Flux Power Holdings, Inc. Q4 FY2020 Earnings Call

Good afternoon and welcome to the Flux Power Earnings Call. This is Justin Forbes, Director of Marketing and Investor Relations for Flux Power. I wanted to let you know that we just issued a press release with our financials. And joining me on the call today will be Ron Dutt, our CEO and Chuck Scheiwe, our CFO who will present the fiscal year 2020 ending June 30 financial results. Now before that, I want to read our Safe Harbor statements. So our discussion may include predictions, estimates or other information that might be considered forward-looking. While the forward-looking statements represent our current judgment on what the future holds, they are exempted to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results or any revision to these forward-looking statements in light of new information or future events. Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading of 'Risk Factors'. A copy of our press release and financial tables can be viewed or downloaded from the Flux Power Investor Relations website at flexpower.com/investors. Thank you. And with that, I'll turn it over to Ron Dutt.

Good afternoon and thanks, Justin, for the introduction. Today, I’m going to provide color on our headlines for fiscal year 2020, ending June 30; and what we're working on and what is our long-term strategy. Our fiscal year 2020 revenue increased 81% to $16.8 million from $9.3 million last year. Our full year results include four record quarters, as compared with comparable quarters in fiscal year 2019. Including our fourth quarter ended June 30, 2020, with revenue of $6.3 million, which was 107% higher than a year ago. Primary drivers of this momentum include expansion of key top-tier customers, increased relationships with forklift OEMs, including their national account sales network, and a recent rollout of a full product line. This rollout includes the launch of a new Narrow Aisle Walkie product we call the S24 and a pack for the popular Class 1 3-Wheel forklift, used in high velocity multi-shift distribution centers. Winning a three-year opportunity with one of the world's largest airlines was gratifying. We also announced not long ago a partnership with Envision Solar, now renamed Beam Global, NASDAQ symbol EVSI, to provide packs for solar backup to mobile charging stations for vehicles. We see this as another new opportunity in a fast-growing sector. Securing supply relationships with more forklift OEMs, such as Clark Material Handling and putting in place a global master purchase agreement with a Fortune 50 industrial company represents significant developments for Flux Power during fiscal year 2020. These relationships strengthen our foundation and position us well for future growth. Proving our brand and reputation with our customers is important to our goal of leading the adoption of lithium in material handling and adjacent sectors. Our vision to lead adoption requires the capability to track the very large fleets that are seeking transformational productivity and lower cost impact to their business. Our lithium and our software technology does this. This drives our strategy towards building scale, but also confidence. What I mean by that is, Flux having as good or better technology and service than our competitors. So our business momentum is strong; however, a word about our sales cycle and quarterly results. The first quarter, which in our case is the quarter ending September 30, coming up this week, has historically been a seasonally low revenue quarter for us, reflecting customers not purchasing or installing new equipment over the historically slow summer months of July and August. And for that matter, December can also experience some seasonality due to the holidays. Hence, to assess our progress, we encourage investors to compare the results of current quarters with comparable quarters from prior year periods rather than consecutive quarterly results. If we turned to what's going on behind the headlines for Flux that I just mentioned, Flux has moved into a facility this past year which we believe to be capable of supporting $100 million of revenue annually and also allows us to participate in the fast-growing waves of lithium adoption. Our facility and operation have also been a source of credibility to visits from our large customers, which include household names you know. We currently have three assembly lines in place, have plans to add three more in the coming year. We anticipate launching another high-volume pack in the coming few months and adding another product line offering to our private label program that we have with a top five global OEM. We recently introduced a new telemetry product, excuse me, SkyBMS, which is the brain of our operating platform and a true differentiator from our competitors. The BMS provides a host of controls to optimize pack operation, including managing extreme operating conditions, providing extensive pack data on state of health, and enabling communications with the forklift truck and our cloud platform. The SkyBMS operates from our existing BMS firmware, connecting to the cloud platform, which provides customized information to enable a paradigm shift in fleet management. And this is also accessible by our techs for downloading any firmware or software, and doing any diagnosis. Our two largest customers are very excited about the added value of the SkyBMS for their operations, reflecting so they tell us an impact that they have not seen before. Internally, we are seeking to expand our footprint in the market and we have been implementing ongoing specific initiatives to improve gross margin by both evolved designs and lower costs from building scale with vendors. We give full attention to building scale, particularly at this point in our history, but we do prioritize profitability goals. Other foundation steps this year have been implementing an ERP system to support our growth along with our ISO 9001 process and quality requirements. Together with our existing customers, we're collecting data in order to build case studies that demonstrate the productivity savings and cost reductions our customers are experiencing, which include energy savings from the grid, environmental enhancement from discontinuing lead acid spillage reports to the EPA, and comparison to lead acid, showing using up to half the kilowatt per hour energy for a given operation. We have and will continue to expand our staff and Board to ensure we have the resources, experience and oversight appropriate for our business and expected growth. And to that point, John Cosentino was appointed as an Independent Director in April of this year, bringing a wealth of industry and New York Stock Exchange public company experience, all of which brings our total to three independent Board members and a total of five. Now a word about COVID-19. It's hard to give a presentation without mentioning COVID. Flux Power was designated as an essential business as a manufacturer of power sources for material handling equipment, supporting the flow of food and other goods during the pandemic. And we have remained open throughout the pandemic. We have experienced only minimal disruptions to our supply chain. We have implemented multiple safety measures to protect our employees with enhanced facility cleaning and sanitation, along with employee daily screening, including temperature checks and symptoms questionnaires, masks, and social distancing rules, and limiting visitors to those that are necessary. In our fourth quarter, the quarter ending June 30, we had two employees test positive for COVID-19 and immediately implemented steps under our internal policies. Those two employees, along with 18 others with possible exposure, were self-quarantined as directed by CDC and other recommended safety guidelines, including state of California guidelines. None of the quarantined employees or any other employees have since tested positive for COVID-19. We are pleased to report that our manufacturing and assembly operations during this period were only minimally impacted, largely due to the diligence we exercised in following the guidelines, and we were able to operate efficiently with our staff. We do, however, recognize that COVID-19 continues to represent a risk to our business and will continue to create and implement strategies to minimize the potential disruptions to our business. Finally, I would like to address our strategy for the near future. Our goal is to accelerate growth now that we're gaining traction with products, customers, and infrastructure. I'm pleased to remind listeners that in mid-August, we completed a capital raise of $12.4 million and qualified for listing on the NASDAQ Capital Market. Our shares now trade on NASDAQ under the symbol F-L-U-X, Flux. These events provided us with growth capital to support our business objectives, enhanced market visibility on what Flux is doing and strengthened our ability to participate in the growing demand for lithium-ion energy as I mentioned earlier. I will now hand it over to Chuck Scheiwe, our CFO to provide the impact of these capital market achievements to our stock liquidity, our balance sheet and capital structure and he will also mention the improvements to our balance sheet since May and provide color on gross margin and operating expense.

