Flux Power Holdings, Inc. Q4 FY2023 Earnings Call

Greetings, and welcome to the Flux Power Holdings Fourth Quarter and Fiscal Year 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 would now like to hand the call over to Carolyn Gordon, Marketing Manager. Carolyn?

Good afternoon. Your host today is Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, who will present the results of operations for the fiscal fourth quarter and fiscal year ended June 30, 2023. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern Time and is available in the Investor Relations section of our company's website, fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast 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 revision to these forward-looking statements in light of new information or about 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 for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. I will turn the call over to Flux Power, Chief Executive Officer, Ron Dutt.

Thank you, Carolyn, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal fourth quarter and fiscal year 2023 financial results conference call. Firstly, please note that on Slide 3, if you're following the deck, there is a short reminder of what we do: electrifying commerce. We are powering material handling, airport ground support, solar energy storage, port authority equipment and other applications with new and clean technology. Our products and services focus on large nationwide fleets that are pursuing a better return on investment and a positive environmental impact compared to lead acid batteries. Our reputation and brand are critical as we target household names, which I will point out shortly. We must have a strong reputation and do what we say to satisfy these large fleets that have hundreds of facilities and need their batteries for new or existing equipment delivered on time without difficulty. Fortune 100 companies demand suppliers that are transparent, experienced, and accountable as they transition their fleets to new and clean technologies, putting us in a very strong position in the electrification market. Now on to our year-end results. Our business priority this past fiscal year focused on progress to cash flow breakeven while continuing to capture increasing demand for lithium batteries. Fiscal year 2023 reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In fiscal 2023, revenues were $66.3 million, up 57% from $42.3 million in the prior year. Quarter four '23 revenue was up 7% to $16.3 million compared to Q4 of 2022 revenue of $15.2 million, marking our 20th consecutive quarter of year-over-year revenue growth. We also continued to improve gross profit, increasing 134% to $17.1 million in fiscal year 2023 compared to $7.3 million in fiscal year 2022, and increasing 44% to $4.3 million in Q4 '23 compared to $3 million in Q4 '22. Gross margin was 26% in fiscal year 2023 compared to 17% in fiscal year 2022 and 27% in Q4 2023 compared to 20% in Q4 of 2022. Adjusted EBITDA loss decreased 74% to $3.7 million for the year ended June 30, 2023, compared to a loss of $14.1 million for the year ended June 30, 2022, and adjusted EBITDA decreased 73% to a loss of $600,000 for Q4 '23 compared to a loss of $2.2 million in Q4 of '22 and $700,000 in Q3 2023. For the fourth quarter, our customer order backlog increased from $25 million to $29 million as of June 30, 2023, reflecting continued lithium adoption. A new $15 million credit facility from Gibraltar Business Capital provides funds for working capital and replaces the $14 million line with Silicon Valley Bank. The new facility has a two-year term with provisions to increase the line to $20 million and provides for our working capital needs of our planned business growth. We are highly focused on achieving cash flow breakeven in the near term, reflected in the reduction of cash used by operations in fiscal 2023, which declined $20.3 million or 85% compared to fiscal year 2022. Our cost and price initiatives also contributed to gross margin improvements to 26% in fiscal year 2023 compared to 17% in fiscal year 2022 and 27% in Q4 of '23 compared to 20% in Q4 '22. Our inventory balance has become more consistent due to improved inventory management, sourcing, and supply chain management. Taken together, we are executing our strategy for cash flow breakeven and sustained profitability as we continue to drive expansion of our product lineup and service network. In the longer term, our strategy revolves around building scale to sell our products to large fleets, building on our momentum in revenue, gross margin, and operating leverage. Right now, we are growing organically and beginning to explore and develop strategies to build partnerships that can leverage revenue growth, technology, and profitability. Our efforts on increasing revenue and margin improvement, specifically for adjusted EBITDA are reflected on Slide 7, showing the upward trend over the past fiscal year and our momentum towards breakeven. We are executing our specific supply chain and cost reduction initiatives to continue this momentum. Further, our realized successes are being applied across various customer applications. Our current potential pipeline of customers continues to expand with three new customers this past quarter and a total of eight new customers in the full year 2023. Our full product line caters to large fleets who seek a relationship partner to meet current and future needs, not just one-time purchases. These customers represent a diverse base in multiple sectors, all of whom are seeking lower costs during the life of the product and higher performance from reliable partners. For example, PepsiCo has hundreds of facilities across the country, and we delivered to all of them. Our primary revenue has come from orders for our packs on new forklift deliveries. As customer adoption of lithium-ion solutions increases across fleets, we're anticipating increasing orders to replace lead acid batteries reaching their end of life given the generally longer life of lithium versus lead acid. We have taken actions to restore our gross margin trajectory that was interrupted by the pandemic, with our goal now of sustained profitability while full year gross margin expanded 680 basis points to 27% compared to the prior year. We continue to see some quarter-to-quarter variations as shipment delays persist due to delays in some selected heavier-duty forklift model deliveries. Our improvement initiatives include a number of actions that have begun to impact gross margin: price increases to offset commodity increases, increased pack volumes, more competitive shipping costs, lower cost, more reliable secondary suppliers, improved manufacturing capacity, production processes, and the transition of product lines to a new modular platform. All of these initiatives are driving our plan to accelerate gross margins. During the fiscal fourth quarter, our backlog increased to $29 million due to new orders outpacing shipments. Normalization of global supply chains and ongoing adoption of our lean manufacturing principles are driving throughput and capacity improvements as we continue to monetize a healthy customer backlog. Our strategic initiatives are also improving sourcing actions to mitigate parts shortages, accelerating backlog conversion to shipments and increasing inventory turns to help mitigate backlog expansion. These initiatives are key drivers of gross margin along with operating leverage discussed previously. During the quarter, we have slightly decreased our inventory of raw materials, finished goods, and component parts to $19 million as of June 30, 2023, all due to improved inventory management while at the same time supporting our strong revenue growth. With that, I will now turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter and fiscal year ended June 30, 2023.

