Q3 2023 KULR Technology Group Inc Earnings Call

Participants

Michael Mo; Chairman of the Board and CEO; KULR Technology Group, Inc.

Shawn Canter; CFO; KULR Technology Group, Inc.

Keith Cochran; President and COO; KULR Technology Group, Inc.

Stuart Smith; Moderator; SmallCapVoice.com

Theodore O'Neill; Analyst; Litchfield Hills Research, LLC

Jake Sekelsky; Analyst; Alliance Global Partners

Michael Legg; Analyst; The Benchmark Company, LLC

Howard Halpern; Analyst; Taglich Brothers, Inc.

Presentation

Stuart Smith

Welcome to the KULR Technology Group Third Quarter 2023 earnings call. I'm your host, Stuart Smith. And with me on the call today is the CEO of KULR Technology Group, that's Michael Mo. Company President and COO, Keith Cochran will be also joining us, and the CFO, the Chief Financial Officer, Shawn Cantor.
As you probably know, KULR Technology Group as a publicly traded company listed on the NYSE American under the ticker symbol KULR. As such, before we begin the call today, please listen to the following Safe Harbor statement covering this call.
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 management's current expectations, forecasts, and assumptions that involve risks and uncertainties. Forward-looking statements made on this call are based on the interim information available to the management team 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 the company's business, which include the risk factors disclosed in their Form 10-K filed with the Securities Exchange Commission on March 28, 2023.
Forward-looking statements include statements regarding management'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, forecasts are entirely on management's best estimate of their financial performance given their current contracts, current backlog of opportunities, and conversations with new and existing customers about their products and services.
KULR Technology Group 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 KULR Technology Group, Michael Mo. Michael, the call is yours.

Michael Mo

Thank you, Stuart. Thanks, everyone, for joining the quarter Q3 2023 earnings call. This is Michael Mo, I'm the CEO and co-founder of KULR Technology Group. I'm pleased to report that we achieved another record revenue quarter in Q3 of 2023.
While our overall revenue grew approximately 120% year-over-year to over $3 million, our service contract revenue grew over 4800% year-over-year. Our business model and customer engagement process start with design and testing services for our customers. We expect strong growth in our service contract revenue to be an early indication of our overall revenue growth potential, which will be driven largely by product sales rep.
Our KULR ONE platform continued to see strong growth in design services and product sales in energy storage, space, battery recycling, and electric transportation markets. In addition, our proprietary thermal management products for the aerospace and defense markets are contributing to the acceleration of our growth into 2024.
Our KULR ONE space battery on the KULR ONE platform has received broad interest in Q4 across the board, due to NASA levying heavy safety requirements of the CubeSat and SmallSat industry. As a result, the company has executed a contract to deliver a light KULR ONE space unit for a new customer account for a 2024 mission, and the program begins in Q4 of 2023.
Based on continued record quarterly growth, and the broadening and deepening of our customer engagements across multiple market verticals, our sales funnel shows that our current 2024 revenue potential to be between $26 million and $34 million. Q3 growth is largely fueled by our KULR ONE platform, which is well positioned to serve multiple fast-growing multibillion-dollar markets where safety, performance, and sustainability is of the utmost importance.
Here are some of the highlights of our achievements. KULR is selected by a top five American electric truck manufacturer to test analyze its next generation batteries with a KULR ONE design solutions platform. This manufacturer has forecasted a substantial ramp up in production of the electric SUV and truck over the next few years. According to research at markets, the US electric truck market is expect to grow at a 54% CAGR to reach over $15 billion by 2030.
KULR and Cirba Solutions announced a groundbreaking national recycling program for lithium-ion batteries and battery materials. The collaboration focused on developing a safe transportation platform for original equipment manufacturers to store, transport, lithium-ion batteries by utilizing KULR's SafeCASE and Cirba Solutions' nationwide logistics and recycling services. The collaboration between KULR and Cirba Solutions is an exclusive nationwide program. The global battery recycling market is projected to grow to $54 billion by 2030.
KULR secured a third NASA order for a automated battery cell testing service. The latest purchase order from NASA is part of a multi-phase agreement for KULR's advanced automated battery cell screening system. In addition to NASA, we're engaged with electric aviation and battery cell companies to provide comprehensive cell testing service for their battery products. The global battery testing market is anticipated to reach over $7 billion by 2030.
KULR and Forge Nano formed a strategic partnership for enhanced battery safety and performance. his partnership will utilize the KULR ONE Design Solutions platform to develop next generation battery packs with Forge Nano's proprietary battery cell technology. The strategic partnership is estimated to be a $3.5 million to $5 million revenue opportunity.
Recently, the US Department of Energy announced it intends to make available a second round of funding to support US battery production and recycling. The announcement of this additional $3 billion in bipartisan infrastructure bill funding is welcome news to American businesses seeking to produce North American-made batteries. We expect this partnership to be well positioned to participate in US Department of Energy programs.
We partnered with Velos Rotors to provide KULR VIBE service as an added enhancement to Velos UAV drone platform to reduce vibration, and also increase balance of the drone payloads that are highly sensitive to aircraft vibration.
By reducing the vibration up to 90%, KULR VIBE significantly improves data quality and visual clarity for LiDAR in high-resolution optical cameras. KULR VIBE is an important solution for the UAV drone market that's projected to reach $38 billion by 2028.
Next, our CFO, Shawn Canter, will go over Q3 financial highlights. Shawn?

