Flux Power Holdings, Inc. Q2 FY2023 Earnings Call

Greetings, and welcome to the Flux Power Holdings Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now hand the call over to Ron Dutt, Chief Executive Officer.

Thank you, Sean, and good afternoon everyone. I'm pleased to welcome you to today's second quarter fiscal 2023 financial results conference call. Firstly, please note that on slide 3 for those of you who have the presentation, there is a short reminder of what we do. That is electrifying commerce. We are powering material handling, airport ground support, solar energy storage, Port Authority equipment and other applications with new and clean technology. Now on to our Q2 results. Our second quarter reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In Q2 2023, revenues were $17.2 million, up 123% from $7.7 million in the prior year, marking our 18th consecutive quarter of year-on-year revenue growth. In the second quarter of fiscal 2023, we received $20.7 million in customer purchase orders from existing and new Fortune 500 customers, reflecting the alignment of timing of deliveries with customer new forklift orders. To highlight the importance of our building strong relationships with our existing customers, over 95% of revenue during the quarter was contributed from customers with whom we have long-term relationships. Our commitment, consistent performance and trustworthiness are the foundation for long-term sustainable relationships with our customers. Our emphasis on product, service, and quality continues to support ongoing new purchase needs and service requirements. We have experienced that business from our installed base will help drive new customers to our technology. And developing our technology internally also ensures our customers have the most up-to-date products and services on a sustainable basis. For the second quarter, our customer order backlog increased from $26.9 million to $30.4 million as of December 31, 2022. Our strategic initiatives to improve sourcing actions to mitigate parts shortages, accelerate backlog conversion to shipments, and increase inventory turns have helped to mitigate backlog expansion. These initiatives are also increasing gross margins that will lead to profitability. New orders in Q2 2023 increased to $20.7 million, compared with $19.8 million in Q2 2022 and was 113% higher compared to $9.7 million in Q1 2023. We were pleased to see that our supply chain disruptions continued to abate during the second quarter, while at the same time, we continue to pursue strategic supply chain and profitability improvement initiatives. Progress with new accounts was substantial in the second quarter, with two new Fortune 500 customers added, each having seven-figure revenue potential. For the past 12 months, we have taken aggressive efforts to mitigate supply chain issues. We recently launched a project for automated cell module production to manage SKUs and accommodate secondary cell suppliers. We also leveraged increased sales volumes to source steel and board components to lower cost regions and to higher volume suppliers. We recently expanded our in-house testing and product validation capabilities with all equipment needed onsite to satisfy UL 2530 and UN 38.3 compliance testing, which included an onsite vibration table being added to the other equipment eliminating the need to outsource testing for either UL or UN certifications, and of course, expediting the process. During the December ending quarter, we began exceeding lower shipping costs as supply chain disruption eased, and we are utilizing lower-cost, more reliable secondary suppliers of key components that meet required specifications. Although our supply chain disruptions have improved, we increased our inventory of raw materials, finished goods and component parts to $19.5 million as of December 31, 2022, to mitigate supply chain disruptions that were occurring and protect our customers for timely deliveries. We are introducing over the next 12 months new product designs based on a new modular platform for our battery packs to address customer needs. Some of the improvements include higher capacities for more demanding shifts, easier servicing and other features to solve a variety of existing performance challenges of diverse customer operations. Our new designs also provide a reduction of the number of parts, part commonality across models, and improved serviceability. We're now building and shipping the first few models of our new platform and scheduling UL listing, forklift OEM approvals and UN38.3 certification. As the supply chain disruption abates, our profitability improvement initiatives have shown positive results and continue to improve margin of shipped packs. Our adjusted EBITDA loss fell again this quarter and decreased by $700,000 to a loss of $900,000 compared to a loss of $1.5 million in Q1 2023 and a loss of $4.7 million in Q2 2022. This was helped by higher revenue, design cost reductions to lower material costs and assembly and other improvements in gross margin. Improved production processes, including progress implementing Lean Manufacturing, have resulted in increased efficiency and higher throughput as well. Our efforts on increasing revenue and margin improvements, specifically for adjusted EBITDA are reflected, showing the upward trend over the past fiscal year. We implemented a $5 million subordinated line of credit facility on May 11, 2022, which included $4 million of signed, committed credit availability. We recently announced and amended an agreement to increase the availability, providing a total capacity of our Silicon Valley Bank working capital line of credit by $6 million to a total of $14 million, to support our higher working capital requirements related to increased customer demand. The current availability on the SVB line along with $4 million of subordinated line of credit provide the working capital needed to meet our goals. Our current and potential pipeline of customers continues to expand with two new Fortune 500 customers this past quarter, and a full product line that caters to large fleets seeking a relationship partner for their ongoing needs. These customers represent a diverse base in multiple sectors, all of whom are seeking lower costs and higher performance lithium-ion solutions. Our primary revenue has come from orders for our packs for new forklift and ground support equipment deliveries. As customer adoption of lithium-ion takes off across fleets, we anticipate increased orders to replace lead-acid batteries that are reaching the end of their lives. We have taken actions to restore our gross margin improvement path. Our gross margin improved sequentially to 24% in the second quarter of 2023, up from 22% in the first quarter of fiscal 2023 and from 20% in the fiscal fourth quarter of 2022. All this reflects the progress in restoring our gross margin trajectory. Our improvement initiatives include a number of actions that have begun to impact gross margin, including price increases on new orders, increased back volumes, more competitive shipping costs, lower costs from more reliable secondary suppliers of key components, improved manufacturing capacity and production processes, new product designs to lower costs and transitioning product lines to a new modular platform. As supply chain disruptions have improved, we have also achieved production process improvements and better supply chain management. During the quarter, inventory increased to $19.5 million from $18.9 million at September 30, 2022, reflecting a trend towards normalization of backlog and inventory levels. On the technology front, we continue to see customer interest in our proprietary Sky BMS telematics product, which provides for remote fleet management and monitoring, and delivers battery pack data to optimize performance and customer fleet tracking. I'm happy to report that customer feedback remains very positive with Flux Power as the leader in technology for these applications. We intend to place a high priority on the continued development of features and capabilities for warehouse managers to increase their productivity and reduce their operating costs. Looking beyond reaching profitability, and building on our success in the material handling industry, we're also focused on broadening our reach into related verticals, such as warehouse robotics. With our operational strategy, including six assembly lines, we are well-positioned to continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate. With that, I will now turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended December 31, 2022.

