Flux Power Holdings, Inc. Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Flux Power Fiscal Year 2021 Financial Results and Company Update Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Justin Forbes. Please go ahead.

Thank you. Good afternoon, and welcome to Flux Power's Financial Results Call. This is Justin Forbes, Director of Marketing and Investor Relations for Flux Power. Ron Dutt, CEO; and Chuck Scheiwe, CFO, will present results of operations for our fiscal year 2021 ended June 30, 2021. Now I'd like to read our Safe Harbor statement. Our discussion 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 that 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, we 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 at fluxpower.com/investors. And with that, I'll now turn it over to Ron Dutt.

Good afternoon, and thanks, Justin, for the introduction. As you may know, we issued our press release on fiscal year '21 financial results on Wednesday, September 22, to support executing a registered direct offering which closed earlier today. We announced on Thursday, September 23, we are entering into a securities purchase agreement with institutional investors with H.C. Wainwright acting as exclusive placement agent. Earlier today, we closed on 2,142,860 shares of common stock with 50% market coverage at a purchase price of $7 even per market share and associated warrant which generated gross proceeds of $15 million. The securities were issued pursuant to our shelf registration, which has been effective on October 26, 2020. We plan to use these proceeds to support our current rapid business growth, to provide capability to accelerate our path to profitability, and to exploit market opportunities. As our key customers are typically Fortune 500 companies with large material handling fleets, they require suppliers who have financial underpinnings and have the capability to deliver quality product on time. After all, it's disruptive to chain suppliers, especially given complexities and purchasing service and at the same time support expansion of lithium adoption across their fleets, which happens over a multiyear period. And to recall from last year, we uplisted on the NASDAQ Capital Market in August 2020, including raising 12.4 million in equity capital. Turning to our financial results for fiscal year '21. We increased revenue by 56% from the prior year to a record $26.3 million. This growth reflects continued momentum from the prior year despite the headwinds of supply chain disruption, and a continued impact of COVID-19. We launched our next generation battery packs with a high volume Class 3 End Rider product line, and there has been a very positive response to the quality and performance of these new packs. Deliveries of several of our product lines were initiated with the world's largest meat processor, along with several major customers in industries including paper products, chemical manufacturing, and packaging. We made good progress acquiring these and other new major customers that are currently working on bringing on more. We are experiencing the impact of growing awareness and acceptance of the lithium value proposition, and the reputation of Flux Power to satisfy Fortune 500 customers. We've resumed deliveries to a global airline that were temporarily deferred during the disruptions caused by COVID. A partnership agreement was signed with CLARK Material Handling, adding another sales channel. And we initiated deliveries of a new proprietary high voltage battery pack to a prior provider of autonomous electric shuttle vehicles. All of this revenue expansion resulted in surpassing 10,000 battery packs in the field as of this past July. We believe this is an indicator of our market leadership in the lithium powered material handling and ground support equipment sectors. The widely reported supply chain disruption has caused us slower deliveries from vendors, especially lithium-ion battery cells, and scarcity of electronic components. Pricing has skyrocketed for steel and shipping costs. We have experienced delays in meeting some customer delivery dates, but have not lost any orders; only had deferred delivery timing. This is evident in our current backlog of open sales orders, which now total over $18 million. Fortunately, our packs accompany orders for new forklifts, which are also experiencing delays, mitigating misalignment of delivery timing to customers. Increased pricing of steel, shipping and some other components have put pressure on us, causing us to recently announce price increases. The material handling sector has seen price increases announced broadly in response to the widespread raw material increases. This component of pricing pressure has had some adverse effect on our gross margins, especially since last June. While it is unlikely that supply chain delays and increased pricing will abate suddenly, we are seeing indications that recovery will be coming. And finally, COVID-19 continues on with the Delta variant. However, we follow California Department of Health and CDC guidance and have had no production stoppages. We made substantial progress on our gross margins during fiscal '21, increasing from 13% last year to 22.1% this year. We continue implementing specific plans to achieve 30% gross margins with the intent to target 40% after that. Chuck will provide more detail on gross margin and operating expense shortly. We also made progress on technology with the introduction of our telemetry product, which offers real-time reports on battery packs' state of health for access by customers located anywhere at any time. Our telemetry has been enthusiastically received by customers, providing added value to managing their fleet. We do have three patents in process that support our state-of-the-art Battery Management System. Our new feature capability with that is expanding and represent a platform for offering power by the month in a bundled package of energy for fleets. And we added EVE as a supplier, a highly regarded Chinese battery cell manufacturer to ensure timeliness and quality of supply. We continually research and assess emerging cell technologies and potential cell suppliers. Our fiscal '21 Q4 revenue of 8.3 million increased 33% from 6.3 million last year, representing our 12th consecutive quarter of year-over-year revenue increases. We made progress during the quarter on initiating shipments of recently developed 400-volt battery packs for autonomous electric shuttle vehicles, as I mentioned earlier. We believe there's an opportunity for applications for high voltage equipment, including larger capacity forklifts and material handling, especially those located at ports of entry, which supports our goal of offering a full line of energy storage solutions. Airports and ports of entry are reporting goals of carbon reduction, which favor lithium adoption. We believe that achieving our goal of leading lithium-ion adoption will be enabled by our ongoing efforts to expand technology leadership and synergistic partnerships with customers and suppliers. As I have mentioned, our telemetry products are currently leading the way with real-time reports via the cloud. Examples of our partnerships include Beam Global and their solar powered EV charging stations; CLARK Material Handling and their forklifts; our private label with a top five forklift OEM and a battery cell manufacturer. We continue to leverage our reputation to expand relationships and build scale. I'll now turn it over to Chuck Scheiwe, our Chief Financial Officer.