Yes, thank you, Ron. As Ron mentioned, we listed on the NASDAQ on August 14 and closed on a related capital raise of $12.4 million. These are meaningful milestones for us and have positioned us for growth. Our strengthened balance sheet has allowed us to explore cost-effective ways for financing our working capital, including obtaining a real working capital line and addressing other cash flow needs with banks and lenders. In addition to raising the equity capital, our August financing expanded our institutional investor base and also increased trading activity in our shares significantly. The underwriters exercised their over-allotment option in full pretty much right away, which was great. One of our goals has been to improve our stock liquidity. With the additional shares in the NASDAQ listing, we now appear to be on that path. Now during the fourth quarter and for the equity raise and uplift just discussed, we closed on a private placement of common stock, raising $4.5 million. We were able to convert a significant amount of short-term debt totaling $8.2 million, leaving $4.4 million of debt on the balance sheet, which is really all held by friendly shareholders. Also, we applied for and received a PPP loan for $1.3 million. We intend to apply for forgiveness of the full amounts of such a loan in the coming months and see no reason that it won't be forgiven. Now talking about gross margin, we have really been focused on that. Our fiscal year 2020 gross margin increased to 13% compared with prior year of 5.9%, and our fiscal year 2020 Q4 gross margin increased to 17% compared to 7.3% during the fourth quarter a year-over-year. So we’re making progress. We initiated a gross margin initiative program in January of 2020 with specific actions to include sourcing actions and lower prices from higher volume purchasing and selecting second-generation design cost reductions in some of the packs. Now to the operating expenses. Our increase in R&D expense reflects our continued product rollout, including UL certification testing expense, the launch of our next-generation BMS and the development of our SkyBMS telemetry that Ron was discussing. The growth in our sales and marketing expense reflects the efforts Ron discussed to expand our customer base and we plan to increase our efforts to support our growth objectives and new customer acquisitions in the year ahead. We brought on three new customers during fiscal year 2020 and are working to expand this base. Lastly, G&A expenses have seen increases just to support our outstanding business growth. Now, I will turn it back to Ron.

