Q4 2023 KULR Technology Group Inc Earnings Call

Participants

Stuart Smith; IR; KULR Technology Group Inc

Michael Mo; Chairman of the Board, Chief Executive Officer; KULR Technology Group Inc

Shawn Canter; Chief Financial Officer; KULR Technology Group Inc

Theodore O'Neill; Analyst; Litchfield Hills Research

Michael Legg; Analyst; Benchmark Company

Presentation

Stuart Smith

Welcome everyone to the full year 2023 earnings call for KULR Technology Group, Incorporated. 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 onto the call, various analysts 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 solicitation of offers to buy any securities of any entity. This call may contain certain forward-looking statements based on current 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 here of 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 their Form 10-K with the Securities Exchange Commission on March 20, 2023.
Forward-looking statements include statements regarding their expectations, beliefs, intentions or strategies regarding the future and combined could 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 contract, 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

Thank you, Stuart. Thank you, everybody, for joining us today. 2023 was the most challenging yet pivotal year for Croda for most of 2023, we're working on paying down approximately $8 million of prepaid and S. convertible note that we owe to Wyatt 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 accessing capital Drilling Limited, our ability to grow our business as we had to reduce our workforce by 15% and worked with our customers and partners closely to manage our operations.
During 2023, we completed two equity financing for a total of approximately $3.5 million. We experienced significant shareholder value erosion during that process. There were no interest in doing that. Again, I'm happy to report that we have retired entire prepay of as convertible note on March 27 of this year. Despite these challenges, 2023 was a transformational year for quarter 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 sale revenue increased 161%.
A number of product sales customers grew from 33 to 39. Engineering Services revenue increased 17%. 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 Q1 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 there's variability in chemistry based on the use and also other chemistry improvements over time, there will always be something new to address. Therefore, there's no one size fits all solution, which necessitates taking a holistic approach to ensure that technical providers' ability to effectively and competitively support lithium ion battery developed it all starts with accessing high-quality battery cells from top tier for year.
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 characterization testing, we can build computer models of the battery pack for simulation analysis, which give us confidence of the battery pack performance before it's ever built that we build a prototype battery pack for pack level system level testing, they range from electrical performance, thermal performance and also safety rates. We've also got our own radiation tolerant battery management system, PMS, intelligent battery monitoring system to get more data when the battery is a field of use.
Last but not least is our safe CASE technology that keeps storage and transportation of the battery safe throughout its life cycle to address this need for holistic approach called I've spent the last few years building a team that has developed a portfolio of products and services that can address all of the information. Some of the quarter's key products include IOC, which is internal short-circuit trigger cells, which Kohler has an exclusive license from NASA and DoD. We have served over 100 customers over the years. With this technology, our patented thermal runaway shield TRS product is used to prevent thermal runaway propagation.
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 Safety Agency, battery safety record for safety testing quarter has onboard a diverse array of tools used to categorize our battery cell performance amongst them as the STRC. technology, which one NASA envisions a unit award. In 2023, we have performed FERC testing for the world's largest automotive OEMs, leading private space exploration companies and top ITO customers. We expect the battery safety testing to be a multimillion dollar business for us and an anchor of our product offering. KULR has invested heavily in quality electrical testing capabilities and has fully automated NASA work instruction 37, which screen sells 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 working structure 37 record. In addition to NASA, we have served several other private space exploration companies that required these battery cells to be the standard to be part of the Artemis mission going to them quarter is an industry leader in Safe Storage and Transportation with a safe case and say, sleep products that are the workforce of our Fairfax panel. Collectively, these products, services and solutions are referred to as core Tier one design solutions or cable and DSL and dial-up cooler to jump in with any customer anytime anywhere to there battery development cycles. Caller leverages all components of the cooler design solutions to design house battery systems and also provide ground up custom solutions for our customer base.
