Flux Power Holdings, Inc. Q3 FY2024 Earnings Call

Greetings, and welcome to the Flux Power Holdings Third Quarter Fiscal Year 2024 Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to hand the call over to Maria Rico, Marketing Manager. Maria?

Thank you, Operator. Your hosts today are Ron Dutt, Chief Executive Officer; and Kevin Royal, Chief Financial Officer, who will present results of operations for the fiscal third quarter ended March 31, 2024. 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 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 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 Third Quarter 2024 Financial Results Conference Call. To begin, I would first like to call out our headline themes and then go on to step through supporting context and color. We have experienced delays in new orders since this past January, driven by revised timing of forklift deliveries, which impact the timing of our orders and shipments. We see indications in our market sector of the impact of higher interest rates and economic uncertainty during this calendar year. While we don't give specific guidance, we are aware of signs of potential abatement of the headwinds later this calendar year. We have been undertaking specific initiatives to increase revenue growth, reduce costs, launch new high-demand products, and ensure our pricing is appropriate for all our models. Simply put, our two high priorities are revenue growth and reaching profitability. Our reputation in the market and with sustaining Fortune 100 customers we have provide evidence of our value proposition, along with over 22,000 Flux Power lithium-ion packs operating in North America. Turning to fiscal third quarter of 2024 results, we did experience reduced revenue of $14.5 million, versus $15.1 million in the year-ago quarter. This reduction in revenue comes following our highest quarterly revenue ever of $18.3 million in the fiscal second quarter of 2024 this year. Regarding our gross margin, the fiscal third quarter of 2024 decreased slightly to 30%, and our adjusted EBITDA was a loss of $1.4 million, compared with a loss of $700,000 in the year-ago quarter. Our backlog has seen a similar impact, with a reduction to $18.5 million from $25 million a year ago. Regarding our customer base, we have no known lost customers and no lost orders to competition. Furthermore, we have not seen any pullback from interest in migrating to lithium-ion solutions. Despite our current higher interest rate environment, we believe the trend of fleet-wide migration to lithium-ion solutions is still advancing, and micro capital spending trends remain intact, as evidenced by the Institute of Supply Management survey released this month showing that manufacturing grew for the first time in 1.5 years in this past March. To support revenue growth, we're expanding our sales force and implementing marketing initiatives to expand awareness of both the value proposition to customers and capabilities of Flux Power to impact their fleet operations. Our solutions provide increased performance of forklifts, product life cycle cost savings, asset management improvements from our leading telemetry and carbon dioxide reductions to the environment. We also provide integration of most brands of charging equipment to our lithium battery packs and provide an integrated solution for our customers. I would like to reiterate that we are highly focused on expanding sales and marketing initiatives to secure new customer relationships and support our customers' continued migration to lithium with their typically very large fleets. Additionally, we're working with our distribution partners to acquire new customers, which includes sales and marketing resources and materials and getting our salespeople closer to end customers and their needs as we collaborate with our dealers and distributors. Also, we're taking several actions in support of our targeted sales trajectory. These include new product launches of heavy-duty models addressing customer demand, adding salespeople to support new customer acquisition, and increasing our marketing resources and initiatives. Importantly, we are launching a new private label program this quarter with another top-tier forklift OEM. As mentioned earlier, we are also taking actions to increase our gross margins, including cost reductions company-wide and selected pricing increases reflecting our total value-add to products and services for our customers. We are pleased to report on our continued progress in expanding technology and partnerships. Prototype testing of our fast-charging technology is scheduled to take place this summer. Separately, we are launching the automation of the modularization of battery cells, which should improve our working capital management. We are working with new potential customers to implement second-life use of our packs that are reaching the end of their initial application. This would include stationary storage opportunities for those packs. We have an initiative with one of our Fortune 50 long-term customers to implement a nationwide installation of telemetry, which we call our SkyBMS. This is all to improve customer asset management. Our software and cloud accessibility includes the development of an application of machine learning and AI features for product support tailored to large fleets. Now I do want to mention two of our recent appointments, and I'm also pleased to highlight our new CFO, Kevin Royal, who joined in early March this year, and also our newly elected board director, Mark Leposky. They both bring impressive depth of experience, successfully building high-growth businesses and are key resources to achieve our strategy of scaling our business with top-tier customers. In the longer term, our strategy revolves around building scale to sell our pack 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 customers. As I mentioned earlier, our adjusted EBITDA loss of $1.4 million during the fiscal third quarter resulted primarily from the impact of lower revenue and a one-time warranty-related expense. As presented in the previous slides, we are experiencing a pause, if you would call it, due to the higher interest rate environment, yet we do see signs of a gradual return to our growth rate in the second half of calendar 2024. Our current customer base continues to reflect large fleets of well-known companies seeking the value proposition of higher performance, lower lifetime costs, and asset management tools and services. Our full product line caters to large fleets who seek ongoing relationship partnerships 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 providing best-in-class products and, especially, services. While the forklift growth rate has historically been single-digit, the adoption of lithium-ion batteries is growing at a much higher rate, driven by the compelling value proposition of lithium compared to lead acid and propane, especially in larger multi-shift operations. The material handling sector is not unaffected by economic downturns, but it is critical to transport goods and provide services throughout the business cycle. Our strategy includes adjacent verticals such as airport ground support equipment, referred to as GSE, and we continue to explore additional adjacencies to leverage our core competencies and capabilities. Gross margin initiatives have dramatically improved over the last 2 years, and we expect continued improvement. Gross profit was down slightly during this third quarter to $4.4 million, and gross margin held steady at 30% compared to the year-ago quarter. With strategic supply chain and profitability improvement initiatives, we are targeting gross margin improvement to continue, with a long-term goal of exceeding 40%. All these initiatives are part of our plan to accelerate gross margin and reach our target goal. As of May 6, 2024, our open order backlog was $18.5 million. Our backlog reflects longer lead times of incoming purchase orders from major OEMs to align with their schedule of new forklift deliveries and extended delivery times for certain model lines for new GSE equipment. Beyond our backlog of open orders, the future continues to look bright, with growth of current customer adoption and new customer potential acquisition.

