KULR Technology Group, Inc. (KULR) Q2 2022 Earnings Call Transcript

All right, everybody. Welcome to the KULR Technology Group Second Quarter 2022 Earnings Call. Now before the call begins, please pay attention to the following. 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 KULR’s current expectations, forecasts, and assumptions that involve risks and uncertainties. Forward-looking statements made on this call are based on information available to the company as of the date hereof. KULR’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 KULR's Form 10-K filed with the Securities and Exchange Commission on March 28, 2022. 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 provided by management in 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. KULR Technology Group assumes no obligation to update the information included in this call, whether as a result of new information, future events, or otherwise. Now this conference call will be available for replay at the company's website kulrtechnology.com. You can go to the Presentations tab or visit the Investor Relations tab. With me on the call today, Michael Mo, CEO and co-Founder of KULR Technology Group, Keith Cochran, President and Chief Operating Officer of KULR Technology Group, and Simon Westbrook, Chief Financial Officer of KULR Technology Group. Later on in the call, management will field questions from several analysts currently covering the company. Michael, the floor is yours.

Thank you, Stuart. Hi, this is Michael Mo, CEO and co-Founder of KULR Technology Group. And thanks for joining us today for our Q2 2022 earnings call. I want to start things off by sharing that we believe that we're at an inflection point of KULR's growth path. In the past year, we have made significant investments across research and development, facility infrastructure, SG&A, and assembling a high-caliber workforce. These strategic investments have resulted in the build-out of our holistic total battery safety platform, providing customers with an extensive set of solutions to achieve battery sustainability within their respective ecosystems. We intend to expand our go-to-market efforts by upselling and cross-selling the individual components of this comprehensive platform to existing and new customers through product sales and a subscription model. The versatility of our holistic platform allows us to penetrate several different sectors and markets. More specifically, we've recently garnered significant customer interest across several verticals, including energy storage, electric aviation, battery recycling, industrial and power tool equipment, and e-mobility, which amounts to a total of over 300 enterprise and government organizations in our sales pipeline. Barring any unpredictable challenges with supply chains or other macroeconomic factors, we're confident that we'll be on the path to a ramp in sales volume, as we begin to recognize these customer engagements from a revenue standpoint over the coming quarters. We're encouraged by the momentum that we're seeing; I remain committed to transforming KULR into a leading platform company that enables the sustainability of the circular electrification economy. With the support of our major recycling partner, KULR gained immediate and open access to commercial partners and customers by securing United Parcel Service shipping certification, which allows for the shipment of batteries using KULR safe case products throughout the UPS batch shipping network. The permit allows the DoT compliance safe case to be used as a safe and reusable shipping solution for lithium-ion batteries of up to 2.1 kilowatt-hours. We completed the licensing of fractional thermal runaway calorimetry from NASA and started the construction of the FTRC testing facility. We already have multiple customer engagements in the pipeline, and three purchase orders are expected to close in September 2022. We secured four major commercial accounts for quarter safe case products, with deployment trials underway. Forecasts are for multi-million dollar recurring commitments over the coming quarters. We received a follow-on order for the space-developed phase change material PCM heat sink technology from leading aerospace and defense company Lockheed Martin Corporation. We announced the partnership with E-One Moli Energy Corporation to secure 75 megawatt hours of battery supply and to advance KULR's total battery safety and thermal management solutions for eVTOL and high-performance e-mobility applications. We continue to expand the application of the carbon fiber substrate material. We continue to fine-tune the biosensing solution for a Fortune 50 Metaverse customer to increase the conductivity and enhance the feel to the skin. We expect new samples and testing to take place in Q3 2022. For new battery architecture development, two provisional patents have been filed with our development partner on high-energy cathodes and high-energy density incorporating our carbon fiber substrate material. We expect to publish the architecture and the data results of these developments by the end of the year. On our path to produce the all-in-one system for sustainable energy storage, we continue to develop a universal modular battery architecture by combining our passive propagation PPR technology and CellCheck for e-mobility, enterprise energy storage, data center, and crypto mining applications. Next, Keith Cochran, our President and COO, will share with you some exciting operational achievements in Q2 2022. Keith, please.

