Flux Power Holdings, Inc. Q1 FY2024 Earnings Call

Greetings and welcome to the Flux Power Holdings First Quarter Fiscal Year 2024 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 Maria Rico, Marketing Manager. Maria?

Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present results of operations for the fiscal first quarter ended September 30th, 2023. A press release detailing these results crossed the wire 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 webcasts 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, 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 opinion 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 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. At this time, I will turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Thank you, Maria, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal first quarter 2024 financial results conference call. Firstly, please note on Slide 3, if you're following the deck, for those of you new to our story, here's a short reminder of what we do in 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 are focused on the growing demand from large nationwide fleets that are pursuing a better return on investment along with a positive environmental impact compared to lead-acid batteries. We are the leading lithium-ion supplier providing full service to the nationwide large fleets who require the best, both now and with future deliveries in product, technology, service, and ease of doing business. Our reputation and brand are critical as we target household names, which I'll point out shortly. We must have a strong reputation and solid track record to reliably satisfy these large fleets that have hundreds of facilities and need their batteries for new equipment 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, which puts us in a very strong position in the electrification market. And we have a trend of on average adding two large new customers per quarter and without losing any of our installed base customers. Now on to our first quarter results. Our business priority this past fiscal year focused on progress to cash flow break-even, while continuing to capture the increasing demand for lithium-ion batteries. During the first quarter of fiscal 2024, and including this past October, we remained encouraged by the underlying growth during the entire year, past year, of our products and also by the momentum toward cash flow breakeven and profitability. Revenue for the first quarter of 2024 decreased 17% to $14.8 million compared to $17.8 million in the first fiscal quarter of 2023. This is due to fewer units of lithium-ion packs sold during the current quarter as a result of ongoing shipment deferrals related to OEM forklift delivery delays along with some seasonal reduction in orders. We continue to improve gross profit, which increased 9% to $4.3 million compared to a gross profit of $3.9 million in the first fiscal quarter of 2023. Gross margin improvement initiatives contributed to a 700 basis point increase in the first quarter to 29%, up from 22% in the prior year quarter. This very notable increase reflects the operational efficiencies we have been achieving in sourcing, design costs, lean manufacturing, and improved pricing. Adjusted EBITDA loss improved to $1.2 million in the fiscal first quarter of 2024, as compared to a loss of $1.5 million in the fiscal first quarter of 2023, driven by the improved gross margins and holding operating expenses in check. For the first quarter, our customer order backlog declined from $28.5 million at June 30th to $21.8 million as of September 30th, 2023, reflecting timing delays in receiving purchase orders. As of November 2, though, backlog had increased to $31 million, reflecting continued and expanded ordering from the airport GSE market and some additional pickup in forklift delivery timing. We've made progress on a number of our growth initiatives that will have near-term and long-term impacts. Our new series of heavy-duty models will be added to most of our product segments, and along with a new OEM private label program, both address strong market demand and will launch beginning in early 2024 calendar year. Our automated assembly of cell modules is tracking similarly in timing. We plan to launch the industry's first integrated telematics fleet-wide program with a Fortune 100 customer later in the 2024 calendar year. We believe that our leadership in telematics will serve as a continuing platform to introduce new features for operating performance and asset management that are highly desired by our customers. Furthermore, we're exploring with partners opportunities on fast charging technology and international sales opportunities. We are highly focused on achieving cash flow breakeven during this fiscal year 2024. Key drivers of the improvement include gross margin expansion supported by steady operating leverage from slow growth of operating expenses over the year. Our cost and price initiatives mentioned earlier contributed to gross margin improvements to 29% in Q1 2024 compared to 27% in Q4 2023. Also, our inventory balances have been stable, reflecting higher inventory returns from improved operational processes and lean manufacturing implementation. Taken together for those two, we are executing operational efficiencies on our strategy for cash flow breakeven and sustained profitability as we continue to drive expansion of our product lineup and service network. We estimate our manufacturing capacity in our current facility could support a doubling of our current annual revenue. In the long 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. Currently, we are growing organically within our capital resources but have begun to explore and develop strategies, including those already mentioned, to build partnerships that can leverage revenue growth, technology, and profitability, and achieve our goal of building scale to meet the needs of our top-tier customers. 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 momentum toward breakeven. That decline in Q1 2024 is directly attributed to the quarterly revenue decline tied to seasonality, historically in that quarter, and along with shipment deferrals. We believe our historical trajectory to profitability is continuing, given our installed base of customers and consistent acquisition of new customers. Additional enablers include the expansion of high-demand models and continued operational and volume-related supply chain cost reductions. Our current and potential pipeline of customers continues to expand with two new customers this past quarter and six new customers total in the calendar year 2023 year-to-date. Our full product line caters to large fleets who seek an ongoing relationship partnership to meet current and future needs, not just one-time transactional purchases. These customers represent well-known household names having large fleets that require high-performing suppliers. While the forklift growth rate has historically been single-digit, the adoption of lithium-ion reflects a double-digit rate. Goods and materials need to be transported in all economic conditions. This speaks to opportunities in adjacent product sectors. The trajectories of our revenue and gross margin on Slide 9 speak for themselves. We have taken actions to restore our gross margin trajectory that was interrupted by the pandemic. Our highest priority now is achieving sustained profitability this fiscal year. Our ongoing improvement initiatives include a number of actions that are now impacting gross margin. They are price increases to offset commodity increases, increased pack volumes, more competitive shipping costs, lower costs, more reliable and secondary suppliers of key components, expanded manufacturing capacity and production processes, and transition of product lines to a new modular platform which has a more efficient design for both assembly and service. All these initiatives are part of our plan to accelerate gross margins as our target is to reach 40% gross margin. Slide 10 highlights our backlog and inventory level trends, which are reflecting a more predictable pattern in recent periods, especially compared to the strong upward trend of our revenue and gross margin mentioned earlier. As of November 2, our backlog increased to $31 million, as I mentioned, with two new customers contributing to this increase. Our run rate of backlog does vary at any point in time, but as a pattern, it ranges from $20 million to $38 million, depending on the timing of orders. Beyond our backlog of open orders, we're working on a pipeline of high-probability orders of well over $100 million that stretches beyond the current fiscal year ending June 30th. We monitor the multi-billion addressable material handling market for economic trends, new entrants, and customer demand trends. We believe this market provides a very positive growth environment with a strong, stable undercurrent, especially given the recognized double-digit growth of lithium-ion solutions in the sector. Our strategic initiatives also include sourcing actions to mitigate part shortages, accelerating backlog conversion to shipments, and increasing inventory returns. With that, I will turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended September 30th, 2023.