Thanks, Chuck. To wrap up our session, I'd like to comment on our go-forward strategy. Now that we have a firm level of foundation building and market traction, it's time to consider accelerating our growth. We now have the stock currency given our successful listing to consider strategic actions including M&A. I say that all these developments we've mentioned can now enable our ability to capture more of the lithium demand waves that are happening and to meet our vision of leading the market. At the same time, we know enough after a number of years at this to continue placing a high priority on customers and employees. I believe our investors will agree with and appreciate that. And that concludes our prepared remarks. Catherine, we are open for questions.

Sure sir. You have your first question from Keith Gill. Mr. Gill, you may ask your question, your line is now open.

Yes, congratulations on a great quarter. And what's your quarterly burn rate and your current cash position, including the recent offering?

Yes, fortunately, the $12.4 million, even after paying bankers' fees, gave us a really good chunk of cash. We have a working capital line that we are about to implement; we’ve had approved terms so that's going to give us further help, because there still is a gap between when we have to buy all the materials for these big orders with steel and battery cells, and when we collect. So the working capital facility is really going to help us to keep us going with cash. So, and what was the other part of your question again?

The quarterly burn, your current cash position and quarterly burn?

Yes, our quarterly burn in terms of fixed costs has been around $500,000 to $600,000. In addition to that, we have incurred various development costs and payments to third parties, such as for UL listing. A significant factor is our working capital needs, which is why we are eager to launch this working capital line.

And Mr. Dutt, it seems that there is a pop-up question here. Your next question from Mr. Rick Senior. Sir, please ask your question; your line is now open.

Are you seeing a shift in your customer base as so with COVID? Are you seeing more online retailers having more business? Are you seeing a shift in business towards those online retailers placing more orders for packs?

Rick, first of all, thanks for asking the question. And I think we've all seen the impact of Amazon and really everything. I don't know about you, but my wife and I just pretty much buy everything online these days. So, the impact of that is good for us. Particularly with Amazon, I can't really provide any more information on that one. But I would say definitely there. And then also with our other customers, such as the big beverage, the global beverage providers, though they're not online retailers per se, they're serving the retail customers directly. That has progressed unabated. Other stores, like Nordstrom, for example, usually have it delivered to your front door. So what we are seeing is a growth in distribution centers and warehouses to support this massive increase in traffic that's going to the DC centers instead of people going to department stores to buy a product. That product still has to get to the department store. So, it's a little complex to sort it out exactly and put your finger on where the increment is. But fortunately, and related to COVID, we've noticed a little impact, but it's certainly outweighed by these trends. So, I feel that is to our advantage. Does that answer your question, Rick?

He already disconnected, sir.

Oh, so I guess it did. I would appreciate any more questions if anybody has. I'll appreciate it.

Yes, sir. You have your follow-up question from Mr. Keith Hill. Sir, you may ask your question.

Thank you. Could you supply some color on your recent partnership with CLARK Material Handling and your expectations with that partnership? Thank you.

Certainly. We announced our partnership with CLARK in a press release, and it's important to understand the context of our relationships with forklift manufacturers, as they already have connections with major buyers in our target market. Over the past few years, we've made significant efforts to cultivate these relationships, which take time to build. CLARK, ranking as the 10th largest OEM globally, approached us because we have established strong ties with the top five manufacturers. They are introducing a new three-wheeled Class I vehicle and expressed interest in using our lithium battery packs, recognizing the demand for lithium from their customers. After comparing us with several competitors, they chose our products, which we are proud of. Their dealers and distributors will promote our packs when they sell those units to end customers, providing a substantial sales and marketing advantage. We have signed a supply agreement with CLARK, and they showcased our packs at MODEX in Atlanta just before the COVID-19 crisis escalated. This collaboration is central to our strategy to leverage their network with large fleets across the country. We aim to further expand our reach, focusing mainly on the top 10 global OEMs while also targeting additional opportunities beyond that. I hope this clarifies things.

Yes, outstanding and congratulations on that partnership.

Thank you. Any other questions?

Yes, sir. We still have one more question from Alan. Sir, please ask your question, your line is now open.

Good afternoon. I apologize for joining late. If this question was already asked, I have a follow-up. You mentioned a significant order from a global airline. When you sell a lithium-ion battery pack to that sector, how does the pricing or other factors compare to the forklift? Also, what is your perspective on the opportunity in that area? Thank you.

Thank you for the question, Alan. It's great to have you here, even if you're late. While I can't disclose specifics about the airline due to restrictions, it's a well-known global airline that you are familiar with. Our initial focus has been on forklifts, but a key distributor for batteries in the airline sector approached us with an exciting opportunity for ground support equipment, such as trucks that handle baggage, conveyors, scissor lifts, and cargo trucks, to transition to lithium systems. We hadn't considered this before, but after some research, we determined that the trucks could efficiently use the same battery packs designed for our large Class I forklifts without needing significant engineering changes. Our team collaborated with the distributor for a pilot program. They started with a purchase of 10 units to assess the operational, maintenance, and service impact, and it led to securing a substantial three-year agreement. Although COVID has put a pause on many activities, we were pleased to see such interest because we can leverage our existing assembly line for large battery packs and will even establish a dedicated line for this new application. This endeavor incorporates our advanced technology in steel, battery management systems, and telemetry used in our forklifts. Thus, this is a strategically crucial development as we adapt our battery packs for various applications.