Thanks, Michael. And thanks to those attending today's call. I will now provide operational highlights for Q2 2022. This June, the KULR organization made significant progress by successfully completing ISO 9001 certification. This is an exceptional accomplishment for the team and demonstrates KULR's dedication in pursuit of manufacturing excellence and operational controls. The timing of KULR's ISO certification aligns perfectly with the development of KULR's highly advanced, fully automated battery testing capability. The system could process approximately 518,650 or 21,700 battery cells annually and even fully supports NASA's construction 37 requirements. The system installation will be completed in Q3 2022, with full-capacity processing initiating in Q4 2022. This advanced capability will be used to support NASA and Department of Defense battery cell deployments as well as internal demands related to KULR-certified cell offerings. Moving forward now, I'll provide some updates related to human resources. KULR continues to strategically expand our team with high-quality talent. In Q2 2022, KULR hired an additional 10 permanent employees to support sales, supply chain, and engineering. Specifically, we've hired three additional Senior Engineers experienced in lithium-ion battery technologies to support pack developments across a broad range of applications. With the increase in KULR product platforms and expanding customer interest, it was also imperative that we increased the strength of our sales and marketing organization. Accordingly, KULR added a Director of Product Marketing and internal sales manager and a technical sales lead, in addition to a new manufacturer's representative team to support East Coast sales. That said, in Q2 2022, the expanded sales and marketing team delivered a 30% increase in KULR's active sales funnel, which now has an excess of 300 customers. Furthermore, the team was successful in landing four major commercial accounts for safe case products with deployment trials currently underway. While we have successfully grown our internal team, KULR maintains a robust outsourcing strategy for software development and volume TRS manufacturing. I will now turn the call over to Simon, who will share KULR's financial highlights. Simon, please.

Thanks, Keith. And hello, everybody. I'm going to summarize the financial highlights of the second quarter. We reported revenue of $588,000 in the current quarter, compared to $628,000 in the quarter ending June 2021. A decrease of 6% was primarily due to lower contract services and product sales revenues in the quarter. Our SG&A expenses increased to $4.3 million in the second quarter of 2022, from $2.7 million in the corresponding quarter of 2021. The 59% increase in SG&A expenses was due to additional marketing and advertising expenses, consulting fees, non-cash stock-based compensation paid to employees and consultants, and the expansion of our new office and production facilities. Our R&D expenses increased 183% from $353,000 in the second quarter of 2021 to $999,000 in the current quarter of 2022, reflecting a combination of headcount, new automated test, and production equipment, and continuing our investment in in-house manufacturing and assembly facilities begun in the last quarter of 2021. Our loss from operations increased 79% from $2.9 million for the second quarter of 2021 to $5.2 million for the second quarter of 2022. The $2.3 million increase in operating loss included increases in payroll, travel, advertising and marketing expenses, professional fees related to the introduction of new accounting systems, and research and development projects. Our net loss increased by 74% from $3 million in the second quarter of 2021 to $5.3 million in the second quarter of 2022. Our net loss per share for the second quarter of 2022 was $0.05, compared to $0.06 for the comparable quarter in 2021. On June 30, 2022, the company reported cash balances of $13 million, compared with $12.2 million at June 30, 2021. Since June 30 this year, we have established a $50 million standby equity purchase agreement. This funding leaves us well-positioned to expand operations, support new business, and consolidate our manufacturing operations in the United States to ensure greater control over logistics in the face of continuing global uncertainties. That concludes my financial summary. Back to you, Stuart.

Thank you, Simon. Now we will move on to our Q&A section of the call. And first, we'll be joined by Jake Sekelsky, he's Managing Director and Senior Research Analyst with Alliance Global Partners. Jake, are you there?

I'm here. Hey, Michael and team, thanks for taking my question.

Okay, Jake. Go ahead.

So, the broader inflationary environment, which you guys touched on a bit, has been impacting companies across the board. Just curious to get your thoughts on any cost pressures that you're seeing across your business lines? And just wondering how this might impact gross margins going forward, if at all?

Hi, Jake. This is Keith Cochran. I'll go ahead and take that question from you. Thank you. We are seeing the current energy policies and resulting inflationary effects having a negative impact on our logistics costs. Accordingly, we took action in Q1 2022 and began the process of near-shoring our safe cases away from China, and now have moved our manufacturing capabilities to Mexico. This reduced our logistics costs significantly, which offsets the minor increase in labor costs for Mexico. As for engineering services, we have adjusted our labor costs to reflect the increase in wages that we're paying our team. We've been cautious in this cost adjustment for only business quotes. But on a positive note, as our volume has begun to increase, we've been able to negotiate better pricing for most of our base materials and have been able to maintain or reduce costs for our customers.

Got it. That's helpful. I have two quick questions. Sorry?

Just asking if you have another question.

Yeah. So just quickly on CellCheck. I'm curious how that rollout is going. Are you seeing more interest in consumer-based applications like e-mobility, or is there partnership interest on a more industrial storage type scale?

