Back in April, I wrote an article about KULR Technology (NYSE:KULR) – an emerging thermal management solutions company. While the market opportunity is significant in light of the growing electrification and the use of batteries, KULR’s Q2’23 results indicate that the company may be in trouble. As the cash burn has intensified, one of the risk that I highlighted in my first article is materializing – KULR is preparing for an equity offering, which could lead to considerable dilution. The current cash position is not sufficient to meet the looming obligations before the end of the year. To add insult to injury, management has backtracked on the equity offering, responding to the negative market reaction, yet the price didn’t recover to pre-announcement levels. Overall, KULR is in a very difficult spot and investors better avoid the stock.
KULR’s top line saw impressive 358.8% YoY growth in Q2’23 to US$2.7M, while the QoQ increase was also considerable at 53.1%. The result was driven by both categories – products and services. Management attributed the revenue growth mainly to the newly launched KULR ONE platform, which is picking interest rapidly amongst potential and existing customers. The company expanded its gross margin to 37.2% from 27.9% a year ago.
However, this is where the good news from the Q2’23 results end. OPEX reached US$7M (+31.4% YoY) with SG&A advancing 29.2% YoY to US$5.6M, while R&D spending soared 40.9% YoY to US$1.4M. The bottom line amounted to negative US$6.3M, compared to a loss of US$5.3M a year ago.
While losses and growing expenses are not unusual for growth companies, what makes KULR’s situation very difficult is its balance sheet. For the H1’23 the cash burn intensified and the company recorded net operating cash flow of negative US$9.9M. I’d like to point out the growth in accounts receivable by more than US$1.0M YtD, which is quite substantial when compared to US$4.5M of revenue in the first half of the year. The considerable cash burn left KULR with only US$1.3M of cash and equivalents, compared to US$10.3M in the beginning of the year.
Brace for dilution
While the Q2’23 data indicates that KULR is yet to be able to meet its OPEX with revenue, to make matters worse, large part of the short term liabilities are due within days. For that reason, the company even put a warning in the Q2’23 report, regarding the liquidity concerns.
Basically, KULR has to pay US$3.15M to Yorkville by 25 August, unless the parties didn’t work out some type of agreement in the meantime. This is more than twice the cash position of KULR as of 30 June. For that reason, management has to tap capital markets. For that purpose, a prospectus for an equity offering was published. However, no pricing of the offering was announced nor a total amount that the company is seeking. The news was not welcomed warmly by the market at all, with the share price tumbling double-digits. Following the negative market reaction, management withdrew the offering, citing market volatility as the reason.
While the offering was withdrawn, I don’t see a way for KULR to go forward without additional financing. So there are three possible options – renegotiating the terms with Yorkville, raising equity, or issuing debt. The problem with the latter option is that KULR is not an asset intensive company, therefore it doesn’t appear to have enough fixed assets to offer as collateral. Not to mention that with the rising interest rate environment and KULR’s level of risk, any theoretical interest on a loan would likely be in the mid-teens. While renegotiation with Yorkville seems like a logical option, it’s not clear whether the creditor would agree and at what terms. So in the end, dilution looks inevitable.
Alongside its Q2’23 report and likely in anticipation of the offering news’ release, KULR announced a partnership with a “top selling” global automaker, regarding EV battery safety and testing. While the news is exciting enough, due to the considerable market opportunity, there is not enough information in order to assess the value of the partnership. Firstly, the automaker is not announced and remains anonymous as of now. But the bigger uncertainty is that there’s no indication of the extent of the partnership and more importantly the revenue that it could bring.
KULR’s financial position has substantially deteriorated in H1’23 as cash burn has intensified. While revenue growth looks impressive, the growth in receivables is worrying. The current cash position of the company is not sufficient to meet its looming short-term liabilities and the clock is ticking. The first attempt of management to kick-off equity offering has failed and the market is waiting for their next move. While the automaker partnership announcement may seem exciting, it lacks important details. In this environment, I think that investors would be better off watching from the sidelines as there seems to be too much risk.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.