Thank you, Ron. As Ron mentioned, as you know, we got listed on NASDAQ last year, which elevated our ability to raise capital, increase our shareholder base, and expand our messaging and exposure. We raised over 12 million in capital and secured a 50 million shelf registration, including a 20 million ATM at the market facility, which we've utilized to raise smaller, lower-cost equity capital levels on a very opportunistic basis. We converted 5.2 million of debt to equity, which eliminated all debt on our balance sheet. We further strengthened our capital structure and positioned for continuing our strong business growth. Additionally, we secured a working capital line with Silicon Valley Bank that is available to support surges in purchasing from large orders. Turning to gross margin, it improved in fiscal year 2021 from 13% to 22.1%, reflecting benefits of our sourcing initiatives, lower prices from higher volume purchasing, and rolling out some design cost reductions. The supply chain disruption that we talked about and price increases in the past months have put pressure on margins, and we're working hard on passing some of those on with price increases as mentioned earlier. While it's difficult to predict when supply chain issues will abate, we do see indications of some mitigation in the coming months. Our ongoing gross margin improvement efforts included a major platform redesign that is already underway, which will benefit most of our product lineup. We believe our specific margin initiatives will drive us to 30% margins in the coming year. We will then continue to pursue 40% margins, implementing further actions under review. Our working capital needs, especially supporting inventory management, is currently a challenge. But these pressure points for market conditions are accelerating the maturity of our processes as we expand our business. We are focused on improving inventory turns to lessen working capital demands. Operating expenses increased for fiscal year 2021, but decreased as a percentage of revenue from 87% to 73%, reflecting productivity gains as part of our long-term strategy. Our operating expenses reflect an infrastructure built for our current $26 million revenue business but are built to deliver Fortune 500 customer quality, timeliness, and responsiveness that is leading us to 100 million plus annual revenue and beyond. To build scale, some expenses need to proceed revenue. Our growth momentum continues off of our recent 50% to 60% annual revenue growth rates. We do not provide guidance yet as it is difficult to forecast the pace of growth when you're growing as quickly as we are. Our cash flow breakeven target is a major priority, as we are committed to profitability while aggressively growing to exploit the current lithium-ion opportunities. We believe the growth opportunities for lithium-ion batteries and material handling and adjacent energy storage sectors continue to represent ever-increasing momentum, enabling building scale and further improving margins as we continue. Now I'll turn it back to Ron.

Thanks, Chuck. To conclude our remarks, I would like to say I'm proud of our grit and persistence in facing the headwinds of the supply chain disruption and COVID that we've seen. These pressure points, while aggravating, are making us a stronger company, increasing the pace of maturing our processes company-wide and binding by necessity new and innovative solutions. Such fallout includes first improvements to purchasing and inventory management for working capital efficiency, sharper focus on design cost opportunities, and operating cost reductions. We believe we have leadership in lithium pack sales in the United States for material handling and ground support equipment, and we are relentless in our strategy and execution to keep that leadership as the lithium-ion battery segment continues its double-digit growth. And that concludes our prepared remarks. Now I will turn it over to questions.