Thanks, Ron. Now, turning to review our financial results in the quarter ended September 30, 2023. As Ron mentioned, revenue for the fiscal first quarter of 2024 decreased by 17% to $14.8 million compared to $17.8 million in the fiscal first quarter of 2023. This is due to fewer units of storage packs sold during the current quarter, which was a result of ongoing deferrals related to OEM forklift timing delays and some seasonal reduction with certain customers. Gross profit for fiscal Q1 of 2024 increased to $4.3 million compared to a gross profit of $3.9 million in fiscal Q1 of 2023. Gross margin was 29% in fiscal Q1 of 2024, as compared to 22% in fiscal Q1 of 2023. This reflects greater gross profit and lower cost of sales as a result of the gross margin improvement initiatives that will help us achieve profitability. This was also partially offset by the lower number of units sold. Selling and administrative expenses were at $4.7 million in fiscal Q1 of 2024, up slightly from $4.5 million in the previous year quarter. This shows the contributions to operating leverage we see. Research and development expenses increased slightly to $1.3 million in fiscal Q1 of 2024 compared to $1.2 million in fiscal Q1 of 2023, and this was primarily due to staff-related expenses. Adjusted EBITDA loss improved to $1.2 million in fiscal Q1 of 2024 from $1.5 million in fiscal Q1 of 2023. Our continued initiatives, business growth, and operating leverage all contribute to drive this trajectory. The net loss for fiscal Q1 of 2024 was $2.1 million, very similar to a net loss of $2.1 million in the fiscal Q1 of 2023. The nominal improvement was principally reflected in increased gross profit, offset by increased operating expenses and interest expense. Cash on the balance sheet was $1.1 million at September 30, 2023, as compared to $2.4 million at June 30, 2023. Please note that the cash balance will vary depending on the timing of payables, receivables, and our borrowing on the working capital line. Net cash used in operating activities increased to $3.1 million for the three months ended September 30, 2023, compared to $600,000 for the three months ended September 30, 2022. This is primarily due to growing the business, the timing of receivables, and other working capital timing. We recently announced a new $15 million credit facility from Gibraltar Business Capital. This is to fund working capital and refinance our existing credit facility with Silicon Valley Bank. This facility is intended to help meet our anticipated working capital needs to fund planned operations to meet the demands of our growth trajectory for the foreseeable future. The facility is structured to expand to $20 million if needed for additional growth. Our available funds include our line of credit; as of November 2, 2023, under the $15 million credit facility from Gibraltar Business Capital, there is a remaining available balance of $2.9 million, with an additional $5 million if needed under the expandable provision. We also have the $2 million available under the new subordinated line of credit. Now I'd like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. Looking at the positive momentum of our existing customer base and new customer acquisitions, we're confident that we're on a strong trajectory toward reaching sustainable profitability during this current fiscal year. Our steady ongoing gross margin improvement reflects our goal to reach 40% gross margin, leveraging our cost, operational, and pricing initiatives. Our long-term plans include focusing on the strong demand in the market for sustainable energy, especially in our industrial sector, where there's no reliance on incentives, but only on ROI. We believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium-ion technology can drive continued revenue growth. We're seeing strong progress with our growth strategy, including the introduction of new heavy-duty models to be launched in 2024, a new private label program to be launched with a major forklift OEM, and a potential partnership on fast-charging proprietary technology, along with the automation of battery cells into modules. Partnering with a Fortune 100 company on the industry's first telematics integration for an entire fleet, and lastly, developing partnerships for international sales channels. Our current production facility should support annual revenues up to $150 million given our facility footprint, second ship buildout, and full lean manufacturing implementation. As I mentioned previously, we announced an improved capital structure that includes a working capital line of credit of $15 million with Gibraltar Business Capital to support current and planned growth with provisions to increase to $20 million and a new $2 million subordinated credit facility with Cleveland Capital with an extended maturity to August 15th, 2025. In summary, we are well-positioned to execute our strategy of electrifying commerce as we offer customers deep experience as first movers in this sector and validation by Fortune 100 customers to entrust their migration to lithium solutions to us. I look forward to providing our shareholders with further updates in the near future as we strengthen our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers. I thank all of you for attending. And now, I'd 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 Rob Brown with Lake Street Capital Markets. Please go ahead with your question.

