KULR Technology Group Inc

AMEX:KULR

Earnings Call Transcript 2023-Q4

[Stuart Smith]

Welcome, everyone, to the Full Year 2023 Earnings Call for KULR Technology Group, Inc. The company's traded on the New York Stock Exchange, the NYSE under the ticker symbol KULR.

I will be joined on the call today by the CEO of the company, that's Michael Mo; and the Chief Financial Officer of the company, Shawn Canter.

The call will proceed as follows. We will get opening statements from both members of the management team. After those opening statements have concluded, we will welcome on to the call of various analysts who will also be asking their questions directly to the company at the conclusion of the Q&A portion of this call, we will then wrap up the call.

With that, before the call can begin, please listen to the following statements. This call does not constitute an offer to sell or a solicitation of offers to buy any securities of any entity. The call contains forward-looking statements based on KULR's expectations, forecasts and assumptions that involve risks and uncertainties. Forward-looking statements made on this call are based on the information available to management as of the date hereof. The company's actual results may differ materially from those stated or [indiscernible] such forward-looking statements due to risks and uncertainties associated with their business, which include risk factors disclosed in their Form 10-K with the Securities and Exchange Commission on March 28, 2023.

Forward-looking statements include statements regarding their 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 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 their 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.

With that, I will now turn the call over to the CEO of the company, Michael Mo. Michael, the call is yours.

[Michael Mo, executive]

Thank you, Stuart. Thank you, everybody, for joining us today. 2023 was the most challenging year pivotal year for KULR. For most of 2023, we are working on paying down approximately $8 million of prepaid advance convertible note that we owe to [indiscernible]. This outstanding debt really limited KULR's ability to access capital in a market that had already been the most difficult for small cap companies in recent history. The difficulties in existing capital really limited our ability to [ grow ] our business as we had to reduce our workforce by 15% and work with our customers and partners closely to manage our operations.

During 2023, we completed 2 equity financing for a total of approximately $3.5 million. We experienced significant shareholder value erosion during that process. We're not interested in doing that again. I'm happy to report that we have retired the entire prepaid advanced convertible note on March 27 of this year.

Despite these challenges, 2023 was a transformational year for KULR as we achieved record revenue growth and built a solid foundation to grow in 2024 and beyond. 2023 total revenue increased 146% year-over-year to reach a record $9.8 million. Total number of customers increased from 36% to 53%. Product sales revenue increased 161% and number of product sales customers grew from 33% to 39%. Engineering Services revenue increased [ 117%]. Total number of engineering service customers grew from [ 14 to 17].

In addition to the tremendous growth in our business, we have built an industry-leading technology platform for battery safety and thermal management and a world-class engineering team to execute our plan. I would like to share with you more about our KULR ONE platform and how it's serving some of the leading companies in the world. Generally speaking, every combination of battery application, storage and operational environments and driving requirements and standards are different. Further, this variability in chemistry based on the use and also on the chemistry improvements over time.

There will always be something new to address. Therefore, there's no one size fit all solution which necessitates taking a holistic approach to ensure the technical providers' ability to effectively and competitively support lithium [indiscernible] battery development. It [indiscernible] with accessing high-quality battery cells from top-tier OEMs. Then we provide cell-level testing categorization. That's from electrical level to mechanical level and also to destructive test level for thermal runaway energy release.

With the data from the cell level categorization testing, we can build computer models of the battery pack for simulation analysis which gives us confidence of the battery packs performance before it's ever built. Then we built the prototype battery pack for tech level and system-level testing that range from electrical performance, thermal performance and also safety ratings.

We've also got our own radiation-tolerant battery management system, BMS, intelligent battery monitoring system to get more data when the battery is [indiscernible] to use. Last but not least is our safe case technology that keeps storage and transportation of battery safe throughout its life cycle of usage.

To address this need for holistic approach, KULR spent the last few years building a team and have developed a portfolio of products and services that can address all the affirmation points. Some of the KULR's key products include ISC, which is internal short-circuit trigger cells, which KULR has an exclusive license from NASA and DOE. We have served over 100 customers over the years with this technology. Our Thermal Runaway Shield (TRS) product is used to prevent thermal runaway [indiscernible].

Our recent announcement on over $1 million order from [ age 55 ] demonstrate how this technology is helping the pioneer and global leader in electric aviation to meet European Union Aviation Agency battery safety requirements.

For safety testing, KULR has onboard a diverse array of tools used to categorize battery cell performance. Among them is the SDRC technology, which won NASA Invention of the Year Award in 2023. We have performed FTRC testing for the world's largest automotive OEMs and leading private sales exploration companies and top [indiscernible] customers. We expect the battery safety testing to be a multimillion dollar business for us in an anchor of our product offering.