Thank you, sir. We have your first question from Allen Klee. Your line is open.

Yes. Good afternoon. You mentioned that you're implementing price increases. Can you tell me when that's going to go into effect roughly and to what extent, all else being equal, that the impact would have on gross margins? Additionally, you mentioned that you saw some signs that margins could potentially improve. Could you elaborate on that? Thank you.

Yes. Sure, Allen. Thanks for the question. Yes, we haven’t increased prices for a couple of years, and you know what's going on overall. Everywhere you turn, there are price increases, and we've seen them. Many others in this sector see the same thing. We're finally catching up. We announced some price increases earlier this month. Of course, as is customary, any of our purchase orders we have are held harmless from that. But our bidding and new sales we’re going after will include those price increases, which cover most of our product lineup. Given there is a lead time in the sale, we don't expect to see a significant impact of that until the beginning of the calendar year. We think that that is being well received generally and is important to maintaining our position and competitiveness in the marketplace. Your other question, gross margin alleviation, I'm not sure what you meant by that. Could you clarify that, Allen?

I'm sorry. You mentioned something that some of the pressures you were seeing on costs and maybe supply chain might be alleviating in the somewhat near term. That's what I was referring to, if you could go into some detail on that.

Yes, steel prices have doubled, tripled. And while all of that isn't passed through to us, a big chunk of it is. We don't see steel prices plummeting. We think it's going to happen slowly or at least not quickly, put it that way. I don't think anybody has a crystal ball on steel prices. We talked to a lot of people; our sourcing folks talked to a lot of people, and we're just going to have to grit through it. The other one is electronic components. A lot of those components are smaller dollar components. But you've got to have them. Our sourcing people continue to chase sourcing components all over the world, like many other companies are doing. So that's going on. Another one is the shipping. If you were to read the Wall Street Journal this morning, they talked about 60 ships backed up out of the ports of Long Beach and LA, with transit times going from what had been under normal times 40-day transit to now up to 80 days. So that backup there at the ports certainly backs up delivery times, increases inventory levels, and all of this increases the cash demands on working capital management. But we see this getting through. We've seen that pressure on gross margin really beginning last year, particularly last June, as our suppliers had absorbed a lot of that up until that point, but it just became too much to pass on to us. So it is a bit of a crystal ball as to the extent when and how much that gets alleviated. But we feel our pricing has covered us in a reasonable and judicious manner, and we will certainly do our very best to continue to manage that.

Thank you. I had a few financial questions and then I'll jump back in the queue to ask a couple more after. But I was wondering when the 10-K would come out. And some numbers that I would like from there that maybe you could share is what the stock-based compensation was, expense for the quarter? Where you see the share count now? What CapEx was for the quarter? And any view with CapEx and stock-based compensation of maybe directionally how they may go next year relative to where they were in your prior fiscal year? Thank you.

Yes. I'm going to turn this over to Chuck to give some more color, but we just released the K shortly before this call started so that's out there.

Yes, the K should be available, Allen, and we can discuss it in more detail later if you would like to know what the K contains and what may be missing from it.

Thank you.

Hi, yes. Thanks for taking my questions. So Chuck, can you give us the cash and debt at June 30 just for our models as we're waiting for the 10-K?

I’m sorry.

The cash and debt at June 30?

As of June 30, there was zero cash and 4.7 million in debt.

Okay, excellent. So then one of the items I wanted to talk about was research and development was up by about a third sequentially. You guys hadn't signaled big increase in sort of the number of packs you're certifying or anything out there. Can you maybe talk us through the programs that you're funding? Are a good portion of these items sort of one-time in nature where you're using external consultants, like you do sometimes for your pack qualification, et cetera? How can we think about R&D spending over the next couple of quarters?

Yes. In the past year, we engaged external resources to assist in the design of our new End Rider pack, which was completely redesigned. This effort created several synergies. We incurred costs for UL listing on most of our product lines due to our switch from battery cells to EVE cells, which required some minor engineering modifications. We have been dealing with this for several months, and there’s still some work left to complete. We will continue to prioritize R&D expenses to maintain our leadership in technology and product performance. This may include introducing new products in areas we haven't fully explored, such as forklifts or the 400-volt high voltage product. We anticipate ongoing R&D efforts in the upcoming quarters. While we typically do not provide guidance on this, it reflects our commitment to remain a leader in our sector, a standard our Fortune 500 clients expect from us.

