Flux Power Holdings, Inc. (NASDAQ:FLUX) Q2 2023 Earnings Call Transcript

Flux Power Holdings, Inc. (NASDAQ:FLUX) Q2 2023 Earnings Call Transcript February 9, 2023

Operator: 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 like to hand the call over to Sean Stuart , Financial Planning and Analysis Manager, Sean.

Unidentified Company Representative: Your host today Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer will present results of operations for our second quarter of fiscal year 2023 ended December 31, 2022. A press release detailing these results crossed the wires this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of our company’s website at fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that the 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 revision 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 and Form 10-Q 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.

Ron Dutt: 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, air support — 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’ has 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 has helped to mitigate backlog expansion. These initiatives are also increasing gross margin 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. Due to the timing of deliveries of customer new forklift orders arising from supply chain disruptions.

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. Also and importantly, 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 cells suppliers. We also leveraged increased sales volumes to resource steel and board components to lower costs regions and to higher volume suppliers. Recently, we expanded our in-house our testing and product validation capabilities with all equipment needed onsite to satisfy UL 2530, that’s UL Underwriters Laboratory 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 ease and we are utilizing lower cost, more reliable and 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 31st 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.

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At the same time, our new designs provide reduction of 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 is abating, as I mentioned, 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 cost 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 improvement, specifically for adjusted EBITDA are reflected on slide seven, showing the upward trend over the past fiscal year. We’re executing our specific supply chain and cost reduction initiatives to continue this momentum. We implemented a $5 million subordinated line of credit facility on May 11 of 2022, included $4 million of signed, committed credit availability. We recently announced and amended agreement to increase the availability, available 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 increase customer demand.

The current availability on the SVB line along with a $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 who seek a relationship partner to meet 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 GSE that’s ground support equipment deliveries. As customer adoption of lithium-ion, tax increase across fleets, we anticipate adoption to increase orders to replace lead acid batteries that are at the end of their lives.

We have taken actions to restore our gross margin improvement path. As highlighted on Slide 9, our gross margin improved sequentially to 24% in the second quarter of 2023, from 22% in the first quarter of fiscal 2023 and from 20% in the fiscal fourth quarter of 2022. All this reflects the progress and restoring our gross margin trajectory. Our improvement initiatives include a number of actions that have begun to impact gross margin. Price increases on new orders, increased back volumes, more competitive shipping costs, lower costs, more reliable and secondary suppliers of key components, improved manufacturing capacity and production processes, new product designs to lower costs and finally, transition of product lines to a new modular platform, all of these are part of our plan to accelerate gross margin improvement.

As supply chain disruptions has improved as mentioned earlier, 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 of the technology for these applications. We intend to place a high priority on 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 do Chuck Scheiwe, our Chief Financial Officer to review the financial results for the quarter ended December 31, 2022. Chuck?

Chuck Scheiwe: Thanks for Ron. Now turning to review our financial results in 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 existing and new customers. Gross profit for the first second quarter of 2023 increased to $4.1 million. This was 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 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. This is compared to $4 million in the fiscal second quarter of 2022. This was reflecting 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, this is compared to $2.1 million in the fiscal second quarter of 2022 and this was primarily due to lower staff lending expenses and timing of expenses related to development of our new products. Adjusted EBITDA loss was 900k for the free month ended December 31, 900,000 for December 31, 2022. This 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, of 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 is reflecting gross margin profit from higher revenue and also partially offset by increases in operating expenses and interest expense. Our cash used in operations for the six months ended December 31, 2022. It 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 debt availability.

These are both resources to manage working capital needs. We believe that our existing cash and additional funding available under our SVB credit facility and our subordinated LOC 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 to our gross margin improvements. And we are working through our cost control initiatives. And we continue to explore increased options for our working capital availability. Now, I’d like to pass it back Ron to offer some closing remarks.

Ron Dutt: Thanks, Chuck. As Chuck mentioned — and I’m going to say this again, because it’s important, 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 acquisition of new customers who wants the benefits of lithium ion technology and 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 continue our growth trajectory. Our current production facility should support annual revenue well beyond $100 million annually, given our facility footprint, second chip build out that’s beginning and lean manufacturing input 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, continuing process improvement and pricing. We continue to execute actions to improve adjusted EBITDA as shown on slide 7, which is a key indicator to achieve profitability. And further, we anticipate expanding into new markets having strong demand for our value proposition of higher performance and service at lower cost. 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, and with our growing list of new and diverse large customers.

I thank you all for attending. And now I would like to handle the call over — to the Operator to begin our question and answer session. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question and answer session. Our first question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal: 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?

Ron Dutt: We get that question asked a lot. And we’ve been advised by some pretty good sources, not to give guidance at this point with blocks at this stage, but I think we can give you the direction here that you can probably figure it out yourself. You can see our trajectory on gross margin that’s continuing, we’re executing to very specific set of actions. They’re going to get us to profitability. We meet once every week on this very, there’s a lot of opportunity on supply chain, design cost reductions and other actions as the growing emerging company like we are as we build volume that really enables us to lower cost in all those areas I mentioned. So run that trajectory. And then look at the other trajectory on our revenue.

And our revenue is — has a pretty 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 that infrastructure, production, delivery and service to support that. We’re getting other companies that are seeing that other large fleets, our sales guys are working on that, we see that trajectory — our trajectory continuing with that. We’re not losing customers, from time-to-time we see through the supply chain disruption that there can be some rescheduling of time — the forklift manufacture; some of those lines can run into delays as well. So our packs are aligned with timing of the delivery of those forklifts, so you can see a little movement here and there quarter-to-quarter, but we’re very confident on the longer term annual pace of our business, and the customer.

So run that line out and you’ll see that when you do that it’s in the very near future, you’ll see the very impressive quarter-over-quarter, quarter-over-prior year increases in our margin, and getting to that breakeven is a combination of continuing growth of revenue projection, to cover our infrastructure and operating costs that are in place to bring on these new large customers that we can serve, and most importantly retain and keep happy.

Amit Dayal: Got it. Thank you for that Ron. And then just, in the press release, you highlight 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?

Ron Dutt: Yeah. It’s — there’s a lot of momentum to it. Let me put it that way. These fleets have many locations, as I mentioned, they don’t convert to lithium all at once it’s too disruptive. And it’s really, as I referred to earlier, it’s tied to primarily whenever they need a new forklift, then they will add the new lithium pack. So it’s an ongoing month after month, quarter after quarter to do that. And — so we can cancel that out quite a few quarters and years and particularly as they can convert all their facilities. And then then you get into ramp 2 and VANTAGE AIR when those have to be replaced. And that’s not to mention that the forklift, particularly larger ones, that forklift lasts longer than the battery. So I think as the operations, we think that we will start seeing more replacement of lead acid batteries as that lead acid batteries, which typically have a shorter life need replacement and once they see and get comfortable with the operating and benefits and operating environment and — of the lithium, they will, some of that will begin.