Flux Power Holdings, Inc.

Greetings and welcome to the Flux Power Holdings Fiscal Third Quarter 2022 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 Justin Forbes, Director of Business Development at Flux Power. Justin?

Thank you. And good afternoon. Welcome to Flux Power's financial results call. Today's conference call is being recorded. Your host today, Ron Dutt, Chief Executive Officer, and Chuck Shiawee, Chief Financial Officer, will present the results of operations for fiscal year 2022, third quarter, ended March 31st of 2022. 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 at 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 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 more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I will now turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Thank you, Justin, and good afternoon, everyone. I'm pleased to welcome you to today's third quarter 2022 financial results conference call. Our third quarter reflected our trend of strong revenue growth from customer demand for our lithium ion battery packs and the addition of new customers and along with product improvements. Revenue increased 89% to $13.2 million compared to Q3 of 2021 fiscal revenue of $7.0 million, marking our 15th consecutive quarter of year-over-year revenue growth. In the third quarter, we received $20.5 million in new customer purchase orders from existing Fortune 500 customers and new customers. To highlight a few of our successes, we have received an order for our Class I X-Series battery packs from a new wastewater treatment customer, and multiple orders for GSE battery packs from an existing large domestic airline customer. And finally, an order for our C-series battery packs from Beam Global, which recently reported a record pipeline. For the third quarter, our customer order backlog increased to a record $38.6 million as of March 31, 2022, reflecting the growing demand for our products from new and existing customers and our continued expansion into new verticals. Beyond our current backlog I just mentioned, we've received a non-binding multi-year letter of intent in the third quarter from one of our large Fortune 100 customers. They indicated wanting to preserve build slots as part of their ongoing fleet conversion to lithium. In March, we introduced three new models Three new products at the MODEX 2022 Material Handling Trade Show. First, the L36 lithium-ion battery pack. That's a 36-volt option for three-wheel, very popular and growing, three-wheel electric forklifts. Secondly, a C48 lithium-ion battery pack for automated guided vehicles and autonomous vehicles. mobile robots used in warehouses. And thirdly, finally, the S-24 lithium-ion battery pack that provides twice the capacity, or 210 amp-hours, for walkie-pallet jacks, a very high-volume forklift truck. In January, we also strengthened our corporate governance with the appointment of Chee Min Bo Lin, a global technology industry veteran, to our board of directors as an independent director, as a member of the audit committee and compensation committee, and as chair of the nominating and governance committee. As we put our third quarter results in perspective, the March 31st ending quarter reflected the ongoing impact of the global supply chain disruption. Increased shipping delays of key parts throughout the quarter triggered delays in production amid increasing purchase orders from growing customer demand. This resulted in continued pre-purchasing of inventory given the production delays. Related to those delays, we experienced increases especially in the prices of steel, various electronic components, and shipping. all of which increased faster to us than we've been able to recover in pricing from ship units in the quarter. Aggressive efforts have been taken to mitigate supply chain issues, including finding more competitive carriers to reduce shipping costs and utilizing lower cost steel suppliers that meet our specifications. We have introduced new product designs in response to customer requests. Some of the improvements included higher capacities for extra long and demanding shifts, easier servicing, lower cost of ownership, and other features to solve a variety of existing performance challenges in customer operations which scan a broad spectrum. We continue to introduce new product designs for margin enhancement, part commonality, and improved serviceability. And we continue during the quarter to progress more potential new customers, especially those that have large multi-shift fleets that see productivity and cost benefits coming from lithium. Inventory increased to $20.9 million at March 31, 2022, primarily to mitigate the impact of supply chain disruptions and to support timely deliveries to customers at the same time. However, we are advancing our supply chain and production initiatives to reduce inventory. In fact, our inventory turns during the quarter increased favorably from 2.0 to 2.5, and that's COGS, cost of goods sold, divided by total inventory. While supply chain issues are still challenging, our strategic supply chain and profitability improvement initiatives are beginning to show positive results. Improved production processes, including implementing lean manufacturing, have resulted and are continuing to result in increasing efficiency, which in turn has seen inventories improve, as I just mentioned. We anticipate inventory levels will decline as we continue aggressively shifting backlog, and our strategic initiatives can continue gaining traction. We recently implemented a $5 million credit facility just on March 11th, 2022, that included a $4 million of signed, committed credit availability. We believe this credit facility, along with our working capital line with Silicon Valley Bank, that totaled $6 million, of which $2.5 million is available, These will both provide availability for unforeseen needs as this supply chain disruption appears to continue. Finally, we're seeing a modest, I'll say modest, improvement in supply chain issues from an internal standpoint due to our intense focus on manufacturing processes, procurement, cost efficiencies achieved so far, as we continue advancing towards our goal of reaching cash flow breakeven and profitability. We have taken actions to restore our gross margin improvement path. As highlighted on slide six, our gross margin improves sequentially to 14.6 in the third quarter from 13.6 in the prior quarter, second quarter fiscal 2022. This reflects initial progress in restoring our gross margin trajectory as shown on the slide with the history. Our improvement initiatives include getting traction from our price increases, utilization of alternate vendors and lower cost suppliers, new product designs to lower cost, reducing part count and complexity, and improving serviceability of packs, all of which are part of our plan to accelerate our gross margin improvement. While supply chain disruptions continue to be a drag on our operational capabilities, in the third quarter, we were successful in keeping inventory levels at least relatively flat, increasing to $20.9 million at March 31st, We felt it was necessary to secure this inventory given the current supply chain inconsistencies to achieve our future financial goals while meeting our growing customer delivery requirements. Looking beyond the remaining 2022 fiscal year and building on our success in the material handling industry, we are also focused on broadening our reach into warehouse robotics and related verticals. With our operating strategy, we are positioned well to continue to support these sectors as the adoption of lithium energy storage continues to accelerate. On the technology front, we continue to see customer interest and our proprietary Sky BMS Telematics product designed for remote fleet management and monitoring that delivers battery-packed data to optimize performance and customer fleet tracking. I'm happy to report that our customer feedback remains very positive. With that, I will now turn it over to Chuck Shiawe, our Chief Financial Officer, to review the financial results for the quarter ended March 31st. Chuck?