Yeah, just a quick update on that with regards to CellCheck. Right now, we're seeing industrial storage really kind of be the front runner for us, and that's where we're putting our energy. Each one of those rollouts will be custom and unique. So, we need partners that are integrating our technology into their system designs from the get-go. So it's a little bit of a long cycle for us to get that out into the market. But we've identified capabilities and products for us to be able to do that.

Fair enough. Okay. That's all on my end. Thanks, guys.

Thank you, Jake. Now we're going to move on to Theo O'Neill. He's with Litchfield Hills Research. Theo, are you on the call?

Yes, I am.

Go ahead with your question.

Thank you. My question, Michael, is regarding the batteries you've secured for your product to serve your customers. Do you have a build plan for how this will roll out over the next 12 to 24 months? What are the initial applications for those?

Yeah. Hi, Theo. As you know, high-quality battery cells with a reliable supply chain are going to be critical for the whole industry; that's going to be critical for the success of our customers, but also very critical for our own roadmap. So we've established a partnership for these very high-quality, cylindrical power cells as well as energy cells. We're optimizing our thermal platform solutions for those cells, to have a comprehensive data analysis on it and also build the safest battery type designs in the market based on these cells. The target markets will include aerospace and defense customers, with whom we have a long relationship. They value reliability, security, and high-performance characteristics of these product offerings. So that will be our first go-to market. We also target industrial power equipment and e-mobility customers for these high-power applications with these cells.

All right. Thank you, Theo. We're now going to move on to Juan Noble. He is with Taglich Brothers, and he's got a few questions for us. Juan, are you with us?

Yes, I am. And thanks again for the call and for taking my questions. My first question, I want to get back to an announcement that was made earlier in the year, regarding your order from Volta; it was supposed to add about at least $1.6 million to the top line in 2022. So I'm just curious if you're still on track to add this amount of revenue in 2022, and does any of this show up in the second quarter?

So, Juan, thanks for joining, and thanks for the question. As a general practice, we won't comment on any specific customer orders in terms of dollar amount and timing, and so forth. But for Volta, and other customer engagements that we're working on very closely, we expect the volume to ramp in their business in the second half of 2022 and also well into 2023. So this is the inflection point that I mentioned earlier, or starting to call that we're seeing a number of customers starting to show these types of revenue ramp opportunities for the rest of the year.

Juan, it looks like you've got another question.

Yes. Just in regard to the follow-on order you received from Lockheed for the phase change material heat-sink technology. I was wondering if you can actually quantify that revenue that's expected from that order. Are there any other KULR products that you believe Lockheed would be looking to get from you?

Yeah, hey, thanks, Juan. I'll pick that one. Again, we're not going to comment on any specific customer orders' dollar amount. We just don't do that as a general practice. But for Lockheed, we also support their advanced battery systems group with our suite of battery solutions. They've been a long-time partner for us, and we continue even as late as today to get additional opportunities for growth with them as well. So, we're pretty excited about that relationship and where it's going. I'll just give you that we did ship some Volta product in Q2, and those shipments have begun to flow out, just to let you know that relationship is strong and moving forward.

All right, guys. Thank you.

Juan, do you have a final question as well?

Yes, I do. I was hoping if you could talk a little about the prospects you have for the carbon fiber products for core components in the sensing of electrical nerve signals that control the navigation to virtual environments such as the Metaverse. So I was hoping you might be able to expand on that.

Sure, Juan. This is a very exciting application for us. It's part of our platform strategy to utilize the carbon fiber substrate into multiple emerging applications. Like I said in the earlier remark, we're fine-tuning the material for higher conductivity, so to pick up the signal with higher sensitivity, and also enhancing the feel to the skin and different skin types, moisture, etc. So, a lot of fine-tuning development is being done right now. We expect new samples and testing to happen in Q3 2022. And let's see how the advancements of those applications work. Yeah, this is the whole carbon fiber substrate material advancing to different applications. It's a very exciting direction for us.

So, you feel that testing would be completed by the third quarter, did I hear you correctly?

Yeah, I'm not sure about completing, but we definitely have samples for the customer to test. Then it's up to the customer's schedule for the testing and the kind of feedback. I will say it's most likely a 2023, maybe 2023 plus product launch for these guys.

Okay.

All right. Thank you, Juan, for your questions. That concludes the Q&A portion of the call. It also concludes KULR Technology Group's second quarter 2022 earnings call. I want to reiterate this conference call is going to be available for replay at the KULR Technology website. Just K-U-L-R technology.com. You can go to the Presentations Tab or also visit the Investor Relations tab. On behalf of management, Michael Mo, Keith Cochran, and Simon Westbrook, we'd like to thank you so much for your participation in our call today, and have a good evening.