Shawn Canter

Thank you, Mike. KULR posted another record quarter -- the second in a row. Adding to the record-setting revenue of the second quarter, revenue for the quarter was approximately $3 million compared to approximately $1.4 million in the third quarter last year. This represents approximately 120% increase, or more than doubling of revenue, comparing the two periods.
For the first nine months of 2023, KULR generated approximately $7.5 million of revenue compared to approximately $2.1 million in the first nine months of 2022, for approximately a 245% increase -- or more than a tripling of revenue comparing the same periods. Our product revenue this quarter was approximately $1.9 million, up about 38% from the same quarter last year.
Our service revenue this quarter was approximately $1.1 million, up about 4,800% from the same quarter last year. As Mike mentioned earlier, our service revenue can be viewed as a foreshadowing of scalable product revenue opportunities.
Our gross margin for the third quarter was 44%, up from 33% in the same period last year. Achieving a gross margin in the mid-40%s has been a goal of the KULR team. We continue to work to increase our gross margin based on revenue mix, pricing, and additional scale.
Our revenue per paying customer in the quarter was almost $170,000, up approximately 94% versus the same quarter last year. For the nine months ending Q3, our revenue per paying customer was over $200,000, up approximately 170%, with the number of paying customers growing to 37, up 28% from the same nine month period last year.
Our revenue per employee in the quarter was approximately $43,000, which is up 14% from the second quarter, and 70% from the first quarter of this year, indicating increasing human capital productivity.
Turning to capital allocation, we want to highlight that for the first nine months of 2023 versus 2022, our cash used from operations is down approximately 20%, and our cash used from operations and investing combined is down approximately 26%, all while increasing revenue by about 245% -- or almost 3.5 times.
We believe our focus on resource optimization and productivity is beginning to show in the numbers. Given what management sees today, we believe we are on track and comfortable with analysts' fourth quarter 2023 revenue estimates.
Stuart, that concludes our comments. I think we're ready for the questions now.

Question and Answer Session

Stuart Smith

All right. Thank you for that, Shawn.
Theodore O'Neill, Litchfield Hills Research.

Theodore O'Neill

Thanks very much, and congratulations on a good quarter. So you just touched on the customer question I was going to ask. In your prepared remarks saying that you have there's an increased number of customers, but in the last several quarters, you've had one customer who has been responsible for about half your revenue, and there're often no more than three customers that make up the majority of revenue. Is this part of the plan, or as you're suggesting here, is there more diversity coming?

Shawn Canter

Maybe I'll -- Shawn, I'll take that one. Thanks for the question -- (technical difficulty)

Stuart Smith

We're getting some cell phone interference from you. If you could find a --

Shawn Canter

-- lot more work to grow our revenue, we expect it to grow two ways. Yes, sure.

Stuart Smith

It sounds like it might be better, go ahead and start with your response from the beginning, please.

Shawn Canter

We say, as we grow our revenue, we expect it to grow both by adding new customers. So that's customer diversity, and growth with existing customers. We believe we've -- (technical difficulty)
You can see that in our numbers period, for example, ending September 30, and from customers representing more than 10% of the total revenue for the period went down from 81% to 69%, indicating increased diversity.
And it's worth noting again, we grew both revenue up about 245%, and paying customers up about 28%. And maybe I'll just make one last point, which is and that many of our customers who use KULR's patented products often rely on these products to satisfy their their compliance and regulatory requirements.
(technical difficulty) -- satisfy those requirements so they can be in market. And so we believe that well, certainly sometimes we can have a customer concentration -- as any particular customer may be ramping up its own production and thus it needs more of our products. These two relationships can be very sticky.
Maybe I'll leave it there. Thanks.