Thanks, Ron. Now turning to review our financial results for the quarter ended December 31, 2022. As Ron mentioned, revenue for the fiscal second quarter of 2023 increased by 123% to $17.2 million, compared to $7.7 million in the fiscal second quarter of 2022. This was driven by increased sales volumes and models with higher selling prices, including increased sales to existing and new customers. Gross profit for the fiscal second quarter of 2023 increased to $4.1 million, compared to a gross profit of $1 million in the fiscal second quarter of 2022. Gross margin was 24% in the fiscal second quarter of 2023, as compared to 14% in the fiscal second quarter of 2022. This reflects a higher volume of units sold with higher gross margins, and lower cost of sales as a result of the gross margin improvement initiatives we have discussed. Selling and administrative expenses increased to $4.3 million in the fiscal second quarter of 2023, compared to $4 million in the fiscal second quarter of 2022. This reflects increases in marketing expenses, commissions, insurance premiums, depreciation, recruiting costs, and our outbound shipping costs. Research and development expenses decreased to $1.2 million in the fiscal second quarter of 2023, compared to $2.1 million in the fiscal second quarter of 2022, and this was primarily due to lower staffing expenses and timing of expenses related to the development of our new products. Adjusted EBITDA loss was $900,000 for the three months ended December 31, 2022, which was an improvement from the $4.7 million for the three months ended December 31, 2021, and it was $2.4 million for the six months ended December 31, 2022. That's a 71% improvement from an adjusted EBITDA loss of $8.5 million for the six months in December 31, 2021. Net loss for the fiscal second quarter of 2023 decreased to $1.7 million from a net loss of $5.1 million in fiscal second quarter of 2022. This reflects gross margin profit from higher revenue and is partially offset by increases in operating expenses and interest expenses. Our cash used in operations for the six months ended December 31, 2022, declined by 88% to $1.9 million compared to the first six months a year ago. We ended the fiscal second quarter of 2023 with $200,000 cash, and we have our $14 million working capital line of credit with Silicon Valley Bank, as well as our $5 million credit facility of which there's $4 million of signed committed credit availability. These are both resources to manage our working capital needs. We believe that our existing cash and additional funding available under our SVB credit facility, along with our subordinated line of credit, will be sufficient to meet our anticipated capital resources to fund our planned operations for the next 12 months. As we discussed, we fully intend to avoid raising equity capital prior to recent profitability. We are on track. We are executing our gross margin improvements, and we are working through our cost control initiatives. We continue to explore increased options for our working capital availability. Now, I’d like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. As Chuck mentioned, we fully intend to avoid raising equity capital prior to reaching profitability, which is currently our top priority. Looking ahead, we believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium-ion technology will drive continued revenue growth. Product, service, and quality are key factors as to why we continue to win business, and will ensure our goal to maintain our growth trajectory. Our current production facility should support annual revenue well beyond $100 million annually, given our facility footprint, chip build-out that's beginning, and lean manufacturing implementation that is in progress. In summary, we are well-positioned to execute our strategy of electrifying commerce, as we offer customers stored energy solutions to increase productivity at a lower product life costs. We are encouraged by strong purchase orders, improving backlog and continued expansion of margins through improved sourcing and supply chain management, continued process improvement and pricing. We continue to execute actions to improve adjusted EBITDA as shown, which is a key indicator for achieving profitability. Further, we anticipate expanding into new markets with strong demand for our value proposition of higher performance and service at lower costs. I look forward to providing our shareholders with further updates in the near-term as we continue to leverage our leadership position in lithium-ion technology solutions, along with our growing list of new and diverse large customers. I thank you all for attending. And now I would like to hand the call over to the Operator to begin our question and answer session.

