Flux Power Holdings, Inc. Q3 FY2021 Earnings Call

Thank you. Good afternoon, and welcome to Flux Power's Financial Results Call. I'm Justin Forbes, Director of Marketing and Investor Relations for Flux Power. Ron Dutt, CEO; and Chuck Scheiwe, CFO, will present results of our operations for our third quarter of fiscal year 2021 ended March 31. I'll now read our safe harbor statement. Our discussions may include predictions, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject 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, we are not obligating ourselves to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion will tend 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 Risk Factors. A copy of our press release and financial tables can be viewed and downloaded on the Flux Power Investor Relations website. And with that, I will now turn it over to Ron Dutt.

Good afternoon, and thank you, Justin, for the introduction. As we mark a full year since the onset of COVID-19, as of the quarter ending March 31, and in light of the ongoing effects of the pandemic, we are pleased to report our 11th consecutive quarter of revenue growth compared to the previous year. Our existing customers continue to drive revenue growth as they purchase new forklifts equipped with Flux Power lithium-ion battery packs. Our efforts to acquire new customers are progressing well, reflecting an increased understanding of our value proposition and its adoption, lower lifecycle costs, and improved operational productivity due to extended run times and environmental benefits from reducing carbon dioxide emissions compared to lead acid or propane fuel sources. In the third quarter of fiscal year 21, revenue rose by 38% to a record $7.0 million, up from $5.1 million in the same quarter last year. This increase marks our 11th consecutive quarter of year-over-year revenue growth, reflecting deeper market penetration among existing customers and the addition of new ones. The ground support equipment sector is reactivating as air travel begins to recover. We have received new orders and further signals of increased activity from one of our customers, a leading global airline. We have introduced our next-generation M24 lithium-ion battery pack for high-volume in-rider and center-rider forklifts, receiving initial orders and strong interest from customers. This new battery pack features innovative designs to meet the needs of large fleets, built on eight years of experience in pioneering lithium-ion battery packs for industrial and commercial uses. Our strategy has focused on developing what we refer to as natural product extensions, which can be manufactured on our assembly lines to help achieve our objective of scaling. These extensions generally require minimal design efforts related to our modular pack designs. We are confident in our ability and past successes in collaborating with OEMs and customers to adapt our energy storage systems for applications that offer significant improvements in cost and productivity, along with environmental benefits. Our aim is to become the preferred provider for large fleets, which necessitates our full capability and scale. Our experience over the past year providing battery packs to a global client for mobile EV charging stations has enhanced our capabilities, and we are also exploring other sectors such as robotics and stationary power applications for our battery packs. We continue to gain new customers, and as noted in a previous press release, we have received orders from two large clients, a global packaging firm and a paper and chemicals manufacturer. Regarding gross margins, expanding them is a top priority, with an increase from 12.8% in the third quarter of fiscal year 20 to 24.1% in the latest quarter. This improvement reflects our efforts this fiscal year to negotiate better vendor pricing and implement design enhancements. We have over 9,000 battery packs deployed, granting us valuable technical and customer-driven insights. Our approach has consistently centered on maintaining our core competencies in technology, quality, and service, with the goal of leading in these areas. As we know, supply chain challenges are widespread and continue to affect us. We are actively tracking the sourcing of components, such as lithium cells, steel parts, and electronic components, including circuit boards. While shipping times have shown improvement over the past quarter, there remains work to be done to return to normalcy. Additionally, shipping costs have risen during the COVID period, reflecting pressure on logistics resources and infrastructure. Regarding the COVID-19 pandemic, while restrictions related to it have eased, the impacts from the past year persist due to customer caution, labor shortages, and supply chain hurdles. We've noticed some customers adopting cautious ordering habits, but the current economic recovery presents positive signs. We are addressing procurement and production challenges, which in turn drives our assessment and enhancement of processes. I will now hand it over to Chuck Scheiwe, our CFO, for an update on our financials and capital structure, including the improvements made to our balance sheet during the quarter.