Regarding in-house batteries, quarter focus are using cell level characterization data to drive the designs of reference architectures that can be rapidly adapted to meet customers' needs, for example, include the Quovadx space, which is for the space application, Q1 Guardian, which is for military application and also Q1 max for modular energy storage applications. What this quarter was better 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, still meet regulatory requirements across a wide spectrum of applications. Our end to end a one-stop shop solution is what the customers are looking for.
Chordoma space architecture is focused on providing high performance and energy dense solutions that are designed with the intent to satisfy NASA GSC two zero seven nine three requirements, which is the gold standard for safe batteries in space exploration. Combination of the Q1 space architecture with quarters offerings available to our customer to cool. Our design solutions is the driving force for some of our key customer engagements, including Nanotech, which is part of Voyager space and among many others, quarter is able to provide rapid time to market to 40 qualified battery systems, something that has been expressed as a much needed capability by the customer base. While others may take three to four years to grow such systems, QUARTER engineering team would take 18 months or less to deliver to our customers as the space economy is expected to reach over $1.8 trillion by 2035.
We believe the lithium-ion battery will be the important role as a primary energy source. We expect Q1 space platform to capture meaningful market share in the coming years. Q1 Cardine architecture, like with the Q1 space, focus on safety and performance. The primary differentiator here is to focus on military standards rather than a NASA T assisted other Q1 Guardian umbrella quarters working on the next generation standard format to five nine zero battery that cheap energy levels never seen before in this form factor.
Our development engagement with Army DexCom is a perfect example of equivalent Guardian engagement. We started this project in Q2 2023 to deliver the next generation aviation battery for the Army with the latest silicon anode technology Army has increased a total contract value to over 1.8 million that were scheduled to deliver our prototype battery in August of this year. This battery will be a game changer for the Army in terms of safety and energy capacity, a hybrid between Q1 Guardian and equivalent Max is our UPS program with the Army as well under a multiyear contract quarter has delivered a Q1 battery pack, specifically for RVs effort to modernize feature comment.
This specialized pack combined high performance, 21 700 parcels with a state-of-art thermal management technology to enhance propagation resistance while minimize size and weight overhead. This customization has resulted in impressive 80% improvement. The UPS runtime, providing strategic edge in a technical comment operation Safety's design has been improved over the last year with adoption of robust thermal liner in Australia and part of this quarter has demonstrated the performance of the recent design with live demonstration with the San Diego fire department and has met officials across the country with the publication of the test results to the public for a 2.5 kilowatt hour battery pack in full propagation with nearly 100 cells that propagated in an hour timeframe.
Coal also maintains a transparent offering of a test result to step forward in 2023 by offering a tire testing and qualifications dataset to US department transportation cooler team recognizes that no two batteries is thermal runaway events are the same. Therefore, it's important to continue testing tissue to test results in lessons learned, customers are coming to quarter because of safe case has the highest energy capacity in the industry. Its patented technology is the most effective in the industry and has been used on International Space Station since 2019. It is reusable, which makes it much more sustainable, a cost effective compared to our competition. In addition to the battery recycling applications.
We're finding new application for safe case used for energy storage in battery that EV production. We're working with a leading U.S. automaker focused on mitigating thermal runaway risk the EV battery module doing vehicle production. This project underscores QUARTERS commitment to safety innovation in the rapidly growing electrical vehicle market. Safety is also being adopted by a leading EVTO. customer for their production month, we showcased the versatility and efficacy of safe case, ensuring safe handling and transportation of battery across sophisticated production facilities.
We believe that quarter one platform and safeties product line are going to be the main growth driver for quarters going forward to more efficiently facilitate our growth. We have established cooler Texas in our new facility in Western Texas in February of this year. This facility is convenient located 2.1 miles from NASA Johnson Space Center, surrounded by large number of cooler existing and target costs. The 17,000 square foot facility is home to our battery R&D team. Our battery testing service in our battery pilot production line is going to be our center of excellence to show all the capabilities of the cooler one design solution.
Next, Shawn Cantor will provide financial updates. Shawn?