Thank you, Ron. Now, turning to review our financial results for the quarter ended June 30, 2023. As Ron mentioned, revenue for the fiscal fourth quarter of 2023 increased by 7% to $16.3 million compared to $15.2 million in the fiscal fourth quarter of 2022. This was driven by the sale of energy storage solutions with higher average selling prices, a higher volume of units sold, and especially significant increases in our GSE sales. The gross profit for the fiscal fourth quarter of 2023 increased to $4.3 million compared to a gross profit of $3 million in the fiscal fourth quarter of 2022. Gross margin was 27% in the fiscal fourth quarter of 2023 as compared to 20% in the fiscal fourth quarter of '22. This reflected a higher volume of units sold, again, with higher gross margin and just lower cost of sale as a result of the gross margin improvement initiatives we continue to work through. Selling and administrative expenses remained unchanged at $4.1 million in the fiscal fourth quarter of '23. This is contributing to the operating leverage we've discussed in the past. Research and development expenses decreased to $1.3 million in the fourth quarter of 2023 compared to $1.4 million in the fourth quarter of 2022. This is primarily due to lower expenses related to the development of new products. Adjusted EBITDA loss decreased to $600,000 in the fiscal fourth quarter of '23 from $2.2 million in the fiscal fourth quarter of '22. This is mostly driven by the improved gross margins. Our continued initiatives of business growth and operating leverage all contributed to drive this trajectory. Net loss for the fourth quarter of 2023 decreased to $1.5 million from a net loss of $2.7 million in the fiscal fourth quarter of 2022. This principally reflects increased gross profit, partially offset by increased operating expenses, along with some modest interest expense. Now turning to review our financial results for the year ended June 30. Revenue for the fiscal year 2023 increased by 57% to $66.3 million compared to $42.3 million in the fiscal year 2022. This is mainly a result of sales of energy storage solutions with higher average selling prices, a higher volume of units sold, and significant increases in the GSE sales. Gross profit for FY 2023 increased to $17.1 million compared to a gross profit of $7.3 million in FY 2022. Gross margin was 26% in FY 2023 as compared to 17% in FY 2022, which again reflects higher volume of units sold with greater gross margin and lower cost of sales as a result of the gross margin improvement initiatives. Selling and administrative expenses increased to $17.6 million in FY 2023 from $15.5 million in FY 2022. This is primarily attributable to increases in outbound shipping costs, insurance premiums, new hires, temporary labor, severance expenses incurred, increases in depreciation expense, travel expenses, marketing expenses, and facility-related costs, partially offset by decreases in commissions, bad debt expenses, consulting fees, public relation expenses, and stock-based compensation. Research and development expenses decreased to $4.9 million in FY 2023 compared to $7.1 million in FY 2022. This is primarily due to lower expenses related to the development and testing of new products by utilizing our in-house testing equipment. Adjusted EBITDA loss decreased to $3.7 million in FY 2023. This is significantly lower from the $14.1 million in FY 2022. This is driven by the improved gross margins and the higher revenue. Net loss for FY 2023 decreased to $6.7 million from a net loss of $15.6 million in FY 2022, principally reflecting the increased gross profit and slightly decreased operating expenses, partially offset by increases in interest expense. Cash was $2.4 million at June 30, 2023, compared to $500,000 at June 30 of 2022. Net cash used in operating activities decreased to $3.6 million in fiscal year 2023 compared to $23.9 million in fiscal year 2022. Again, this is primarily due to a decrease in net loss, lower inventory levels, and an increase in accounts