Thank you. We will now begin the question and answer session. Our first question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you. Good afternoon, everyone. So there are a lot of emphasis on gross margins and cash flows. Where do you expect to sort of be with gross margins, say in the next 12 months?

We get that question asked a lot. And we've been advised by some pretty good sources not to give guidance at this point, but I think we can provide direction here that you can probably figure out yourself. You can see our trajectory on gross margin is continuing. We're executing a very specific set of actions that are going to get us to profitability. We meet once every week on this very issue; there's a lot of opportunity on supply chain, design cost reductions and other actions as we grow into an emerging company like we are. Those growing volumes really enable us to lower costs in areas I mentioned. So run that trajectory. And then look at the other trajectory on our revenue. Our revenue has a consistent trajectory to it, and we are continuing to bring on new large customers; some of our key customers have hundreds of locations around the country that we deliver to. So we have developed the infrastructure, production, delivery, and service to support that. Our sales teams are working on that, and we see that trajectory continuing. We're not losing customers, but we do see some rescheduling of timing due to supply chain disruptions causing delays. Our packs are aligned with the timing of the delivery of those forklifts, so there can be some movement quarter-to-quarter, but we're very confident on our longer-term annual pace of business and customer retention. Running that line out and you'll see impressive quarter-over-quarter increases in our margins, and eventually breakeven, which is a combination of continuing revenue growth to cover our infrastructure and operating costs to bring on these new large customers.

Got it. Thank you for that, Ron. In the press release, you highlighted that a lot of business is still coming from existing customers. Is there any risk of saturation, reaching saturation with those customers, or is that runway still pretty strong for you?

