KULR Technology Group, Inc.

Welcome, everyone, to the Cooler Technology Group third quarter 2022 earnings call. Before I begin this call, I would like to read the safe harbor statement that covers 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 Cooler'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. Cooler'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 includes the risk factors disclosed in their Form 10-K filed with the Securities and Exchange Commission on March 28, 2022. Forward-looking statements include statements regarding the company's expectations, beliefs, intentions, or strategies regarding the future and can be identified by forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, should, and would, or other 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 Cooler's future financial performance. Given their current contract, current backlog of opportunities, and conversations with new and existing customers about their products and services, Cooler assumes no obligation to update the information included on this call, whether as a result of new information, future events, or otherwise. I'm your host for this call, Stuart Smith, and with me on the call today are Michael Moe, CEO of Cooler Technology Group, Keith Cochran, President and COO of Cooler Technology Group, and Simon Westbrook, CFO for Cooler Technology Group. Later in the call, the company will field questions from a panel of analysts that are currently covering the company. With that, Michael, I'd like to turn the call over to you.

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Thank you, sir. This is Michael Moe. I apologize for my voice today.

I'm a bit under the weather. I'm pleased to report that Q3 was an inflection point for Cooler as we reached record revenue of $1.39 million. We ended the quarter with $16.2 million cash on the balance sheet. We're well positioned to build a heating energy management platform to accelerate the global transition to a sustainable electrification economy. As we have communicated to our shareholders throughout the year, We're making significant investments in our people and infrastructure to prepare and accelerate the growth ahead. We have doubled down in manufacturing and automation infrastructure in North America in Q3 with 4.46 million vendor deposits compared to 2.15 million in Q3 of 2021. We expect the trajectory of investments to moderate as we enter our next growth phase to monetize auto investments that we have made. As we enter into the monetization and growth phase of our business, our growth margin profile will fluctuate in the range of 30% to 50% in the coming quarters. This is a function of us engaging different customers with a wide range of products and services during the quarter. Aerospace and DoD customer engagements will typically have higher gross margin profile, whereas mass market commercialization products will drive more top line growth. We expect close margin to monetize or try to normalize in 2023 as our customers in multiple market segments enter bonding productions. As we prepare for bonding productions of our customers for the remainder of 2022 and into 2023, we nearly tripled our inventory deposits in Q3 to $1.03 million compared to $309,000 a year ago in quarter and $691,000 in Q2 of 2022. We expect inventory level by the end of Q4 to increase from current levels. The quarter sales and marketing team expands its customer engagements through direct sales and manufacturing reps. Cooler has over 300 customer engagements by the end of 2023 with some of the world's largest industrial and commercial companies. As we continue to expand our relationship with these major partners across our product portfolio, we expect to cross-sell and upsell our total solutions package to these customers. In September, Cooler received approval from Department of Transportation to increase the energy level in three special permits from 2.1 kilowatt hour to 2.5. Expanding the usage of safe case products, Cooler will utilize the permit upgrades to support a recently awarded project with one of the three largest outdoor rider landscape companies in the world for the safe shipment and storage of lithium-ion batteries. Through a partnership with Molycell, Cooler has access to best-in-class lithium-ion battery cells with high power and energy to build battery modules with the highest safety rating. As part of the strategic relationship, Kohler has access to over 700 megawatt hours of energy battery capacity to further strengthen our production and supply localization initiatives within North America. Securing multi-cell supply accelerates our ability to provide total solutions to high-value customer applications with revenue potential that could exceed $350 million annually in five years. We're very excited about the upcoming Consumer Electronics Show CES in January 2023. This is the largest electronics show in the world.

We plan to showcase three new products. First is CoolerVibe. As you know, we recently completed the VibeTech acquisition.

Cooler is expanding itself as a vertically integrated energy management company focused on sustainable energy solutions. The new product, Cooler Vibe, is a patented AI solution with learning algorithms that utilize data from sensors to reduce vibration for a more energy efficient system. We'll demo Cooler Vibe with a new customer interface, wireless sensors, and run a new AI platform. This new architecture will allow Codavive to scale up from DOT helicopter applications to mass market industrial motors and renewable energy applications such as wind farm. We'll also showcase Cellcheck in full operation on a new cloud computing platform with AI capabilities. We'll unveil a new energy storage product that integrates all these capabilities for terrestrial and space applications with the highest safety rating and in-depth monitoring capabilities. Next, Keith Cochran will share you more on the quarter of IPAC acquisition and operational updates for the quarter. Keith, please.