Stuart Smith

Hey, Shawn, before we get to you again, this is Stuart. We will need you to move again to a better location, if you don't mind, I apologize for interrupting, Theodore, go ahead with your next question, please.

Theodore O'Neill

Yes, I was actually able to understand a fair amount of it. So that did answer that question. I was [only] wondering also if you can give us an overview of your CellCheck platform and how you're planning to integrate AI into it?

Keith Cochran

Yes, I'll take that one. Thanks a lot for your question there, Theodore, appreciate it.
Our CellCheck platform is designed to provide real-time information on the health of the battery pack. And in addition, we use sensor information data to allow for deeper analytics for numerous factors such as, say, degradation over time, looking for correlation of impacts of temperature changes, versus performance capability, et cetera.
So of course, now that there's much easier access for using AI to analyze multiple data points simultaneously, we'll use that to help draw the opportunities for product enhancement. So AI will be used for the analysis of our data, but not actually integrated into the hardware if that makes sense. But with that said, we do have AI integrated into our KULR VIBE platform, and that's in our software. And this allows for real-time algorithm adjustments to be made that further refine our ability to provide the optimal solution to achieve incredible check and balance performance.

Theodore O'Neill

Okay. And the army contract you announced on October 30, which is being extended. You said October 30, you said it would be extended -- when it goes into production. what's the opportunity there for KULR?

Michael Mo

Yes, hey thanks, Theo, this is Michael, I'll take that. So the current contract is a development contract in nature and if extended, we expect to have other development contracts on top of that. The prototype production likely starts late 2024 into 2025. We started with army on airborne and UPS applications. Army is very interested in increasing the power and energy density of lithium ion battery, but the lithium-ion battery safety is a top concern, as you may know that they're one of the largest consumer batteries in the world.
So once we can prove out the lithium-ion battery that we produce for them is safe and meet their energy needs, we believe the opportunity opens up from the current approximately about $100 million opportunity for these applications, to a much, much larger opportunity across the RB platform.

Theodore O'Neill

Okay. Thanks very much.

Michael Mo

Thank you.

Stuart Smith

Thank you, Theodore.
Jake Sekelsky, Alliance Global Partners.

Jake Sekelsky

Hey guys, thanks for taking my questions. Just sort of starting with the contract announcement with the American EV truck maker, and I recognize that specifics haven't been disclosed. I'm just wondering what the timeline might look like from the testing phase to the product implementation phase? I know sometimes it's tough to gauge when partners are larger parties, but I'm just curious what your thoughts are here.

Michael Mo

Yes, we have started engaging with the customer, and we're likely to perform the tests in Q4 of this year. So that's the quarter we're in right now, and going into 2024. Based on the test results, and we will continue our engagement with the customer after we have the chance to analyze those results.

Jake Sekelsky

Okay.
So you guys it sounds like you're hitting the ground running there?

Michael Mo

Yes. Yes, Jay.

Jake Sekelsky

And then, so I think you touched on it a bit, but it looks like cash consumption has come down quite a bit year-over-year while you were still able to continue to grow revenue. I'm just curious if you feel there any additional areas where expenses could be cut further without sacrificing growth, obviously heading into next year?

Shawn Canter

Sorry, sorry, they just patched me into my phones to try to get a better connection. Can you just give me the question one more time?

Jake Sekelsky

Yes, no problem. So I was just saying you touched on this earlier on cash consumption coming down a bit year over year, without sacrificing revenue growth obviously. I'm just curious if you guys feel like there's any additional areas where you could cut some expenses further without sacrificing growth heading into next year?

Shawn Canter

Oh, sure. Well, I can tell you that we are constantly reviewing all of our processes and procedures, and we'll continue to do that in order to become more and more efficient. I think that in addition to that, as we are growing and gaining scale, I think we'll be able to continue to improve our margins.
And you'll see those hopefully continue to improve as we move forward. So while we've done a lot of work, so far, I think this is a focusing on growing and focusing on optimizing our resources across our various platforms will continue.
So there's no specific area we're targeting. We're always looking at all the areas and how we can run more leanly and efficiently.