payable. Available working capital includes our line of credit as of September 20, 2023, under our $15 million credit facility with Gibraltar Business Capital, with the remaining available balance of $3.8 million and the $4 million available under the subordinated line of credit we have. We recently announced a new $15 million credit facility from Gibraltar Business Capital to fund working capital and refinance the existing credit facility with Silicon Valley Bank. This facility has been used to repay the credit facility with SVB and, along with our existing cash, is intended to help meet our anticipated working capital needs to fund planned operations to support the demands of our growth trajectory for the foreseeable future. In summary, the substantial progress made reducing fiscal full year 2023 net cash used in operating activities now positions Flux Power toward an improved cash flow trajectory in fiscal year 2024, supported by a reinforced balance sheet and a strong Fortune 500 customer order backlog. I'd now like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. Looking at the positive momentum in fiscal 2023 that Chuck just took you through, we are confident that we are on a strong trajectory toward near-term profitability while balancing continued revenue growth, gross margin improvement, and ongoing cost control initiatives. Our long-term growth strategy continues to focus on the strong demand for sustainable energy. We believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium-ion technology business can drive continued revenue growth. Product quality, leading technology, and service are key factors as to why we continue to attract and maintain business relationships, which will enable the continuation of our growth trajectory that you've seen on the slides. For our technology and our proprietary technology, we are working to implement artificial intelligence features and capabilities into our SkyBMS telematics platform, which delivers insight into fleet management so customers can make more informed and timely decisions to maximize operational efficiencies. With AI, we can anticipate and resolve issues sometimes before they happen, addressing the number one driver in fleet management pain points and minimizing downtime of the equipment. Our current production facility should support annual revenue up to $150 million, given our facility footprint, second shift build-out, and lean manufacturing implementation. Looking beyond reaching profitability and building on our success in the material handling industry, we are also focused on broadening our reach into related verticals such as warehouse robotics. With our operational strategy, including eight assembly lines, we are well-positioned to continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate. We will also pursue relationships and initiatives to ensure leadership in technology that expands the product and service value to our customers and then also to our shareholders in the end. We ended the fiscal year supported by a new working capital line of credit of $15 million with Gibraltar Business Capital to support planned growth with provisions to increase to $20 million, as Chuck had mentioned. 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 cost during the product's life. We are encouraged by strong purchase orders and the expansion of margins through improved sourcing and supply management, ongoing process improvement, and pricing. We continue to execute actions to improve adjusted EBITDA as shown on Slide 7, which is a key indicator to achieving profitability. Furthermore, we anticipate expanding into new markets, having strong demand for our value proposition of high performance and service at a lower total cost of ownership. I look forward to providing our shareholders with further updates in the near term as we strengthen our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers. I thank you all for attending. I'd like to hand the call over to the operator to begin our question-and-answer session.