Thank you, Ron. Our operating expenses increased to $3.1 million during Q3 '21 from $2.6 million in Q3 '20, that's primarily due to increases in personnel to support growth, significant increases in insurance payment, and higher freight expenses that Ron mentioned. Our R&D expenses remained unchanged during the quarter compared with the year ago. And our net loss for the quarter decreased to $1.7 million from a loss of $4 million in Q3 '20, reflecting increased gross margin. We had other income due to the PPP loan forgiveness and decreased interest expense. We made further progress in strengthening our balance sheet during the quarter converting all of our remaining short-term line of credit debt of $2.4 million to equity. And with the PPP loan forgiveness, we now carry no debt at all. We did raise $1.7 million under the ATM in the aftermarket facility during the quarter, giving us a cash balance of $2.4 million at March 31st quarter end. Our $4 million line of credit with Silicon Valley Bank provides working capital that remains unutilized and available to support growth. The borrowing availability on the credit line is tied to Flux Power's outstanding accounts receivable and on-hand inventory. To add to Ron's mentioned progress with our gross margin initiative, including the current quarter reported at 24.1%, we do believe continued implementation of our cost improvements, supporting higher gross margins, along with our revenue trajectory will drive us toward our goal of becoming cash flow breakeven. Now I'll turn it back to Ron.

Thanks, Chuck. To conclude our remarks, I'd like to mention that we are optimistic about the future of the economy, our business sector, and our own momentum. It's still early in our trajectory to give guidance in the current COVID-driven environment and adds its own complexity. But we are excited by our customers' response to the value proposition of our packs to their business. And that's not to mention the significant savings in tons of carbon dioxide versus alternative energy sources. We believe our cost savings proposition, productivity enablers, and positive environmental impact all provide transformational changes to take fleets to the next level, and that concludes our prepared remarks. Now I will turn it over to any questions.

I was just curious if you could share any public information about the Company's bidding with Amazon and the current status of that.

Yes, thank you for the question. We occasionally receive inquiries about Amazon due to its prominence. However, we can't share any details publicly. I can mention that it's publicly known they announced significant investment plans in electrification and reducing their carbon footprint. We have had discussions with them and understand they have a diverse range of facilities, including both new green facilities and existing ones. They have also installed fuel cell facilities in their new locations. Additionally, we know they are very interested in lithium. They are exploring these options at their own pace and according to their priorities. We remain interested and have had productive discussions, but there’s nothing to announce at this time, and I don't anticipate anything happening in the near future.

I thought it was a very impressive quarter from an independent shareholder viewpoint. My understanding is you've got extensive capacity in your existing facilities to grow in addition to just growing your own internal product lines. Is there the ability to partner with other entities to build for them if they need additional capacity? And then I guess this leads into a broader question of strategic partnerships and potential M&A type activity, and whether that's something that you ever consider or pursue?

Yes. Thanks for the question. Yes, we've mentioned in the past, our facility, we estimate we could do probably $100 million annually of revenue here. And of course, we're still ways from that. We are growing very rapidly and certainly hope to continue that. I'd say a couple of remarks for you. We don't have any plans to build products for other companies to generate production revenue from them. We are fully engaged here with our plans. As we've reported, we entered a partnership with a global company last year as their exclusive lithium provider. They're a rapidly growing company. Our current thinking is those kinds of partnerships are working well to our pacing and strategy and trajectory, particularly with natural product extensions. We build products here for that. We are currently looking at some other such type partnerships right now, but nothing to announce at this point. But I think to state the obvious, that makes a lot of sense for us to continue to grow. We, of course, in this industry, fully expect with the rapid growth that there to be consolidation, M&A strategic activity. And we, of course, certainly have an eye on that. I've done a dozen or so acquisitions in the past and am very sensitive to what can work and what can't. So I think we'll certainly be judicious in anything that we would do. But I think for now, that would probably be a secondary step to partnerships, just in terms of how we currently think about it. The industry is moving fast, and things can happen pretty quickly. So we're in our financial planning process right now and considering all these matters and positioning what we have to do to grow. And as we said, we want to be a leader for large fleets. That certainly does not mean not growing, so we are looking at all that seriously.

There are no further questions at this time. Presenters may continue.

Okay. I understand there are no more questions. So with that, I'd like to thank everybody for listening. I appreciate your interest. I look forward to continued communication, including not only these calls, but our website and newsletters. For those who are interested, please get in touch with us. We believe and we see a very exciting future for us and look forward to it. So with that, I'll close it off and thank you for your time and attention today.

This concludes today's conference call. Thank you for participating. You may now disconnect.