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spk03: You are in the right place for the Cooler Technology Group full year 2023 earnings call set for today, Friday, April 12th, 2024. The call begins at 4.30 p.m. Eastern. Please hold on the line. Welcome everyone to the full year 2023 earnings call for Cooler 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 Moe, and the Chief Financial Officer of the company, Sean Cantor. 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 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 solicitation of offers to buy any securities of any entity. This call may contain certain forward-looking statements based on Cooler'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 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 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 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 Moe. Michael, the call is yours.
spk01: Thank you, Stuart. Thank you, everybody, for joining us today. 2023 was the most challenging yet pivotal year for Kula. For most of 2023, we're working on paying down approximately $8 million of prepaid advanced convertible note that we owe to YA. This outstanding debt really limited Kula'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 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 two 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 27th of this year. Despite these challenges, 2023 was a transformational year for Kula as we achieve record revenue growth and build 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 CoolerOne 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 all the 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 the technical provider's ability to effectively and competitively support lithium-ion battery development. It all starts 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 give us confidence of the battery pack's performance before it's ever built. Then we build a prototype battery pack for pack 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 in the field of use. Last but not least is our safe case technology that keeps storage and transportation of batteries safe throughout its lifecycle of usage. To address this need for holistic approach, Cooler spent the last few years building a team and has developed a portfolio of products and services that can address all the affirmation points. Some of the Cooler's key products include ISE, which is internal short circuit trigger cells, which Cooler has an exclusive license from NASA and DOE. 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 H55 demonstrate how this technology is helping the pioneer and global leader in electric aviation to meet European Union Aviation Safety Agency battery safety requirements. For safety testing, Quora has onboarded a diverse array of tools used to categorize battery cell performance. Among them is the FTRC technology, which won NASA Invention of the Year Award in 2023. We have performed FTRC testing for the world's largest automotive OEMs, leading private space exploration companies, and top eVTOL customers. We expect the battery safety testing to be a multi-million dollar business for us and an anchor of our product offering. Quora has invested heavily in quality and electrical testing capabilities and 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. Cooler is an industry leader in safe storage and transportation with a safe case and safe sleep products that are the workforce of our SafeX product line. Collectively, these products, services, and solutions are referred to as Cooler One Design Solutions or K1DS. and they allow Cooler to jump in with any customer, anytime, anywhere through their battery development cycles. Cooler 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, Quora focuses on using cell-level categorization data to drive the designs of reference architectures that can be rapidly adopted to meet customers' needs. Key examples include the Quora One Space, which is for the space application, Quora One Guardian, which is for military application, and also Quora One Max for modular energy storage applications. What sets CoolerOne battery design 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 Cooler One Space Architecture is focused on providing high performance and energy dense solutions that are designed with intent to satisfy NASA JSC 20793 requirements, which is a gold standard for safe batteries in space exploration. The combination of the Cooler One Space Architecture with Cooler's offerings available to our customer through Cooler One Design Solutions is the driving force for some of our key customer engagements, including NanoRack, which is part of Voyager Space, among many others. Quota is 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 three to four years to build such systems, the Cooler Engineering team will 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 that lithium-ion battery will be the important role as the primary energy source. We expect CoolerOne's space platform to capture meaningful market share in the coming years. The CoolerOne Guardian architecture like with the Quora 1 space, focus on safety and performance. The primary differentiator here is to focus on military standards rather than a NASA TSC standard. Under the Quora 1 Guardian umbrella, Quora's working on the next generation standard format 2590 battery that achieves energy levels never seen before in this form factor. Our development engagement with Army DEF CON is a perfect example of a Quora 1 Guardian engagement. We started this project in Q2 of 2023 to deliver the next generation aviation battery for the Army with the latest silicon anode technology. Army has since increased the total contract value to over $1.8 million, and we're 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 Quota One Guardian and Quota One Max is our UPS program with the Army as well. Under a multi-year contract, Quota has delivered a Quota One battery pack specifically for Army's effort to modernize future command posts. This specialized pack combined high-performance 21700 power cells with a state-of-the-art thermal management technology to enhance propagation resistance while minimize size and weight overhead. This customization has resulted in an impressive 80% improvement in UPS runtime, providing strategic edge in the tactical command operations. The safe case design has been improved over the last year with adoption of robust thermal liner in a strap and buckle system. CUDA has demonstrated the performance of the recent design with live demonstration with the San Diego Fire Department and HACCP officials across the country. And with the publication of 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 time frame. Kohler also maintains a transparent offering of a testing result to step forward in 2023 by offering the entire testing and qualification data set to US Department of Transportation. The Cooler team recognizes that no two batteries in thermal runaway events are the same. Therefore, it's important to continue testing to ensure the test results and lessons learned. Customers are coming to Cooler because the SafeCase has the highest energy capacity in the industry. Its Panda technology is the most effective in the industry and has been used on international space stations since 2019. And it's reusable, which makes it much more sustainable and cost-effective compared to our competitions. In addition to the battery recycling 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 focused on mitigating thermal runaway risk in EV battery module during vehicle production. This project underscores Cooler's commitment to safety innovation in the rapidly growing electrical vehicle market. SafeCase is also being adopted by a leading eVTOL 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 Cooler One platform and Safecase product line are going to be the main growth driver for Cooler going forward. To more efficiently facilitate that growth, we've established Cooler Texas in our new facility in Webster, Texas in February of this year. This facility is conveniently located 2.1 miles from NASA Johnson Space Center and is surrounded by a large number of Cooler existing and target customers. The 17,000 square foot facility is home to our battery R&D team, our battery testing service, and our battery pilot production. It's going to be our center of excellence to show all the capabilities of the Cooler One design solutions. Next, Sean Cantor will provide financial updates. Sean?