Shawn Canter

Thanks, Mike. You can see the financial results from our full year 2023 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 two years. Additionally, cooler 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 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. Cooler 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 41% year over year.
With that, back to you, Stuart.

Question and Answer Session

Stuart Smith

All right. Thank you, Shawn, and now we will begin the Q&A. portion of this earnings call. First, we have a call or questions from Jacques, the cascade. He is the Managing Director and Senior Research Analyst at Alliance Global Partners. And I'm going to be asking questions for him this time, he was not able to make it today.
So the first question is, what inventory management strategy are you looking at as safe case sales ramp on the back of the Eva toll contract announcement?

Shawn Canter

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

Stuart Smith

Thanks to. Okay, very good. Next question is a two-part question. Do the recent award permits from the Department of Transportation for the safe transportation of EOL. and DDR. batteries? Have a specific time frame that they are active for also, can you touch on some areas the new permit opens the door, too?

Michael Mo

Our store? Yes, I think that this micromolar or the safety special permit telco for three years and the new permit, it really gives our OEM customers and also logistic partners, more flexibility on how many smartphones, tablets, laptops and power tools that can fit into each save case and think sleep is really for business purposes. And also, we're working with top logistics shipping companies that e-commerce logistic companies to use the 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, digital customers, the more we get into their operation, the more application we find. And now we're taking these application requirements and refine our solutions so they can serve this entire industry and target markets with a favor case and feedback technology. So we are super excited about these new applications opportunities, and we expect them to be a good revenue drivers going forward for us.
Thank you, Michael. Right now we're going to be joined by Theodore O'Neill. He is the principal of Equity Research at Lichfield Hill's research. Theodore, you now have the call. Please proceed with your questions.

Theodore O'Neill

Thanks very much, and congratulations, solid quarter. I think you see that. I have two questions for you. My first question is the last three months coolers announced projects or contracts with a leading global space innovator Networks, a leading automaker, the Army Lockheed in aged 55 and you receive special permits from the DOT. Can you prioritize for us, if possible, the time line for these to turn into recurring revenue and how big those markets might be?

Michael Mo

Okay. Yes. So thank you, Theo. Feel we actually talk quite a bit about these customers in in my prepared remarks and how they could tie into our customer or our product roadmap and really excited about these engagements. As you can see, there is during different markets, they're not correlated markets. And so that's really our diversification strategy on our customer base and reduce our risk on the service contracts.
So to answer your question, so we always start with service contract revenue. As you can see, our service contract revenue start, the grew 117% year over year, and that's really indication of what can lead to future product revenue growth for us of the H. 55 engagement, for example, and we start the contract services revenue about three years ago. And now you can see the ramp up in volume for over a million dollars worth of order, the Army telecom contract, we started 18 months ago and now we're delivering to the prototype battery and the networks of the prototype battery is delivered within nine months up. 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, has different a life cycles and product ramps up, you know, site product ramp cycles, but the faster time to market that we know for them is why they choose KULR.

Theodore O'Neill

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 sort of some kind of contract.

Michael Mo

Yeah. Well, thanks for keeping real up-to-date because I think online store just opened up a couple of days ago, Combidex.

Theodore O'Neill

Yes, it is for both.

Michael Mo

Yes, thank you. It is for both for B2B and B2C customers. We're getting a lot of increase of from Park Apartments. Has my teams dangerous goods teams and companies as well as consumers directly or inquiring about the safety. 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 are also working with online and offline distributors now for our focus on as has met safety, dangerous goods industry. So stay tuned for more business partnership announcements in the future on additional distribution channels for us.

Theodore O'Neill

Okay. Thanks very much.

Michael Mo

Thank you, Theo.

Stuart Smith

Alright. Thank you, Theo. And now we'll be joined by Michael Legg Senior. 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

Thanks, Michael, Shawn, great job getting that off the balance sheet? I know adds be a large part of your focus there, the 2324 and want to China understand how much of that focus now that you have that off the balance sheet and put back to strategic growth, getting more out 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 on the balance sheet or ability to get product out the door count to get into the revenue? Wondering where we're at now and how you see that going forward? We'll just start there, please.

Michael Mo

Yeah. Michael, thank you. Yes, I'll take that. So no, I mean that the outstanding debt that we had throughout 2023. So first part of 2024, which we just got completely paid off and retired, it was very, very consuming for the management to solve that in my prepared remarks, I talked about how that really choked up access to capital and that really force us to work very closely with our customers and partners on our operations and cash flow.
I would say that that had a impact in our performance, the to the second part of 2023. And though we had to cut workforce, we had to put certain programs on hold on to focus on the right programs to serve. As you know, I mean, every customer is a good customer, but that's some customers on the more urgent. So we have to prioritize, if you will.
So. Yes, no, I had I had I had a real impact on not just the management time timeframe, the resources, the mindshare but also operations. But we're certainly glad that that's out of the way. And Sean and I and the entire team can really focus on the business.
Meanwhile, super proud of the team is executing on the technology side or the infrastructure side operations side and getting a huge growth in customer engagements, a huge growth in revenue per customer. And I think we're just setting up the stage for a very strong future growth.

Michael Legg

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 you usually have?

Michael Mo

I will say that the engineering service contracts are hopefully getting shorter and shorter, like I said, you know, the NRx delivery was nine months. So some of these engineering service contracts still has a conservatively nine to 18 months design, qualification, testing prototypes, so forth. And then you get to, you know, starting to ramp. And so you're looking at, you know, 2024 getting the 2023 customer to ramp, and then you get 2024 customers will end of 2023 customers start going to pilot productions in '24, '25. And yes, I think that's a that's probably a 12 to 18 months red wrap story, Mike.

Michael Legg

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

Stuart Smith

Great. Thank you so much. All right. Well, with that, that was our last set of questions from Michael. And we want to thank Michael Theodor 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, Tom's 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.