Excellent. Thank you for that. So another question that I had that maybe we can discuss a little bit more detail is the airport ground equipment market seems like it might be positioned to take off, given the airline traffic is rebounding out there. This has been an area where you've had some really exciting activity over the last couple of years. Can you maybe update us on your customer conversations? Are some of the customers where you were actively engaged previously maybe coming back? And is there a possibility for a broader swath of customers to execute orders with Flux over the next few quarters?

Yes, we're pleased to see orders returning. Our largest customer in ground support equipment is a major airline, and they’re placing back orders. We are actively building and shipping. They continue their transition to lithium, which is exciting. While I can't disclose specific names, they are recognized as a leader in airline technology. We collaborate with a knowledgeable distributor in this industry, and they have had our battery packs tested by several airlines in recent years. The pandemic had significantly impacted demand, but the signs suggest that more airlines will increasingly adopt lithium. We can’t provide specific guidance, but we are observing these trends. While I hesitate to call it inevitable—nothing is guaranteed—airlines and airports are under pressure to meet clean technology and sustainability mandates. Lithium technology offers a viable solution for reducing carbon emissions and addressing issues associated with lead-acid batteries at airports and diesel alternatives. The momentum is building, and we are prepared to seize the opportunity.

Excellent. Last question, if I may, inventory was up a couple million dollars sequentially. I can understand if you're maybe doing something intentional there, given supply chains are stretching out. But can you talk us through inventory? Do you expect us to stay high for the next few quarters? And is there maybe a large finished goods component, or is this mostly raw material work in process?

Most of it is raw. We are building up more finished goods than we have in the past, but we're covering ourselves. That's our job as a company is to buy inventory, because we don't know what's happening right now. So we're going to run a little larger on inventory, hope to drop that down in the next couple of quarters. But yes, it's going to be there for a little bit because our job is to protect our customers.

I would agree with that. Congratulations on that strong revenue result. Despite this challenging environment, it's pretty impressive. Thanks.

Thanks, Craig.

We have your next question from Adam Eagleston. Your line is open.

Thank you, gentlemen.

Hi. How are you doing?

Yes, doing well. A few questions on the capital raise. Can you share who the investors were, strictly financial, any of these strategic partners, maybe any color you can provide there would be helpful?

Yes, Adam. It was all institutional players, half a dozen or so. And no, we don't share their names as is customary, but it was nice to continue to get more institutional players as shareholders. When we uplisted last August, it was our first real collection of institutional players, which provide a lot of stability and credibility. So we had really new ones this time. So it's good to add to that. But we did that raise fairly quickly. The institutional players were there, ready and able, and we actually raised a little more than we thought. Terms were good, interest was strong. Hope that helps.

That helps. Why this size at this time and how did you think about the cost of capital here?

Yes, good question. We had a lot of talk about that. We didn't think we’d have to raise money at this point as we started working our way through the summer. But as we talked about, the supply chain disruption has caused us to require more cash, more in inventory and a number of other uses of cash. We looked at that and felt let's go ahead and get something less than 10. Upon further reflection, not only were we considering our own operating position and outlook, but certainly the image we present to our large Fortune 500 companies; as I mentioned in my words, we're getting new customers and even the existing customers are banking a lot on us, because this isn't a transactional business. They're banking on us being their supplier of millions of dollars' worth of assets each month, each quarter, that get added and for many years. I think we're well served by having a little more cash than we thought we needed. The markets have been soft, probably oversold, but we didn't want to be jumping in and out of the market in the coming months because we're growing very rapidly. Our kind of growth can need capital, and we don't want to slow the train down. So it was part of several of those concerns and strategies, because we are very confident in continuing this aggressive growth. We're adding large Fortune 500 companies all the time. We need to present to them that we're just not doing some transactions here. We're someone that has the bandwidth, the foundation to be a major supplier to them as adoption of lithium-ion battery packs continues to expand and gain momentum. I hope that helps.

I agree, and we continue to be impressed with the strong top line growth and understand the need to have a certain level of gravitas for these Fortune 500 companies. That still didn't quite answer the question about what the cost of capital was at this point. Also, I would ask, given that a lot of this was related to the supply chain and we understand those challenges and commend you for navigating those, there is if I recall a line of credit that's available for those purposes as well, that might have been less painful.