spk04: Thanks, Mike. You can see the financial results from our full year, 2023, in our 10K, which is now online. I'll touch on some highlights. 2023 was another record revenue year for Cooler. Cooler 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. Cooler 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 numbered 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.
spk03: All right. Thank you, Sean. And now we will begin the Q&A portion of this earnings call. First, we have a call or questions from Jake Sikelski. 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 strategies are you looking at as safe case sales ramp on the back of the EVA toll contract announcement?
spk04: Thanks, Stuart. It's Sean. I'll take that one. Our contract manufacturing partners hold Buffer Raw Materials Inventory, and a 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. I think this will put us in a good position for supporting customers while maintaining our focus on improving our cash flow. Thanks.
spk03: Okay, very good. This 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 timeframe that they are active for? Also, can you touch on some areas the new permit opens the door to?
spk01: So, yeah, I take that. This is Michael Moe. On the Safe Case Special Permit, they're good for three 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 they can fit into each safe case and safe sleeve is really for business purposes. So we're working with top logistics shipping companies and e-commerce logistics companies to use these solutions for the OEM customers. It turns out that these logistics 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 application requirements and refine our solutions so they can serve the entire industry, the entire new markets with the safe case and safex technology. So we're super excited about these new applications opportunities, and we expect them to be a good revenue drivers going forward for us.
spk03: 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.
spk02: Thanks very much, and congratulations on a solid quarter. I have two questions for you. My first question is, in the last three months, coolers announced projects or contracts with a leading global space innovator, NanoRacks, a leading automaker, the Army, Lockheed, and H55, and you've received special permits from the DOT. Can you prioritize for us, if possible, the timeline for these to turn into recurring revenue and how big those markets might be?
spk01: Yeah, so thank you, Theo. We actually talked quite a bit about these customers in my prepared remarks and how they to tie into our customer or our product roadmap 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, so we always start with service contract revenue. As you can see, our service contract revenue grew 117% year over year. That's really indication of what can lead to future product revenue growth for us. The H55 engagement, for example, we start the contract services revenue about three years ago. Now you can see the ramp up in volume for over a million dollars worth of order. The Army DEFCON contract, we started 18 months ago, and now we're delivering the prototype battery. And the NanoRacks, the prototype battery is delivered within nine 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, has different life cycles and product ramp cycles. But the faster time to market that we enable for them is why they choose Kohler.
spk02: Okay, that's helpful. My other question is that you've opened an online marketplace recently. 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?
spk01: Yeah, well, thanks for keeping it real up to date because I think our online store just opened up a couple days ago. It did, yeah. It is for both B2B and B2C customers. We're getting a lot of inquiries from fire departments, hazmat teams, dangerous goods teams, companies, as well as consumers directly inquiring about the safe case. 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 offline distributors who are focused on hazmat safety, dangerous goods industry, So stay tuned for more business partnership announcements in the future on additional distribution channels for us.
spk02: Okay. Thanks very much.
spk03: Thank you, Theo. All right. Thank you, Theo. And now we'll be joined by Michael Legge, Sr. He is the Managing Director at Benchmark in Emerging Growth Research. Michael, the call is now yours. Please provide us with your questions.
spk00: Thanks. Michael, Shawn, great job getting that off the balance sheet. I know that has to be a large part of your focus at the end of 23 and the beginning of 24 and want to try to understand how much of that focus, you know, now that you have that off the balance sheet and put back to, you know, strategic growth, getting more out the door and, you know, 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 and your ability to get products out the door? 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.
spk01: Yeah. Yeah, Michael, thank you. Yeah, I'll take that. So, no, I mean, that the outstanding debt that we had throughout 2023 Also, the 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 choked off 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 are a little bit more urgent, so we have to prioritize, if you will. So yeah, it had a real impact on not just the management time, 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 in 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.
spk00: 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?
spk01: I would say that the engineering service contracts are hopefully getting shorter and shorter. Like I said, the NanoRacks delivery was nine months. So some of these engineering service contracts still I'd say conservatively, nine to 18 months, design, qualification, testing, prototype, so forth. And then you get to, you know, starting to ramp. And so you're looking at, you know, 2024, getting the 2023 customers to ramp, and then you get 2024 customers, or end of 2023 customers, start going to pilot productions in 2021. four, 25. And, um, yeah, I think that's a, that's probably a 12 to 18 months red rev story, Mike.
spk00: Okay, great. Congrats. And nice to see all the progress and, uh, look forward to 24. Great. Thank you so much.
spk03: 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, Tom, to end the call.
spk01: Thank you, Stuart.
spk03: This does conclude today's conference call. You may disconnect at this time and have a wonderful day.
spk01: Thank you for your participation.
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