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Thanks, Michael, and thanks for those joining our call today. We appreciate you. First off, I'll share what I tell our team almost every day. It's a great time to be a Cooler. Our team is highly energized as we head into the close of the year. I feel the true sense of accomplishment coming from the team as we deliver into production multiple products the team have been working on the last two years. One platform that we are particularly proud of is the deployment of our automated lithium ion 18650 and 21700 battery cell testing capability which meets the performance requirements of the very complex NASA Work Instruction 37. Cooler will have the only fully automated test system capable of meeting Work Instruction 37 to deliver high volume testing of battery cells required for all manned missions by NASA and many other DOD branches. The system will launch operation in December, and Cooler will begin shipping fully tested cells in January of 2023. Another exciting platform recently acquired is CoolerVibe, as Michael had mentioned. The incredible technology uses artificial intelligence with a self-learning algorithm to provide precise calculations to balance any device that spins or rotates, thereby virtually eliminating vibrations. CoolerVibe was originally created to fix track and balance problems for military helicopters and we will continue to expand this service offering in the near future. However, I think many will ask how this relates to Cooler's mission of supporting renewable energy. So let me explain that. The reality is that vibrations steal energy and performance by creating friction and impedance. When your device is based on a battery technology, it's imperative that vibrations are eliminated to maximize battery life and increase performance. Cooler Vibe recently balanced the motors and blades of a mission-critical drone to demonstrate the benefits of the technology. The results were a 23% increase in battery life and a lift increase of 45%. Same motors, same blades, just Cooler Vibe optimized. I would also like to share that in July, Cooler completed ISO 9001 certification, demonstrating our commitment to operating at the highest level of quality and performance by utilizing a certified quality management system. The team did a tremendous job of preparation and delivered the certification with zero nonconformance findings. Lastly, Schooler has been able to recruit and maintain high-quality talent in support of our growth during a period of very tight labor markets and intense competition for that talent. We are very thankful for the dedication of our team. And as I said, it's a great time to be a Cooler. And with that, I'd like to turn it over to Simon Westbrook for financial comments.

Thanks, Keith. I'm going to provide some financial comments on the third quarter this year versus the third quarter last year. Firstly, from a revenue point of view, We reported revenue of $1.39 million in the current quarter compared to 601,000 in the quarter ended September 30th, 2021. This was an increase of 132% as a result of increased shipments following the improvement in supply constraint issues last year. Our selling general and admin expenses increased to 4.4 million in the third quarter of 2022 from 3.1 million in the corresponding quarter the prior year. The 40% increase in SG&A expenses was due to additional marketing and advertising expenses, consulting fees, and non-cash stock-based compensation paid to employees and consultants, and expansion and kicking out new office and production facilities. R&D expenses increased 122% from $482,000 in the third quarter of 2021 to 1,070,000 in the third quarter of 2022, reflecting a combination of headcount and new and automated test and production equipment, continuing our investment in in-house manufacturing and assembly facilities that was begun in the last quarter of 2021. Our loss from operations increased 56% from 3.1 million in the third quarter of 2021 to 5 million in the third quarter of 2022. The 1.8 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 80% from 3.1 million in the third quarter of 2021 to 5.6 million in the third quarter of 2022. And the net loss per share for the third quarter of 2022 was 5 cents as compared to 3 cents for the comparable period last year. Finance-related costs increased by $814,000, largely due to a one-time charge related to the 1.5 million financing and retirement of the remainder of the 5 million promissory note. As a result, we now have no debt outstanding. the EPS would have been a net loss of $0.04 per share, excluding this one-time charge. At September 30th this year, the company reported cash balance of $16.2 million, compared with $14.9 million at September 30th last year. This leaves us well positioned to expand operations, support new business, and consolidate our manufacturing operations in the U.S. to ensure greater control over logistics in the face of continuing worldwide uncertainties. Now back to you.