Thank you, Ron. Now turning to review our financial results for the quarter ended March 31, 2024. Revenue for the fiscal quarter of 2024 decreased 4% to $14.5 million, compared to $15.1 million in the fiscal third quarter of 2023, due to lower capital spending in the market sectors that we serve, resulting in shipments of fewer units during the quarter. Gross profit for the fiscal third quarter of 2024 decreased 7% to $4.4 million, compared to a gross profit of $4.7 million in the fiscal third quarter of 2023. Gross margin decreased to 30% in the fiscal third quarter of 2024, as compared to 31% in the fiscal third quarter of 2023. The gross profit margin decreased slightly, by 100 basis points, as a result of higher warranty expense during the current quarter, partially offset by lower average cost of sales per unit achieved as a result of our product cost improvement initiatives. Selling and administrative expenses increased to $5.3 million in the fiscal third quarter of 2024, as compared to $4.7 million in the fiscal third quarter of 2023, primarily attributable to higher staff-related expenses, including certain severance expenses and increases in stock-based compensation, recruiting expenses, outbound shipping costs, and professional service fees, partially offset by decreases in sales commissions, E&O insurance expenses, travel expenses, and depreciation expense. Research and development expenses increased to $1.3 million in the fiscal third quarter of 2024, compared to $1.2 million in the fiscal third quarter of 2023, primarily due to higher staff-related expenses, including severance expenses, stock-based compensation, and general research and development costs. Adjusted EBITDA loss was $1.4 million in the fiscal third quarter of 2024, as compared to a loss of $0.7 million in the fiscal third quarter of 2023, primarily attributable to the impact of lower revenue. Net loss for the fiscal third quarter of 2024 was $2.6 million, compared to a loss of $1.4 million in the fiscal third quarter of 2023, primarily attributable to decreased gross profit and increases in operating expenses and interest expense to support our planned growth. Cash was $1.3 million on March 31, 2024, as compared to $2.4 million at June 30, 2023, based on timing of utilizing our credit line. Net cash used in operating activities decreased by $0.9 million to $4.3 million in the 9 months ended March 31, 2024, compared to $5.2 million in the 9 months ended March 31, 2023. Available working capital includes our line of credit as of May 6, 2024, under our $16 million credit facility from Gibraltar Business Capital, with a remaining available balance of $3.2 million, and $2 million available under the subordinated line of credit with Cleveland Capital. The credit line with Gibraltar, subject to eligible accounts receivables and the inventory borrowing base, provides for expansion up to $20 million. Now looking at capital allocation, we have been impacted by slowing revenue this calendar year, which is extending the time frame to reach cash flow breakeven. We are working with Gibraltar, our lender for our working capital line, to revise our financial covenant requirements to support our current trajectory. As a result, we needed to include a going concern clause in our 10-Q filing, which we anticipate to file on Monday, May 13, 2024.