KULR has invested heavily in quality and electrical testing capabilities that has fully automated NASA Work Instruction 37 which screens cells and is part of the cell qualification process for human space exploration. We have the only fully automated cell screening line in the industry to meet NASA Work Instruction 37 requirements.

In addition to NASA, we have served several other private space exploration companies that require these battery cells to be the standard to be part of the Artemis mission going to the moon.

KULR is an industry leader in safe storage and transportation with a safe case and safe products that are the workforce of our [indiscernible] product. Collectively, these products, services and solutions are referred to as KULR ONE Design Solutions, (K1DS) and they allow KULR to jump in with any customer, anytime, anywhere to their battery development cycles.

KULR leverages all components of the KULR Design Solutions to design house battery systems and also provide ground-up custom solutions for our customer base. Regarding in-house batteries, KULR focused on using cell level categorization data to drive the designs of reference architectures that can be rapidly adopted to the customers' needs. Key example include the KULR ONE space, which is for the space application, KULR ONE Guardian, which is for military application and also KULR ONE [ MAX ] for modular energy storage applications.

[ With this ] KULR ONE battery designed apart from the competition is not only the superior thermal performance and safety aspect of it, it's the flexibility of the architecture that allows to be quickly customized and still meet regulatory requirements across a wide spectrum of applications. Our end-to-end and one-stop shop solution is what the customers are looking for.

The KULR space architecture is focused on providing high performance and energy dense solutions that are designed with intent to satisfy NASA JSC 793 requirements, which is a gold standard for safe batteries in space exploration. The combination of the KULR ONE space architecture with KULR's offerings available to a customer through KULR ONE Design Solutions is the driving force for some of our key customer agents, including [ NanoRac], which is part of Voyager space, and -- among many others.

KULR's able to provide rapid time to market to fully qualified battery systems, something that has been expressed as a much-needed capability by the customer base. While others may take 3 to 4 years to build such systems, the KULR engineering team will take 18 months or less to deliver to our customers.

As the space economy is expected to reach over $1.8 billion by 2035, we believe [indiscernible] battery will be the important role as the primary energy source. We expect KULR ONE space platform to capture meaningful market share in the coming years. The KULR ONE Guardian architecture, like with the KULR ONE space, focused on safety and performance. The primary differentiator here is to focus on military standards rather than a NASA TSC standard. Under the KULR ONE Guardian umbrella, KULR's working on the next-generation standard format 2590 battery that achieve energy levels never seen before in this form factor.

Our development engagement with RV devcom is a perfect example of a KULR ONE [ Guardian ] engagement. We started this project in Q2 of 2023 to deliver the next-generation AV battery for the RB with the latest [indiscernible] technology. [ Army ] has increased the total contract value to over $1.8 million, that we're scheduled to deliver our prototype battery [indiscernible] of this year. This battery will be a game changer for the [ Army ] in terms of safety and energy capacity. A hybrid between KULR ONE Guardian and KULR ONE MAX is our UPS program with the Army as well. Under a multiyear contract, KULR has delivered a KULR ONE battery pack specifically for Army's effort to modernize future command post.

This specialized combined performance. 21,700 power cells with the state of our thermal management technology to enhance propagation resistance while minimize size and weight overhead. This customization has resulted in an impressive 80% improvement in UPS [ run time ] providing strategic edge in technical command operations.

The SafeCase design has improved over the last year with adoption of robust thermal liner in the strap and [indiscernible]. KULR has demonstrated the performance of the recent design win life demonstration with the San Diego Park Department and has met officials across the country. And with the publication of this result to the public for a 2.5 kilowatt hour battery pack in full propagation with nearly 100 cells that propagated in an hour time frame. KULR also maintains a transparent offering of our testing results and a step forward in 2023 by offering the entire testing and qualification data set to U.S. Department of Transportation.

The KULR team recognizes that no 2 batteries thermal runaway events are the same. Therefore, it's important to continue testing. They showed the test results, lesson learned. Customers are coming to KULR because of SafeCase has the highest energy capacity in the industry. Its [ pantonology ] is the most effective in the industry and has been used on international space issues since 2019. And it's reusable, which makes it much more sustainable and cost-effective compared to our competitions.

In addition to the battery cycling applications, we're finding new applications for SafeCase used for energy storage in battery and EV production. We're working with a leading U.S. automaker for mitigating thermal runner risk in EV battery module during vehicle production. This project underscores KULR's commitment to safety innovation in the rapidly growing electrical vehicle market.