Good afternoon.

Hi Rob.

Hi Rob.

I just want to talk a little bit about the orders. Sounds like the run rate picked up after quarter-end. How is that kind of looking going into the next quarter here? And what's sort of the dynamics in the market at this point?

The shorter answer is, it looks good. You can see some of the lumpiness. Most Q1's are always a slow season due to some of our bigger customers who are busy in the summer with their operations and not ordering or installing new equipment or thinking about new orders. We do experience that. We're seeing continued underlying demand in the market. There are two model lines that have some extended forklift timing that has caused some of these delays for us, for our competitors, and for the OEMs. But we see that more than offset by the growing demand that we have. The near-term initiatives we have in terms of new product lines that we couldn't offer before are going to start impacting this in the spring as we prepare for them.

Great, thank you. Could you elaborate on the new private label program? How is it functioning, and how does it add to what you've been doing?

Yeah, sure. We've had one private label program in place for a number of years with the top five OEMs. It's proven to be very successful. It's in that Class 3 space. Those forklifts are the smaller forklifts and lower price. But that Class 3 space, the equipment, is the most numerous by unit volume of any of the product lines. Number one, these large Fortune 500 fleets we go after that have tens and hundreds of offices across the country mostly use these. These large fleets like to buy packs from a variety of product line models. So the private label one is one for that smaller class. It's viewed a little differently than the large forklifts. We see that a private label where the OEM sells and distributes it through their equipment dealerships across the country, is an effective way to go to market with that particular line. It's also similar to car dealers who might sell small cars but the customers come in and buy large SUVs as well. So it's a way to efficiently cover the market and help us build scale.

Yes, Rob, I'll add to Ron's comment that that product in the white label we currently have that's been there for quite a while, is very predictable in terms of month-by-month ordering, which is really nice for us. It's something we can latch onto as very consistent ordering quarter-to-quarter, which is great.

Great. Thanks for the color. I'll turn it over.

Thank you. Our next question comes from the line of Matthew Galinko with Maxim Group. Please proceed with your question.

Hey, thanks for taking my questions. Ron, I think you might have mentioned two new customers in the quarter. Did I understand that correctly?

