qualify multiple sources. And to date, we haven't encountered any material issues, but we'll keep staying focused on it.

[Stuart Smith]

Again, next question with a few customers accounting for a large portion of revenue. How is KULR planning to diversify its customer base to mitigate risks associated with customer concentration.

[Shawn Canter, executive]

It's a good question, Stuart, and I'll -- let me offer some insight here. This is something we are definitely paying attention to and I'll share some actual figures with you. With respect to customers who represent 10% or more of our business for the third quarter of this year compared to last year -- third quarter our customer concentration is down 38%.

For the 9 months ended the third quarter of this year versus the same period last year, our customer concentration is down 46%. And as we continue the ongoing trend of growing our customer base, customer concentration should continue to improve.

[Stuart Smith]

Thank you, Shawn. Next question then with lithium battery transportation and storage likely to be more regulated by governments in the future, which could require batteries to be transported stored in products similar to what KULR is currently producing. How is KULR positioning themselves to be able to quickly meet a large demand for their products in the future if it arises?

[Michael Mo, executive]

Yes. Stuart, I'll take that. And first of all, I certainly hope and expect such large demand to pick up. And if it were to happen to our safety case products, in our products as well. So for the Safecase products, we have contract manufacturing partner who can scale up production very quickly with their existing factories and operations. These are partners that we worked with for a while now. and they're both in North America and also in Asia. So we can scale up the production very quickly without much capital expenditure from core.

[Stuart Smith]

Very good. Well, let's move on to the next question then. When do you feel like the stock price will reach $1 -- and what are the strategies to get there?

[Shawn Canter, executive]

Stuart, it's Shawn. Maybe I'll try to take a crack at that. Certainly, this is the multimillion dollar question, so to speak. KULR continues to grow and diversify its revenue. Our balance sheet and concentrations continue to improve, as I referenced earlier, KULR's efforts to streamline are showing up in lower expenses. And while we cannot predict when a stock will reach a certain price, we can continue to work on the factors that would traditionally be likely to increase demand for KULR stock, which all else equal, should cause an upward trend in the stock.

[Stuart Smith]

A question about our current state politically, that is, and here's the question. Now that Trump has won the presidential election, has there been any talk amongst the associates of Elon Musk about major investments coming in 2025, noting that Tesla and SpaceX is a customer of KULR?

[Michael Mo, executive]

Stuart, I'll take that one. Yes, now the election is complete. We're certainly seeing more certainty in the marketplace, which is usually good for business. As I talked about earlier, we are already seeing some policy direction pushes from the administration having a big impact on electric aviation and the [indiscernible] Market. We are already working with all these customers, and we're building a platform to accelerate the design, the testing and also the certification of these batteries with FAA. And that's really exciting for us.

For the other product markets such as the EV and space customers mentioned in the question, we will see how the new policy changes can impact those industries and how that can drive KULR's business.

[Stuart Smith]

All right. Now this will be our final question for the call today. When can we expect to start hearing about huge orders to where KULR profits would show advanced signs of growth?

[Michael Mo, executive]

Stuart, I'll take that. We'll obviously continue to update our shareholders on the new customers and engagements. History has shown that our customer base is growing quickly. Our order sizes are bigger and our gross margin is improving. And so these are all the positive trends in our business model and how we're executing on our business model, and we'll continue to execute on that and keep our shareholders updated.

[Stuart Smith]

Well, very good. As I mentioned, that is our final question of the day. I would like to thank once again the CEO of the company, Michael Mo, as well as the CFO for the company Shawn Canter their participation in the call today. And of course, to all the shareholders that provided their questions via social media, or e-mail. We appreciate your questions. We hope we got to everyone, as I always say, a lot of the same questions get asked in different ways, but we consolidate them into what we feel like represents the vast majority of the questions that are sent in over the last well, a couple of weeks.

But of course, you send them in over the past quarter as well. So for Shawn, Michael and myself, I'd like to thank you, and I will now turn the call over to the operator.

[Operator]

Thank you. This does conclude today's conference call and webcast. You may disconnect at this time, and have a wonderful day. Thank you for your participation.