SafeCase is also being adopted by a leading e-vehicle customer for the production line which showcased the versatility and efficacy of SafeCase ensuring safe handling and transportation of battery across sophisticated production facilities. We believe that KULR ONE platform and SafeCase product line are going to be the main growth driver for KULR going forward.

To more efficiently facilitate our growth, we've established KULR Texas in our new facility in Webster, Texas in February of this year. This facility is conveniently located 2.1 miles from NASA adjusted Space Center and is surrounded by a large number of KULR existing and target customers. This 17,000 square foot facility is home to our battery R&D team, our battery testing service and our battery panel production line. It's going to be our standard excellence to show all the capabilities of the KULR ONE Design Solutions.

Next, Shawn Canter will provide financial updates. Shawn?

[Shawn Canter, executive]

Thanks, Mike. You can see the financial results from our full year 2020 in our 10-K, which is now online. I'll touch on some highlights.

2023 was another record revenue year for KULR. KULR extended its growth trend, growing revenue at about 100% compound annual growth rate for the last 2 years. Additionally, KULR extended its trailing 12-month revenue growth record once again. KULR generated revenue of approximately $9.8 million versus $4 million in 2022, an increase of 146%. Product revenue increased 161% and service revenue was up 117% year-over-year.

Gross margin for 2023 was 37% versus 59% in 2022. This reflects the increase in product sales and a larger portion of revenue mix that management anticipates will scale revenue going forward. Revenue-generating customers in 2023 [ number ] 53 versus 36% in 2022, a 47% increase. Revenue per customer in 2023 was approximately $185,000 versus approximately $111,000 in 2022, a 67% increase. KULR consumed less cash from operating and investing activities in 2023 than in 2022. Net cash used in operating activities decreased 31% year-over-year. Net cash used in operating and investing activities decreased 4% year-over-year. With that, back to you, Stuart.

[Stuart Smith]

Thank you, Sean. And now we will begin the Q&A portion of this earnings call. First, we have a question from Jake Sekelsky. He is the Managing Director and Senior Research Analyst at Alliance Global Partners. And I'm going to be asking these questions for him this time. He was not able to make it today.

So the first question is what inventory management strategies are you looking at as safe case sales ramp on the back of the [ EVTOL ] contract announcement?

[Shawn Canter, executive]

Thanks, Stuart. It's Shawn. I'll take that one. Our contract manufacturing partners hold buffer materials inventory and have capacity to support our demand on short notice. We will hold minimal finished goods inventory to support small orders and have our supply chain ready to quickly fill large orders as they come in. I think this will put us in a good position for supporting customers while maintaining our focus on improving our cash flow.

[Stuart Smith]

Okay. Very good. This next question is a 2-part question. Do the recent award permits from the Department of Transportation for the safe transportation of EOL and DDR batteries had a specific time frame that they are active for? Also, can you touch on some areas, the new permit opens the door to?

[Michael Mo, executive]

Stuart, yes, I'll take that. This is Michael Mo. On the SafeCase special permit, they're good for 3 years, and the new permit really gives our OEM customers and also logistic partners more flexibility on how many smartphones, tablets, laptops and power tools that can bid into each SafeCase and SafeSleep is really for business purposes.

So we're working with logistics shipping companies and e-commerce logistics companies to use these solutions for the OEM customers. It turns out that these logistic partners themselves have a lot of batteries for internal use, storage and shipment. So as we explore more, we're finding new applications. Kind of like what we talked about in the prepared remarks, how we work with automotive OEMs, [ EVTOL ] customers, the more we get into their operation, the more application we find.

And now we're taking these opportunity requirements and refine our solutions so they can serve these entire industry in entire new markets with the SafeCase and [indiscernible] back technology. So we're -- we're super excited about these new applications opportunities and that we expect them to be good revenue drivers going forward for us.

[Stuart Smith]

Thank you, Michael. All right. Now we're going to be joined by Theodore O'Neill. He is the principal of Equity Research at Litchfield Hills Research. Theodore, you now have the call. Please proceed with your questions.

[Theodore O'Neill, analyst]

Congratulations on a solid quarter. I have 2 questions for you. My first question is -- in the last 3 months, KULR's announced projects or contracts with a leading global space innovator, [indiscernible], a leading automaker, the Army, [indiscernible], 55 and you received special permits from the DOT, can you prioritize for us possible the time line for these to turn into recurring revenue? And how big those markets might be?

[Michael Mo, executive]

Yes. So thank you, Theo. We actually talked quite a bit about these customers in my prepared remarks and how they tie into our customer or our product road map. And really excited about these engagements.

