Flux Power Holdings, Inc. (NASDAQ:FLUX) Q4 2023 Earnings Call Transcript

Flux Power Holdings, Inc. (NASDAQ:FLUX) Q4 2023 Earnings Call Transcript September 21, 2023

Flux Power Holdings, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.1.

Operator: 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?

Carolyn Gordon: Good afternoon. Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present 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. [Technical Difficulty] I will turn the call over to Flux Power, Chief Executive Officer, Ron Dutt.

Ron Dutt: Thank you, Carolyn, and good afternoon, everyone. I’m pleased to welcome you to today’s fiscal fourth quarter and fiscal year [2003] (ph) 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. That is, electrifying commerce. We are powering material handling, airport ground support, solar energy storage, port authority equipment and other applications with new and clean technology, our products and services, our 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 the household names, which I’ll point out shortly.

We must have a strong reputation and do what we say in order to 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. 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 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 the fiscal year 2023 compared to 17% in fiscal year 2022 and 27% in Q4 of ’23 compared to 20% in Q4 ’22, as well, our inventory balance has become more consistent due to improved inventory management, sourcing and supply chain management.

Taken together, we are executing on 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 onetime purchases. These customers represent a diverse base in multiple sectors, all of whom are seeking lower cost during the life of the product and higher performance for lithium battery packs from a reliable partner. 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 prior to forklift in the 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 lumpiness as shipment delays persist 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 and secondary suppliers are key components, improved manufacturing capacity and production processes and transition of product lines to a new modular platform.

All of these initiatives are proud of 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. Chuck?

Chuck Scheiwe: Thank you, Ron. Now, turning to review our financial results in 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 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 our 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 development of new products. Adjusted EBITDA loss decreased to $600,000 in the fiscal fourth quarter of ’23 from $22 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 reflecting increased gross profit, partially offset by increased operating expenses, along with some modest interest expense. Now turning to review our financial results in 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, higher volume of units sold and the 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, 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 increase in outbound shipping costs, insurance premiums, new hires and temporary labor, some severance expenses incurred, increases in depreciation expense, travel expenses increased, marketing expenses and facility-related costs, partially offset by decreases in our commissions, bad debt expenses, consulting and fees, public relation expenses and stock-based compensation. Research and development expenses decreased to $4.9 million in FY 2023 as compared to $7.1 million in FY 2022. This is primarily due to lower expenses related to development and testing of new products by utilizing our in-house testing equipment we have purchased.

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 is 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, as 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 payment.

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 that new $15 million credit facility from Gibraltar Business Capital to fund working capital and to 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 meet 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 strong Fortune 500 customer order backlog.

I’d now like to pass it back to Ron to offer some closing remarks.

Ron Dutt: 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 with 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 continuation of our growth trajectory that you’ve seen on the slides.

For our technology and our proprietary technology, by the way, we are now 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 have the capability to anticipate and resolve issues sometimes before they happen, addressing the number one driver in fleet management pain points and we want to minimize downtime of the equipment. And 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 solution 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. And 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 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. And further, we anticipate expanding into new markets, having strong demand for our value proposition of high performance and service at 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. And now, I’d like to hand 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’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Rob Brown: Hi, good afternoon, and congratulations on all the progress.

Ron Dutt: Thank you, Rob.

Rob Brown: 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?

Ron Dutt: Yeah. Fortunately, we have a number of product lines and not only material handling, but GSE, which was really part of our strategy, and I mentioned, we want to continue to add those lines because it’s helpful 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 and which was really well received. There was some pent-up demand from the supply chain disruption and so that played well because it’s been nearly zero for some period of time. And 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 a 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.

Rob Brown: Okay. Great. Thank you. And then on the gross margins, you had some bumpiness in the different — compared to Q3, I guess, it was down a little bit. Could you expand on that? Are you sort of where you want to be on pricing? Or do you have more to go on pricing or have the margin retrenched a little bit?

Ron Dutt: 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. That 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 chunk of our business. And it’s something we continually look at. But the variation or lumpiness, however you want to turn it in the past couple of quarters, is driven by really these factors I’ve mentioned, the product mix can change some model lines and as well.

So that’s all part of what we manage. 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.

Rob Brown: Okay. Thank you. I’ll turn it over. Yep, thank you. I’ll turn it over.

Ron Dutt: Thanks, Rob.

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

Matthew Galinko: 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?

Ron Dutt: Yeah. Each quarter, we’ve been adding two or three new customers. Some are different in — some of the big 800-pound gorillas, which we try to really focus our effort on a very large fleet. Some of the more moderate fleets are important as well because they represent good diversity, good balance as part of our overall strategy [four] (ph) larger fleets. We added two in the Pacific Northwest, and we also added a supplier who had picked up the business and the project. I don’t know if you recall, some quarters ago, we have a product and a project for 400-volt autonomous shuttle vehicles of eight people at limited speed. So we see that as a segment that is an adjacency and they picked it up and our — and we understand they’re going to expand that.

So that’s important. We like, as part of our strategy, expanding to larger packs whether they be 80-volt packs of material handling, 80-volts in GSE or more and also 400 volts in this case. That demand, the sophistication of our engineering capabilities and, of course, then to gross margin. So pleased to see that happening. Some quarters, we get bigger bumps in the new customers. but it’s all part of — all the new customers have a timeline of how fast they order, how fast they adopt, how many locations they have. So in summary, the diversification is very welcome and part of our strategy.

Matthew Galinko: Great. Thank you. And my follow-up, I guess, really around — and apologies if you covered this earlier, but how your visibility is for revenue over the next fiscal year? And any just early even qualitative comments on what we might expect over the next year? I guess to qualify that a little bit, revenue ended the year a little lower than it entered the year, Q4 versus Q1, but obviously, we had the strong growth for full year in ’23. So just how should we be thinking about the ’24 trajectory on the top line?

Ron Dutt: Yeah. No, good question. We spent a lot of time looking at that as you might imagine. And again, we are — we live by the ordering patterns of the deliveries of the new forklifts, which is probably 95% of the business as opposed to replacing in the life lead acid battery. So depending on how all those orders flow and who it’s from, you can really get some variability in how that proceeds. At the same time, we’re — a number of our largest customers, a couple of them have been giving us letters of intent for all of calendar year ’24 and ’25, they’re nonbinding, of course. But certainly, the larger companies in the world where there’s been some battle scars from shortages to parts are very keen on ring-fencing the allotment that they get theirs first.

So we’re seeing that. Very encouraging signs. Continued growth. All of our customers are expanding through their tens and hundreds of facilities, and they typically do it one at a time and add them. And so you see that accumulation process. So we think this growth trajectory is going to continue because of that also, in our — the slides we have in our deck that are on our website show you all the accounts that we’re in very early stages and a lot of them are household names that have very large fleets. And bringing those new customers on are going to add to that, how much, how fast, it’s a little uncertain. The other final element I would point to as we look to fiscal year revenue, as we said, we are in the process of rolling out some heavy-duty models of our current offerings.