Keith Cochran

Hey, Shawn, let me just get down there. This is Keith Cochran. Thanks for the question, Jay. The other thing to keep in mind is most of our product revenue is variable cost. In other words, we use outsourced manufacturing for that. So we're able to scale without a lot of significant investment into machinery and personnel. So we can flex there up and down on a variable cost basis. So that's one of the strategic approaches we started from the beginning.

Jake Sekelsky

Got it. That's helpful. Thanks again.

Stuart Smith

Thank you, Jake.
Michael Legg, Benchmark.

Michael Legg

Thanks. Good afternoon. Can we talk -- contract service revenues came in strong. R&D was up a little, but R&D is also an indicator of future revenues. I believe, Shawn, I think we talked about that. Can you first talk about the R&D pipeline? The new customer opportunities there, if it's anything a bit different than what we have in contract services?
And then on the SG&A decline down to $4.8 million from $5.6 million last quarter, can you talk where you cut those expenses out and what we're doing there? And then do you have the ability to keep expense SG&A at these levels?
And then just lastly, can you talk a little bit about the cash position, the cash flow and any types of cash inflows and outflows we have coming up near term and how we're going to handle that? Thanks.

Shawn Canter

Yes, sorry, Mike, a lot of questions in there. So I think the first one was about R&D, and how that is an indication of growth? And so yes, I think it -- and Mike and Keith obviously jump in here, too -- but our R&D expenses are associated with the work that we are doing in order to satisfy the increasing customer demand pull that we're seeing, and are going after those contract,s and going after those solutions that those customers demand from us.
So I think you're right. I think that while we certainly are -- as I mentioned for Jake -- we certainly are cognizant of maintaining trying to keep our costs as lean as possible, what we don't want to do is we don't want to sacrifice growth. And so where appropriate, we will invest in satisfying that customer demand.
And I think the second question was around SG&A? And so on that front, as I said, we continue to look at all of our processes where we can reduce costs or improve efficiency, which results in cost savings, we will continue to do that.

Keith Cochran

Hey, Shawn? Let me just get in on this a little bit. (multiple speakers)
One of the things that we've been able to do on SGA is really cut some of our marketing costs. And the reason we're able to do that is we're starting to get very good brand recognition out in the industry. And we're getting to a point now that we're kind of full, if you know what I mean. We're really not having to beat the doors down of other OEMs. They're coming to us proactively.
And some of the most recent large announcements that we've made, have been from people that have actually come to KULR to seek our mineral capability. So marketing is an area that we've been able to really reduce costs. That's sustainable at least for the foreseeable future. So now we're taking that capital and redeploying that back into R&D.
And then on the R&D side of the business, we gain great leverage from the last 2.5 years of investment that we've made in the KULR ONE platform. And so what we see there is we're able to get much more efficient with those R&D dollars, because from one battery pack to the next battery pack, we're starting to get into situations where it's almost a replication of previous work done. So that improves the efficiency. So I just kind of hope that answers your question a little bit.

Michael Legg

Yes. No, that's perfect. And then just on the on the cash, and the cash uses coming up, can you just go over that -- where we stand?

Keith Cochran

Okay. I'll defer that back to Joel.

Shawn Canter

Thanks, Keith.
Yes, so in terms of cash, we continue to, as you see, grow the business, optimize our costs. So between our cash, our receivables, our current visibility in terms of what the pipeline looks like, our various partnerships and initiatives, we feel like we're in a good position to continue to finance the growth of the business, and we'll continue to use the cash flow generated internally. And to the extent that external financing is appropriate, we'll do that to continue to meet the growing customer demand that we're experiencing.

Michael Legg

Okay. Congrats on the quarter and thanks.

Shawn Canter

Thank you.

Keith Cochran

Thank you.

Stuart Smith

Alright. Thank you, Michael, for your questions.
Howard Halpern, Taglich Brothers.

Howard Halpern

Here's the first question. Do you believe the most recent announcement with Velos to provide your KULR VIBE service as an added enhancement to the Velos V3 UAV helicopter will provide you with an opportunity to accelerate the rollout of this offering to other helicopter companies as well as branch out into other verticals?

Keith Cochran

Can I take this one? First off, I want to say Velos is just a great partner, and we really enjoy working with them. So thanks to the Velos team. We appreciate them a lot. And also thanks for the question.
To answer your question, the answer is an unequivocal yes. In fact, just this week, we had a very positive meeting to display the KULR VIBE capabilities for a drone OEM. So little diversity there, away from the helicopters and into the drone space, of which we've been [like] for quite a while.
But yes, we're getting interest from OEMs in the drone space. We're using our wireless sensing technology we are deploying into the Velos aircraft now. And as for standard helicopters, KULR VIBE uses the onboard sensor data to define the solution to provide optimal track and balance, [allowing] for our customers to use the technology simply by calling in the sensor readings to us over the phone.
We also have adapted the technology to run on IOS and Android platforms, so we can load that onto tablets for the folks that are out in the field needing to use our technology.