As you can see, they're in different markets. They're not correlated markets. And so that's really our diversification strategy on a customer base and reduce our risk. The service contract -- so to answer your question, though, we always start with service contract revenue. As you can see, our service contract revenue start -- grew 117% year-over-year. That's really an indication of what can lead to future product revenue growth for us.

The [ H55 ] engagement, for example, we start the contract services revenue about 3 years ago. Now you can see the ramp-up in volume for over $1 million worth of order. The Army [ Devco ] contract, we started 18 months ago. then now we're delivering the prototype battery. And the [ Nanorex], the prototype battery is delivered within 9 months. So as you can see, we're shortening the design cycle for our customers. We're getting them faster time to market so they can win, and we expect that trend to continue. And each customer frankly, have different life cycles and product -- product [ rev ] cycles. But the faster time to market that we enable for them is why they choose KULR.

[Theodore O'Neill, analyst]

Okay. That's helpful. My other question is that you've opened an online marketplace, which customers is this aimed at? And who would be buying online versus going directly to you and trying to negotiate some kind of contract?

[Michael Mo, executive]

Yes. Yes. Well, thanks for keeping it [ real ] up to date because I think our [indiscernible] opened up a couple of days ago. It is for both. Yes. Thank you. It is for both for B2B and B2C customers. We're getting a lot of increase from fire departments, hazmat teams, dangerous goods teams, companies as well as consumers directly inquiring about the SafeCase.

So we established the online store. We believe it's a good way to directly interface with our customers and can serve them in a scalable way. And in addition, we're also working with online and off-line distributors who are focused on hazmat safety, dangerous goods industry. So stay tuned for more business partnership announcements in the future on additional distributed channels for us.

[Stuart Smith]

All right. Thank you, Theo, and now we'll be joined by Michael Legg Sr. He is the Managing Director at Benchmark in emerging growth research. Michael, the call is now yours. Please provide us with your questions.

[Michael Legg, analyst]

Michael, Shawn, great job [ getting ] and you've got off the balance sheet. I know that adds [indiscernible]. A large part of your focus at the end of '23 and the beginning of '24. And I want to try to understand how much of that focus now that you add that off the balance sheet, you can put back to strategic growth getting more out of the door. And obviously, the revenues in the fourth quarter were down sequentially from the previous quarter.

Was any of that impacted by the cash, the balance sheet and our ability to get product out the door? I kind of want to get into the revenue run rate and where we're at now and how you see that going forward. So let's just start there, please.

[Michael Mo, executive]

Yes. Yes, Michael, thank you. Yes, I'll take that. So I mean, the outstanding debt that we had throughout 2023, also first part of 2024, which we just got completely paid off and retired was very, very consuming for the management to solve that. In my prepared remarks, I talked about how that really [indiscernible] access to capital that really forced us to work very closely with our customers and partners on our operations and cash flow.

I would say that, that had impact in our performance leading to the second part of 2023. And we had to cut workforce. We had to put certain programs on hold to focus on the right programs to serve I mean, every customer is a good customer, but some customers a little bit more urgent. So we have to prioritize, if you will. So yes, no, it had a real impact on not just the management time frame, the resources, the mind share, but also operations.

But we're certainly glad that that's not in the way. Shawn and I and the entire team can really focus on the business. Meanwhile, super proud of the team executing on the technology side, on the infrastructure side, operations side, and getting huge growth in customer engagements, huge growth in revenue per customer. And I think we're just setting up the stage for a very strong future growth.

[Michael Legg, analyst]

Great. And when you look at all these new contracts you're bringing on, what type of visibility do you have into those for when deliveries will be? And how much lead time on that do you usually have?

[Michael Mo, executive]

I would think that the engineering of this contracts are hopefully getting shorter and shorter. Like I said, the [indiscernible] delivery was 9 months. So some of these engineering service contracts still, I'd say, conservatively 9 to 18 months design, qualification, testing, prototype, so forth and then you get to starting to ramp.

And so you're looking at 2024, getting to 2023 customers to ramp and then you get 2024 customers -- well end of 2023 customers start going to pilot production in '24, '25. And yes, I think that's probably a 12 to 18 months REB story, Michael.

[Michael Legg, analyst]

Okay. Great. Congrats and nice to see all the progress and look forward to '24.

[Stuart Smith]

All right. Well, with that, that was our last set of questions from Michael. And we want to thank Michael, Theodore and Jake for providing their questions to us here today. That now concludes our call, so I will turn the call back over to our operator, Thomas, to end the call.

[Operator]

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