There's a lot of momentum to it. Let me put it that way. These fleets have many locations; they don't convert to lithium all at once because it's too disruptive. It's really tied to whenever they need a new forklift, then they will add the new lithium pack. It’s an ongoing process. We believe we can count on several quarters and years of business, particularly as they convert all their facilities. Don't forget that the lead acid batteries have shorter lifespans than the larger ones, so we see future replacement demand increasing. As for the overall market, penetration rates of lithium in electric forklifts are estimated at around 7% to 8%, indicating that we have a long way to go. We're just beginning this, scratching the surface, with a lot of low-hanging fruit remaining. We believe our new customer outreach and acquisition efforts remain very promising.

Understood. Thank you for that. Just one last one for me, Ron. In the last earnings call, you highlighted product opportunities in adjacent areas. Has there been any progress on that front or any revenues coming from new adjacent product opportunities?

Other than ground support equipment, which is gaining a lot of momentum, we felt the need to focus on our number one priority right now—growing that core business. There’s a lot of momentum and opportunity within existing sales channels and production processes. We want to expand in the future by building scale. To do that, we need to be profitable first before branching out into adjacencies. While we have technology and capability, significant capital commitment is required to pursue those avenues. We remain excited about reaching profitability, which will facilitate growth into adjacent areas.

Hey, thanks. Hey, Ron and Chuck, congrats on the continued great growth and progress toward profitability. I want to ask about the rollout of new designs; sounds like you're shipping some new models out to OEMs now. Can you just give us a sense of when we might start seeing some of that benefit from the margins and how we should think about that impacting the rest of the portfolio?

Absolutely. We're really excited about this rollout. We've been innovating for eight years and have a lot of battle scars to show for it, which enable us to better understand our customers' needs. We recently began shipping our new G80 pack, which features modular designs and decreases in part counts for better serviceability. We're utilizing those modular designs across all our product line needs, and each model undergoes UL listing to ensure durability and safety. This process is underway with timelines involved for testing and certification, but we expect significant rollout through this calendar year. Overall, this strategy speeds up our process as we cut out the outsourcing of UL testing that has been slowing things down.

Got it. It's helpful and safe to assume that not having to outsource the UL listing process speeds things up a bit?

Yes, it does. We’ve established a long-standing relationship with UL since 2016, and that trust accelerates the process significantly compared to when we had to outsource the testing. Their testing capacity has been under pressure with all different kinds of lithium-related products coming through, so managing this internally will effectively speed our time to market.

Perfect. I wanted to follow up on the new Fortune 500 logos you mentioned; is that incremental to what you referred to in the last quarter?

Yes, absolutely. We're careful to attract new customers each quarter and incentivize our salespeople accordingly. We only count shipments to customers with whom we have established a relationship we consider long-term. We're focused on acquiring sizable customers, so our tracking is meticulous and strategic.

Perfect. One more follow-up, Ron: you mentioned that more than 95% of revenues come from long-term customers. How does that correlate with your backlog, especially regarding these new wins?

That's a great question. The backlog varies significantly based on customer delivery timelines—some orders are immediate while others expand over longer timeframes. Additionally, our backlog around $30 million only represents immediate orders; we have letters of intent for larger volumes that extend into 2024 and 2025, ensuring future commitments. To give you just a little more perspective on that, about 25% of the backlog won't ship until July 1 through December 31.

Hi. Thank you for taking my questions, and congrats on the strong quarter. I guess going back to the new large customer wins you announced this quarter, can you talk about where those customers are in their adoption cycle of lithium-ion, and how competitive was the bidding process?

Absolutely. Typically, our salespeople work alongside OEM sales forces, like those from Toyota Crown, collaborating to reach potential customers. We conduct demos to ensure they utilize the correct pack before pilot testing. Our target customers often have many facilities, so they will typically start with one location for implementation. This incremental approach allows them to gain comfort with the new technology before scaling adoption across multiple locations. While the bidding process involves competition, we're confident in the stickiness of our service and product. Once customers experience our solution, they tend to remain with us, thus minimizing loss risks. I would like to thank each of you for joining our financial results conference call today, and I look forward to continuing to update you on our ongoing progress and growth. If we're unable to answer any question or address any concerns, please reach out to our IR firm who would be more than happy to assist you. Have a great day.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.