Thank you, Kevin. To summarize our comments so far, the fiscal third quarter of 2024 saw fluctuations from the timing of deliveries and customer new forklift orders and interest rate variability. We do, however, remain confident in our recovery and are highly focused on additional selling strategies to support our historical sales trajectory. Gross margin initiatives have dramatically improved margins over the last two years. With strategic supply chain and profitability improvement initiatives, lower costs and higher volume pricing, we continue to experience gross margin improvements. We are highly focused on expanding sales and marketing initiatives to secure new customer relationships and support the continued migration to lithium of current customers. We're very excited to add another tier-one OEM private label program to supplement our strong OEM relationships and approvals. We are also working with our distribution network to expand customer acquisition. We're leveraging our position with growth-oriented projects and developing partnerships with vendors, technology partners, and opportunities to further drive growth. We are working to expand product lines for multiple customer segments and adjacent markets with new products and filling gaps in our energy storage offerings. Recently, we introduced our new second-generation lithium-ion battery pack for Class II narrow-aisle forklifts and Class I 4-wheel counterbalanced forklifts, and we'll be adding heavy-duty models to most of our product lines in the coming months. Our telemetry, which includes asset management features, is in the pilot stage with a Fortune 50 company for implementation nationwide. Finally, be assured, our top priorities are revenue growth and reaching profitability. Fortunately, underlying interest in migration to lithium-ion solutions has never been greater. 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, and now I would like to hand the call over to the operator to begin our question-and-answer session.

The first question we have is from Craig Irwin of ROTH MKM.

This is Andrew on for Craig. So the first question I have here is on the announced private label, the second one with the OEM. I was wondering if you could just kind of describe maybe the scale of the partnership, any details on the rollout there. Just more color would be much appreciated.

Sure. The private label we have with another OEM is going to be equal to or bigger than that. It provides very consistent, almost monthly, definitely quarterly, orders. They are both Top 5 OEMs globally. We found that it's very helpful because these Class III walkie pallet jacks are found almost in every installation around the country. The OEM dealerships feed that interest and really provide a very helpful, efficient distribution strategy for us. So we already are getting work. We work closely with the OEMs and project their forecast for this. They're both of similar magnitude and size at this point. We're very excited about launching this. We've just started it. It involves three to four variations of that product line.

It's great to hear. Second one here, kind of touched on different initiatives to stimulate revenue between the prepared remarks and in the press release mentioning direct-to-consumer initiatives, kind of working with your marketing team, and even I think, Ron, you mentioned potential partnerships earlier on the call. Could you just kind of talk through what you're looking at there and the different ways you can kind of boost demand?

I think it's pretty exciting. While we have a good core of customers shown on our slide, on our website, in the presentation, of all the household customer names, we see it as the best time to aggressively expand our sales and marketing reach by adding more salespeople. We're in that process right now. I fully expect to at least double, possibly triple, that over the coming year. We found that there's a very strong interest to get more exposure of who we are, what we do, and references of having Flux as a supplier to help them understand what configuration of lithium is best for them, and to work with them. It's a long-term partnership, so our salespeople are not just out there quoting deals trying to get the lowest bid. It's about building that reputation and those references that show how we can provide a complete package for them, understanding their needs, and stretching their people and installations around the country. Our salespeople, our marketing initiatives, we're looking to really get aggressive with those.