Thank you. We'll now be conducting a question-and-answer session. Our first question is from Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Hi, good afternoon, and congratulations on all the progress.

Thank you, Rob.

Just wanted to get a little bit into the order activity. It appeared pretty strong in the quarter. Could you give us some color on sort of the uptick in orders you saw and what's driving it and maybe how that's playing out?

Yeah. Fortunately, we have a number of product lines not only in material handling, but GSE, which was really part of our strategy, and I mentioned we want to continue to add those lines because particularly during the last six months of this fiscal year and the last quarter, of course, we saw a big increase in Delta's and Air Canada's orders in shipping, which was really well received. There was some pent-up demand from the supply chain disruption, and that played well because it's been nearly zero for some period of time. At the same time, as I mentioned in my remarks, we have seen some limited, selected delays in new forklift deliveries from some of the major global OEMs being pushed out. So that didn't represent losing any business, just deferring more to the future. So there was certainly the benefit of that diversification, of course, with all those orders, we have small, medium, and large packs. And there's a little bit of difference in the gross margin depending on the mix of those packs. So those were the key drivers in the revenue.

Thank you. Regarding the gross margins, there was some variability compared to Q3, and it appears to have decreased slightly. Could you provide more details on this? Are you satisfied with your current pricing, or do you believe there is room for further adjustments, or have the margins contracted a bit?

Yeah. It's a good question, Rob. We're always looking at pricing in the marketplace, particularly what we've gone through in the past three years with passing on price increases by vendors and the abatement of a lot of those effects of the supply chain as we sit here now. Pricing is one of them. We've made progress in trying to achieve gross margin at sustainable levels for our product lines, and it ranges. Larger packs tend to have a higher gross margin than the smaller packs. But yes, in fact, we were just discussing earlier today some potential pricing actions on a portion of our business. And it's something we continually look at. But the variation in the past couple of quarters is driven by the factors I've mentioned: the product mix can change some model lines as well. We feel confident in our overall management of trend line and as it relates to our forecast accuracy, which is critical to manage the business.

Okay. Thank you. I’ll turn it over.

Thanks, Rob.

Thank you. Our next question is from Matthew Galinko with Maxim Group. Please proceed with your question.

All right. Thanks for taking my questions. I think you mentioned two new customers in the fourth quarter. Anything you can share about the market they are in or size or expected opportunity?

Each quarter, we've been adding two or three new customers. Some of these are large, established companies that we prioritize for our efforts, especially those with significant fleets. However, smaller fleets are also important because they provide good diversity and balance in our overall strategy. We gained two new customers in the Pacific Northwest and also acquired a supplier that took on a project we initiated some time ago. This involves 400-volt autonomous shuttle vehicles designed for eight people operating at limited speeds. We view this as an adjacent segment, and the supplier is looking to expand further. As part of our strategy, we aim to grow into larger battery packs, whether they are 80-volt packs for material handling, 80 volts for ground support equipment, or 400 volts in this scenario. The demand for these products reflects the sophistication of our engineering capabilities, which positively impacts our gross margin. It's encouraging to see this progress. While some quarters may show bigger increases in new customers, it all depends on their order timelines, adoption rates, and number of locations. In summary, we welcome diversification as a key aspect of our strategy.