Thank you. Is it possible I could ask something else or?

Sure. Feel free.

Thank you. I have two questions. First, could you provide an update on your pipeline backlog? Second, in your press release, you mentioned that in July, $400,000 of debt was converted to equity and that there was a $3.2 million private equity raise. Could you let us know the share count as of the end of July or today, if possible?

Yes, sure. No, to address the last question first. I’m going to call on Chuck in just a minute, but I think it's around 11.3 million shares or so. And, Chuck, I don’t want to do all the talking here. Chuck will provide just highlights on the conversion to equity and the pipe raise, which happened before we decided to do the uplisting. But regarding the backlog, as I said, July and August are slow months. So our backlog is significantly higher than it was a year ago, but it's not quite as high as it was in the spring. To understand that and put that in context, let me just explain the sales and ordering cycle. In many businesses I've been in, the backlog is a key barometer for what's going to happen in the near future. It's noteworthy for us, but our sales cycle works with a number of these very large fleets that are scheduling their equipment ordering and installation. They need to stage it over the year. Our new packs focus on going into new trucks, brand new trucks. When orders get established for the trucks there's a lag before we get the order on lithium. We don't have a long lead time for getting orders in our hands. What we do get along the time is our dialogue with the OEMs and Fortune 100 companies converting their fleets to us. They give us indications of what the whole next year looks like. I wish we had those orders in hand. I’d be a hero on this conversation. But that’s not how it works, and we don't mind that. The dialogue and relationship we have on what to expect for the next year is really what counts. While I can't disclose specifics due to FD rules, we do have well under $10 million in current backlog, but we anticipate it will grow significantly as we move through September and into October. So, with that, Chuck, you want to mention the $400,000 conversion and what that looks like?

Yes. Overall pipe, we had three different closings: the first one was about $265,000; then another $1.1 million; and then $630,000, followed by another $722,000. We closed at $3.2 million in total for the pipe. We halted that to focus on the uplisting. In terms of current outstanding shares, we're looking at 11.4 million right now.

I thought we had more shares than we do, which is 11.3 million. The $400,000 comes from one of our insiders converting to equity in July from our short-term line, which we've noted as convertible debt that occurred in July. Alan, can you please provide us with another question?

I would love to ask another one if you don't mind.

Yes, go ahead. I think our time's creeping up, so we should probably get moving.

So I attempted to listen and understand Tesla's Battery Day last week. And I probably sailed on understanding everything. But they did make some points in terms of a goal of like cutting the costs of their batteries by half in around three years or so. And I know they have different types of batteries than you, but I was just curious about how you think about the opportunities of lowering your battery pack costs over time?

That's a great question. The cost of the cells in the battery pack accounts for about a third of the total material costs for smaller packs, and it can be as much as half for larger packs. We work with two suppliers and utilize large-format cells, similar to Tesla's cylindrical cells, which resemble large double A batteries. The specific format isn't critical; it comes down to packaging. In either scenario, the cell suppliers create modules which can be connected to achieve the desired power level. We have managed to reduce costs with both suppliers over the last six months and anticipate further reductions mainly due to increased volume. Currently, our cost per kilowatt hour for the packs is between $500 to $600. Tesla claims lower costs, and it's important to note that the cost per kilowatt hour differs when comparing just the cells to the entire battery pack or even a car. Tesla has reported achieving around $150 per kilowatt hour due to their high production volumes, and many analysts expect a continued decline in battery costs. Moreover, while there's been talk about rising lithium prices, it's worth mentioning that lithium constitutes less than 1% of our pack's cost. Our focus remains on reducing the cost per kilowatt hour through technological advancements and increased production.

No. Thank you so much. Fascinating. I appreciate it.

Yes, thanks, Alan. I look forward to talking to you in the future. So with that, our session has come to an end. I would just mention that we had numerous people on the call. Thank you for your attendance and attention to what we're doing. After being at this for a number of years, and in many other industries, I believe we are at the right place at the right time. We're also getting a lot of the essentials to build a large business in place. Chuck and I are always available for questions. We're glad to talk to you. Thanks again, and have a good day.

Yes, thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect. Speakers, please remain online for a follow-up conference.