The next question we have is from Rob Brown, of Lake Street Capital Markets.

On the sort of the order activity and the market demand, I know it's slowed down a little bit. How is the visibility there? Do you get a sense of things starting to pick up from kind of customer conversations? Or is there sort of a time cycle or seasonality to the orders that you feel comfortable with that can get some growth in the back half?

In the past, we've had some seasonality for the summer, particularly for the food and beverage distribution companies who don't like to install new equipment in the summer. So there has been some of that experience. However, what we are seeing is a broad-based reaction by the end customers to the interest rate activity. We have a lot of input across the sector at the trade show. We see indications of things starting to pick up and having less caution on putting new equipment into place in the latter half of the year, particularly more towards the fourth quarter. There are lead times on forklifts and on batteries that have to be factored into the understanding of timing. I would say we see us coming out of that in the back half of this year.

Okay. Good. And then on the new product launches, could you remind us again of sort of how, where you're at in that? And I know there were some models that were launched and some are coming, but where are you at in the new product kind of refresh and enhanced models?

Sure. We have been working on a series of what I would call heavy-duty models for all our lines. Our customers with their forklifts need different power levels depending on whether they're lifting and moving potato chips or engine blocks. We are introducing these heavier-duty power capabilities across really almost all our lines and getting them through UL Listing, which has taken longer than we anticipated. However, that is happening and getting approved, and we are going to be rolling those out in the coming months. I believe the demand is there for higher-voltage applications, such as our 80-volt, particularly in the material handling side.

The next question we have is from Eric Stine, of Craig-Hallum.

I've been jumping around on calls. So I hope I don't double-up on questions or topics, but maybe we could just go back to the interest rate dynamic. Can you just talk about whether you get a sense that it's more interest rate uncertainty or is it the level of interest rates being the issue?

That's a great question, Eric. There seems to be a degree of uncertainty regarding what's really going to happen with interest rates. Having come off a long era of very low interest rates, even at 4%, 5%, 6%, 7%, 8%, it creates a lot of uncertainty. Many customers are waiting for interest rates to mitigate a little bit before they execute these orders. While the equipment discussed particularly, the forklifts don't suddenly die and require immediate replacement, they do have limited life, and that gives asset managers some wiggle room on timing. I don't see this situation as long term.

Okay. All right. That's helpful. And then maybe just on the additions to the sales organization, could you provide any expectations for how quickly the new sales additions start contributing to top line?

Certainly. There’s a rule of thumb that it takes about 1.5 years for new salespeople to get fully up to speed, but the person we just hired has a network and contacts, which means he can bring in business definitely within the 3- to 6-month period. We are also finding there is much interest in our energy solutions, and salespeople are very attracted to that. So I'm very optimistic about our growth here.

The next question we have is from Craig Irwin of ROTH Capital Partners.

So I guess, Ron, you did a really good job last quarter communicating the air pocket for the March quarter. One thing that impressed me was the gross margins. Can you update us on anything that might have changed with the target of getting to 40% gross margins? Are there any things likely to change over the next couple of quarters that might present an opportunity to capture more margin dollars?

We are benefiting from a lot of hard work on improving our vendor relationships, coupled with increased volumes. The significant reduction in battery pack costs coming out of China is a nice boost. Additionally, we are seeing ongoing cost reductions from product improvement initiatives and are two-thirds of the way through our lean process. All these factors will positively influence achieving our long-term goal of 40% gross margin.

Excellent. Have you considered diversifying into other potential opportunities like military batteries or industrial batteries?

Yes, very much so. Our strategy is to add adjacencies without creating a whole new infrastructure. We just submitted a bid on a Department of Defense proposal, which I think will fuel our strategy for scale. We are also exploring opportunities in automated shuttle vehicles.

There are no further questions at this time. I now would like to turn the floor back over to Ron Dutt for closing comments.

Thank you, operator. I'd like to thank everyone for joining our financial results conference 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, please reach out to our IR firm, MZ Group, who would be more than happy to assist. This concludes our update for this past quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.