Thank you. For my follow-up, I would like to know how clear your visibility is for revenue in the upcoming fiscal year. Could you share any early insights on what we might expect over the next year? To provide some context, revenue decreased slightly from the start of the year to the end, comparing Q4 to Q1, although we did see strong growth for the entire year in 2023. How should we approach the revenue trajectory for 2024?

We have spent considerable time analyzing our revenue visibility for the upcoming fiscal year. The majority of our business relies on the ordering patterns for new forklifts, which constitute about 95% of our operations, as opposed to replacing lead acid batteries. The flow of these orders and their origin can introduce variability. However, many of our larger customers have provided us with letters of intent for calendar years 2024 and 2025, which, while nonbinding, indicate a strong interest in securing their supply amidst past challenges with part shortages. This interest is a positive sign for continued growth. All our customers are expanding their operations across multiple locations, typically establishing one facility at a time, which supports our belief in sustained growth. Our presentation materials on the website detail our early-stage accounts, many of which are well-known companies with substantial fleets. Onboarding these new customers will contribute to our growth, though the pace of that addition remains somewhat uncertain. Additionally, we are in the process of introducing heavy-duty models aimed at companies like Subaru and Caterpillar, which require enhanced lifting capacities for industrial applications. This rollout presents further expansion opportunities, and while we are cautiously optimistic for the next year, we remain very bullish on growth over the coming years as these factors begin to take effect.

Great. Thank you. I’ll jump back in the queue.

Thank you. Our next question is from Jeff Grant. Please proceed with your question.

Hey, guys. Thanks for the time. Ron, in the release, you mentioned exploring and developing some partnership opportunities that could include vendors, technology partners, and just kind of other various opportunities. I’m wondering that can take a lot of different directions. Can you give us either maybe some examples of what you're assessing or maybe just high level the benefits you're looking to achieve through any of these opportunities you guys are thinking about?

Yes. Sure. No, I know it's keen because it goes with our strategy, which I mentioned many times is to build scale. We’re executing to our plan right now, building scale organically but certainly developing partnerships where they make sense and fit with our strategy and with partners we can trust and work with. I've done a dozen acquisitions in my time, and I could tell you it's easy to do one, a bad one. Integration is a big part. Two areas that we are in the early stages of are expanding our capability with, for example, automation of modularizing ourselves along with related projects and leveraging the most efficient source. We also have a partner interested in licensing our packs in South America. We'll see; very early stages. We're not committing to anything. Just want to give you some color on some of the types of things we could do. Another one is technology. Billions are spent all over the world trying to get the next best increment of technology in lithium battery cells, and we have some discussions going on around one opportunity. It's important to explore these relationships because the timelines can be pretty long, but it's certainly part of our long-term strategy.

Great, that's really helpful. I appreciate that. For my follow-up, you mentioned that the inventory could be reduced a bit sequentially. How much more capacity do you have for that to be a source of cash or support cash generation in the upcoming fiscal year?

Yeah, Chuck, can you handle it?

Yeah. We continue to work through that, and we see some opportunity to continue to monetize some more of that. What we've been seeing lately is orders shifting around. So finished goods is higher than we would like it to be. I think we're running $4 million to $5 million typically. It should be down more around $2 million to $3 million. So there's some space there. What we continue to do as we grow larger, we're able to push some inventory off the balance sheet by using suppliers, such as we have a Chinese supplier of truck adapters that holds it in their own inventory at their risk. So we can start to look at more relationships like that or common off-the-shelf parts and have them roll out to our property and stock rather than us making orders. We spend a lot of time working on tweaking that to just get the most out of it. But there's definitely a few million there.

Great. Thank you, guys. Appreciate it.

Thanks, Jeff.

Thank you. Our next question is from Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Great. Thanks. Ron, Chuck, congratulations on the progress. I just had a couple of questions. I think you mentioned the AI initiative for the SkyBMS. Should we look at this as additional functionality to remain competitive? Or should we consider this to be an effort to improve margins by selling this as an add-on service?