Thank you, Simon. And that does conclude our opening statements by management. We're going to move on to the Q&A session. Once again, we're joined by several analysts who are currently covering the company, but one of them, Jake Sikalski, managing director, senior research analyst at Alliance Global Partners, is unable to connect with us at the moment. However, we did receive his questions in advance. So here is the first question. As the focus on higher energy density batteries increases, Do you expect to seek expanded permits for SafeCase?

Yes, I think that, yes. As you know, the automotive and some industrial applications are making the batteries higher energy capacity, and also meantime making them more modular. So we're working on expanding the SafeCase product line to accommodate higher energy capacity up to 10 kilowatt hours.

Very good. Now moving on to a question regarding VIBE Technologies. You recently announced the acquisition of VIBE Tech. Should we expect top line growth from this to show up in 2023?

Yes, Stuart, I'll take that. This is Keith Cochran. Absolutely. We're in the final sign off of a long term agreement to support a large commercial aviation company with cooler VIBE services. You can look forward to that announcement once the documents are fully executed, which should be sometime during this quarter. Additionally, we have many engagements to support funded DOD projects, and we're currently working to secure that business also during Q4. Thank you, Keith.

Here's the next question from Jake. We've seen the drone industry start to mature and become more widely adopted. And battery safety should be a primary focus here. Should we expect additional partnerships in this vertical over the near term?

Yeah, I'll take that as well, Stuart. As I shared in my remarks, we're in the midst now of the full-scale launch of CoolerVibe. And the results have been nothing short of astounding to those that have witnessed the demos. Accordingly, we're in conversations now defining service agreements with those potential customers. Additionally, we are in discussion to incorporate cell check, TRS, and provide battery pack design and architecture in the drone industry to dramatically increase the safety of evatols.

Excellent. Now we're going to be joined by analyst for Litchfield Hills Research. That's Theodore O'Neill. Theodore, are you with us on the call?

Yes, I am. Thank you. Go ahead with your questions, Theo. Right, you can hear me.

Yes, we can.

Great. Can you give us an update on the planned rollout of your customer's commercial drone production schedule or some sort of milestones over the next 12 months for that program?

Yeah, Patio, we can't comment specifically on any specific customer's drone production schedule. But what we can say is that we'll unveil an energy storage product. that can be used for large commercial drums that is fast charging high charge rate or high discharge rate with quarter vibe capabilities embedded in the battery together with cell check kind of what Keith just talked about this will be integrated unit and we expect that to be the central power in the intelligence unit for the vehicle and that we expect to demo that in CES 2023, and seed design wins in 2023, the next two months.

So I understand your customer wants to protect what their plans are, but is there any possibility there'll be revenue out of this in the next 12 to 24 months? Can you even say that much?

Yes, there is.

Okay. Thanks very much.

Thank you.

All right, thank you, Theodore. And now we're going to move to an analyst from Taglich Brothers. We're joined by Howard Halpern. Howard, are you on the line?

Yes, I am. I'm pinch hitting for John. John is typically the one asking questions, but he's unavailable today. But he did leave me with a broad question. You know, you've put a lot of work in this year, but could you really, you know, flesh out what the key elements that you have put in place to drive, you know, significant revenue growth, you know, next year and over the next five years to, I guess, reach your goal of 350 million potentially in the next five years?

Yeah, Howard, thanks for your question. I appreciate that. I'll take this one, Stuart. Yeah, there are four areas of products we have a hard line of sight on that will drive our top line in early 2023. Those areas are cooler safe case, our TRS materials, our automated lithium ion battery testing service, and the use of our allocation of lithium ion cells from MolyCell. We are expecting further top line pickups from Cooler Vibe as it ramps its customer base throughout the year. We further have new product announcements coming in Q1, which we're also very excited about. I think that is the base platforms that we have in place today. They're really foundational to the company, and we will expect to see pretty significant revenue growth in 2023. Okay.

Okay. Thanks, and keep up the great work, guys.

Thanks so much, Howard. Appreciate it.

Well, gentlemen, that concludes our question and answer portion, as well as our comments from management. That wraps our call for the day. I'm going to turn it over. to our operator now who will close out the call. Thank you, ladies and gentlemen. This does conclude today's conference call and webcast. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day. Thank you once again.