We can discuss this all day. The information is available in the 8-K and 10-K filings, which detail the cost of capital. Everything is disclosed. As a company, we make informed choices about what is best. Along with our Board, I’m unsure about what more you are looking for regarding the specific cost of capital.

There's another element of this that comes to mind, Adam, just as we sit here and talk about it. Cost to debt is deeper than cost to equity. Of course, we could have gone with debt. But I think one of my concerns, particularly after my days at Ford Motor and Ford Credit, we need to ensure that we have some strength in our capital position. I think for us right now, this phase of our development, equity really represented a better positioning of this company going forward.

Again, perhaps at 7, what you said reflected strong interest, clearly the reaction of the market based on the structure with the warrants invested immediately, the market is telling us a different story, respectfully.

I think we went out at 7 with warrant recoveries to leverage Black-Scholes and things that add value in the market around 6. It's trading slightly below that. Many bankers have told us that when seeking capital, the perception of dilution can be a concern. The bankers we spoke with believe this was a successful fundraising effort, not just those who handled our deal. There are certainly multiple views on this matter. Thank you, Adam.

We have your next question from Allen Klee. Your line is open.

Yes, hi. The sequential growth in your backlog was quite impressive, increasing from around 13.7 million in July to over 18 million now. I would like to know more about what's contributing to that growth. Are there specific areas that are particularly strong? Additionally, in a broader context, how do you view the adoption of lithium-ion technology in the coming year? How do you see its potential for gaining recognition and market share, and what is your perspective on your competitive position in that landscape? Thank you.

Yes, Allen, there are a couple of points to discuss. First, the strength of our backlog is primarily driven by larger packs, rather than the smaller walkie pallet jack packs. We are receiving substantial orders for our larger Class 1 and Class 2 forklifts, as well as from the reemergence of GSE packs, which has significantly contributed to our backlog. We see this as a positive trend, as larger packs usually offer higher margins, and the large companies we are working with have a strong demand for them. Therefore, I believe we will see a shift towards this trend. Regarding the overall demand for lithium, I’ve mentioned before that a few years ago, we were trying to convince companies to switch from lead acid or propane to lithium. Now, that need is widely understood. There are many larger companies that recognize the benefits, and the supporting literature and customer experiences are readily available. The momentum from GSE and clean tech initiatives from the federal government certainly helps accelerate this shift. We observe a clear growth in our material handling and other related segments. While I’m not aware of any precise forecasts, we have been experiencing consistent growth. There are several companies offering similar products, with about half focused on regional operations. They prioritize obtaining UL listings, third-party certifications, and scaling their operations. A few competitors align closely with our focus. We take pride in our reputation for reliability, ensuring that large companies can depend on us not only to deliver functioning products but also to provide timely service and a smooth business experience. Our objective is to meet this increasing demand while considering the competitive landscape. I’ve spoken to many leaders in our competitive group, and I wish them success. We aim to enhance the reputation of lithium, which offers unmatched performance, overall costs, and safety compared to other options. I hope this information is helpful.

Thank you very much. One last question, telematics, could you give us an update? And since I know that this line of business is a much higher margin, so I'm curious if we should think about this becoming a material impact on your business at some point in the near-term future? Thank you.

Yes, we're very excited about telematics, which is becoming increasingly prevalent in the economy. Our engineers developed a version during the rollout of new packs over the past three or four years, and we've decided to commercialize it as an option. We are proud to be the only competitor we know of that provides real-time reports transmitting data from our chips in the battery pack directly to the cloud using Wi-Fi or cellular connections. This allows us to deliver customized real-time information to our customers and engineers. There have been instances where we resolved issues before the customer was even aware of them. The advantage of utilizing software and transmission capabilities anytime, anywhere, combined with GPS, offers immense potential for our customers across various types of issues. We view this as a platform to create different billing arrangements as they organize services, which is particularly relevant for the large fleets we work with that require constant equipment functionality, often referred to as needing premium service. Our tools effectively support this need and hold great value that we don’t intend to provide for free. We aim to offer valuable software-based solutions to enhance customer satisfaction, expecting to see increased adoption and evolution in this area.

That's great. Thank you so much.

Sure, Allen. Thanks.

I'm showing no further questions at this time. Presenters, please continue.

Okay. If there are no further questions, thanks everybody for listening in. It's an exciting time here at Flux, exciting time in the economy as you all know, but for us here at Flux very excited about the growth we have, the customers we're bringing on, and the future we have. So Chuck and I thank you once again.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Presenters, please stay on the line.