I'm sorry, our sound wasn't very good. Could you repeat that? I couldn't quite hear it.

Yeah, yeah. So basically, the AI initiative for the SkyBMS, should we consider it to be an additional service that could improve revenues? Or is it to give additional functionality that will make your product more competitive?

It's really both, and I find it very exciting. AI is a prevalent topic nowadays, and our SkyBMS is our battery management system's firmware and software. It connects the battery pack to the cloud, enabling access from anywhere. The possibilities this technology offers are limitless, and we are very enthusiastic about it. Our CTO has been leading this initiative for several years. Our experience positions us as a frontrunner in the industry; we were the first to have UL-listed batteries in 2014. This experience helps us understand various use cases, opportunities, and environmental factors, allowing our BMS to recognize patterns early, relay necessary information, and suggest fixes proactively to support customers before issues arise. It can analyze service patterns and estimate the remaining lifespan of battery packs, enabling efficient management across different equipment. Overall, this enhances asset management for our clients and adds significant value. We are beginning to market this offering, which also positively impacts our margins since it is primarily software-based. Strategically, this is crucial because our long-term relationships with Fortune 100 and 500 companies are founded on our capability and proprietary technology, ensuring they have access to leading-edge solutions without the disruption of changing vendors. Moreover, one of our largest clients has expressed interest in collaborating with us to integrate our AI and telemetry systems with the telemetry of their forklifts, which would centralize maintenance and operational data. This partnership represents an important advancement with our customer base, and we are very optimistic about the future and maintaining a leadership role with leading global OEMs.

Great. Great. Thanks, Ron, for that color. In terms of costs, there was a question around gross margins, and you also gave some color on it. But it seems that the SG&A expense was also lower quarter-over-quarter. I think the third quarter SG&A was $4.7 million versus $4.1 million. Should we read anything into that, or was that just some non-cash items?

Yeah, Chuck?

We are maintaining sustainability. The key takeaway is the operating numbers. While we have some non-cash and non-recurring items, our focus is on maintaining operating leverage and keeping operating expenses stable moving forward.

Yes. And we've spoken to this a number of times. To secure and particularly keep these large customers that have these large fleets, we have to have the capability to deliver product on time and service on a timely basis. It does take, I think of it this way, a minimum level of capability in your fixed cost, your operating cost, your operating resources in order to do that. If you look at our numbers, you've seen for a number of quarters now, very impressive operating leverage of revenue growing much faster than operating expenses. We expect that to continue as we have made the investment in UL listings, our quality, lean manufacturing, ISO 9000, which we felt are necessary to be a sustainable leader in the sector.

Great. Great. Thanks. And then the last question, we are already towards the end of September; this quarter is coming to an end. I know for fiscal 2024 you may not be able to give guidance. But for this next quarter, based on whatever you have seen thus far, should we expect sequential or year-over-year improvements in the top line? How should we look at this quarter?

Well, I think this quarter has historically been our weaker quarter because some of our large customers, specifically in the beverage and food delivery sectors, tend to avoid implementing new assets during the summer months of July, August, and even September. They generally pace their deliveries accordingly. We're still seeing this pattern. It wasn't as pronounced last year, but it seems to be recurring. Chuck, do you have anything to add?

No, it's exactly it. We are seeing that typical seasonality we see in this July, August, September quarter is typically down a little bit over prior quarters. A lot of that is driven by some of our largest customers, who used to call it just the summer months. They go quiet because they're too busy delivering beverages.

Got it. Understood. Thanks, and good luck. Thanks for taking my questions.

Yeah, thank you.

Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back to Mr. Dutt for closing remarks.

Thank you, operator. I'd like to thank each of you for joining our financial results conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions or didn't get to them, please reach out to our IR firm, MZ Group, who would be more than happy to assist. And this concludes our call. Thank you.

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