Yes, you did. We actually have more than that. Our focus is on large customers with multiple locations nationwide. There are a few aspects to consider. Typically, even the larger customers begin with one or two locations, gradually expanding to the point where some of our biggest clients, recognized names, feel confident enough to transition their entire fleet to lithium. We are always pleased to welcome new customers. However, our clients usually prefer not to have their names disclosed, whether for us or anyone else in the industry. If you examine our progress this past year and into this quarter, we have several names, exceeding two per quarter. We do this to emphasize the impact they have and they represent diverse areas and sectors. Does that answer your question, Matt?

It does. That's great. My follow-up is regarding the fast-charging partnership you mentioned. Is that driven by demand from existing customers, or is there another incentive to pursue this direction?

I believe when we think of fast charging, we often consider electric vehicles like Teslas that require quick charging. This is crucial in the automotive industry. However, in the industrial sector, aside from a few large plants like those owned by Amazon and Walmart that utilize fuel cells, the demand is not as high. These fuel cells can charge in five minutes and support continuous operations without long downtimes. Yet, most of the industry does not prioritize that need. Fast charging does represent improvements in operational efficiency and offers advantages in cold weather due to its thermal management. It also allows for significant energy input during breaks and lunch, enabling better use of battery packs with less lithium. We're examining various technological advancements in the market, such as solid-state and sodium technologies. We're open to utilizing cutting-edge technology and will consider applications that are commercially viable. Our goal is to provide leading technology to our large customers, who expect the best. They want assurance that our technology is competitive for the future, or else it could jeopardize our long-term relationships. We'll keep you updated as we explore this further.

Great, thank you.

Thank you. Our next question comes from Jeff Gramp with Alliance Global Partners. Please go ahead with your question.

Good afternoon, guys. The press release mentioned some high-confidence orders totaling over $100 million, obviously well in excess of any backlog that you guys have had. Are you guys seeing a change in buyer behavior whereby they might feel the pressure to place larger orders ahead of time? Or is this just an indication you want to give to the market that these are recurring orders that present themselves in the backlog periodically? Just trying to understand how we should interpret that figure a little bit more clearly.

Yeah. There had been some of that, particularly related to the supply chain shortage of some of our big customers giving us letters of intent. If you recall, we mentioned that before. This is different. This goes to what I just said a minute ago. We have some of our largest customers, Fortune 50-type customers, who are getting comfortable enough with the whole lithium experience. It's not just the battery that drives the equipment in my operation; it’s the entire end-to-end process of ordering, delivering, training our people, and servicing. These companies run very complex operations. What we're seeing now with the $100 million refers to one of our largest customers looking to convert their entire fleet in a shorter amount of time. These companies may have anywhere from 30,000 to 40,000 forklifts across North America. They implement new forklifts over time instead of all at once since it would be too disruptive. This $100 million really reflects that beginning in the March quarter. We believe we will start to see that. It's still a little premature, but we're delighted to hear this kind of interest.

Great. That's really exciting. Thank you for that. My other question is on this telematics integration with the Fortune 100. I know you guys in the past have talked about different recurring revenue opportunities as they relate to BMS and telematics. Is that progressing toward that type of opportunity with this specific application, or is this more of a value add to engender better repeat business?

Well, it's really everything you mentioned. I'd say the big driver is that we introduced telematics in this material handling sector a few years ago. The sector was used to the equipment and telematics for their operations, primarily around planned maintenance. We've had to help bring our customers up to speed on the real impact and value of this. Our sales of telematics have been slowly building, but we're seeing that accelerate now. We have one of our largest customers that finally got to the point where we believe this is resonating, and they want to put it on all their packs. There's always a reason to know the health of it or if there’s a potential problem. If you can address a service issue before a pack goes down, which is crucial since the biggest sensitive point is downtime of equipment. This telematics provides the intelligence to address those issues and improves asset management. It gives us a strong opportunity to integrate real artificial intelligence because we have the sensors and data for timely responses. This customer is on board, and we’re excited about the traction we’re now seeing, which was always a part of our vision.

Jeff, just to add, as you were leading to, everything we're doing with telemetry right now for new customers does include a monthly service fee. That's how we're approaching it. Just so you're aware of that. That's definitely on all new offerings.

Great. Understood. All right. Thank you guys for the details and your time.

Thank you. I would now like to turn the call back over to Mr. Dutt for his closing remarks. Thank you.

Thank you, operator. 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 were unable to answer any of your questions, please reach out to our IR firm, who will be more than happy to assist you. This concludes our call. Thank you.

Thank you. You may now disconnect your lines at this time. Thank you for your participation.