Howard Halpern

Alright. Can you talk about how your relationship with Forge Nano is progressing, and what are the long-term opportunities?

Michael Mo

Yes. I think that Forge Nano makes their batteries with a special coating technology, I think, so ADL. So the partnership is we use our cell screening line to to help them categorize their batteries, and getting more data on performance out of those battery cells.
And then we'll use our KULR ONE design solutions to make battery packs over their cells for joint partners and customers. So this is a great synergistic opportunity for us. As I mentioned earlier, there's also the new DOE program, that [will] specialty battery cells in the US. That's about $3 billion.
And I think that our automated cell screening line is a perfect fit to incorporate into their mega factory to participate into these grant applications. So starts with about a $3.5 million to $5 million opportunity for the next couple of years. And I think that they can grow much more substantially once they have the factory up and running.

Howard Halpern

Alright. The next question is how are your new facilities performing in terms of driving your timeline from design to deployment?

Keith Cochran

Well, the facilities are performing very well, and we've added capabilities to further improve our time to market. We have added in new CNC equipment -- two 3D printers, [tam] welders, an Arbin battery cycler as well as additional tooling.
Also having our own battery cell testing and pack capabilities in San Leon. We can expedite our pack prove-out testing as we need to. We have full control of the facility. This provides a significant advantage by reducing the lead times with outsourced suppliers. So we thought that was critical for us to invest in in-house infrastructure for this.

Howard Halpern

Alright, Shawn, I know you touched on this in Michael's question above, but let's talk about the status of your capital position relative to driving operational breakeven.

Shawn Canter

Okay. Well, I guess the first thing I should say, and I'm sure it's clear, it's obvious to everybody is we're working very hard to get to an operational cash breakeven point as quickly as we can. And I guess this is evidenced by the growth trends that we've put up, and we've noted earlier. And our continued efforts as we've as we've previously talked about to optimize our cost structure.
We continue to work on growth. We continue to work on resource optimization. And I think we have a good line of sight to having operational breakeven in, we think, potentially in the second quarter of next year. Obviously, we'll have to meet certain milestones, which -- can't guarantee we will.
But we think that they're very much possible based on what we see today in the revenue visibility, the pipeline, the the various customer partnerships we have, and certain initiatives that are in place. And so we're working very hard to get there as quickly as we can. Obviously, that would be a big milestone for KULR and the team and so on. So we'll continue to work towards that goal.

Howard Halpern

Alright. And Howard's final question is, how is the company attempting to drive brand awareness of their thermal runaway shield offering in order to prevent tragedies such as a fire that killed three generations of New York City family. It was sparked by a lithium ion battery used to power an electric scooter of one of the victims there. This is pulled from a New York Post headline yesterday, November 13
So that is this question. How is the company attempting to drive brand awareness of their thermal runway shield offering?

Keith Cochran

Well, first off, we're really sad to hear about the tragedy, and we are aware of it. And I think the core mission of KULR is to make safer battery products. So I think, Howard, I know you're well aware of the KULR CellCase products as well as our thermal management capabilities here. But yes, that's a core mission to KULR is to save lives, and prevent these types of tragedies.
We discreetly work that with regulatory agencies. We certainly don't want to be seen as somebody that taking advantage of a tragedy. So when we do our advertising and so forth, we do that directly with folks that control the regulatory environment. So those are a little bit more behind the scenes. It's not to drive industry awareness. We think we're doing that pretty well already.
We have a variety of customers already consuming our safe case products. And so I think we have pretty good brand awareness there now. But what we're trying to do is improve the situation with the regulatory agencies and bring awareness of our products to them.

Stuart Smith

All right.
Very good. As I mentioned, that was the final question. I would like to thank Michael Mo, Keith Cochran, and Shawn Canter of KULR Technology Group. And of course, they would like to thank all of you for joining us on the call today. Thomas as our operator, I will now turn the call over to you to close it out.

Operator

Thank you very much, and thank you once again for your participation today. You may disconnect at this time and have a wonderful day. Thank you once again for your participation.