Yeah, thank you, Ron. As we turn to review our financial results in the quarter ending March 31st, revenue grew 89% to $13.2 million in the fiscal third quarter of 2022. This was compared to $7 million in the same year-ago quarter. And the company grew by 71% from 7.7 million in the fiscal second quarter of 2022. Increased revenue was primarily driven by our sales of a higher mix of the large packs we sell that have higher selling prices. This was combined with the higher volume of units sold to both existing and new customers. In the third quarter of 2022 alone, we booked 20.5 million in new customer orders, as mentioned. While there can be some seasonality with orders, strong customer demand continues. Although gross profit was higher in the fiscal third quarter at 1.9 million compared to the same quarter a year ago at 1.7 million, gross profit margin decreased to 14.6% in the fiscal third quarter of 2022, as compared to a gross profit margin of 24.1 in the same year-ago quarter. Gross profit was impacted by higher costs for steel, electronic parts, the common off-the-shelf parts. All happened during this quarter. Those were partially offset by higher revenues for the quarter. Selling and administrative expenses increased to $3.9 million in the fiscal third quarter of 2022 from $3.1 million in the same fiscal period of 2021. This reflects increases in outbound shipping, higher insurance premiums, and higher personnel expenses. Research and development expense increased to $1.7 million in the fiscal third quarter of 2022 compared to $1.5 million in the fiscal third quarter of 2021. Those increases were primarily due to expenses related to new product development, UL certifications, and UN 38.3 testing that we do. So the cash usage, as we discussed previously, has supported our actions to protect our customer orders, given this global product shortage and delivery delays. We are actively working to reduce inventory balances as we move through this pandemic-caused disruption. We ended the third quarter with $3.8 million in cash. And, you know, as Ron mentioned previously, we have our $6 million working capital line of credit with Silicon Valley Bank, of which $2.5 million is still available on that line. And as mentioned, we recently closed on a $5 million credit facility, of which we currently have $4 million of committed signed debt availability. These are resources that help us to manage our working capital needs. This added credit facility, along with progress on our initiatives, has led to the removal of the going concern clause we had in our SEC file. I'd like to now pass it back to Ron to offer some closing remarks.

Thanks, Chuck. In summary, we are well positioned to create long-term value for our shareholders. Our strategic initiatives have been deployed, positioning us to work towards mitigating ongoing global supply chain disruptions, and executing on our record 38.6 million customer order backlog, and finally generating cash receipts to accelerate our trajectory to cash flow break-even and profitability. Looking ahead, we continue to focus on increasing our energy storage solutions to new and existing customers who are anxious to the benefits of lithium-ion technology, and also to focus on expansion into emerging sectors such as warehouse robotics and high-voltage applications. We continue to see strong interest from both investment funds, customers, and vendors for products that are aligned with ESG values, that is environmental, social, and governance. LuxPower is at the forefront of sustainable products with technology that avoids tons of carbon dioxide emissions due to higher efficiency and reduced energy consumption for the same work requirements as done by other sources of energy. 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 with our growing list of new and diverse large customers, as shown in our PowerPoint on our website. We also hope to see some of you at the upcoming HC Wainwright Global Investor Conference in two weeks, and the LD Micro Conference in June, and also our Investor Analyst Facility Tours that we're planning for the period this coming July through December held at our headquarter facility in Vista, California. 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. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. Our first question is from the line of Ahmed Dayal with HC Wainwright. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for taking my questions. Ron, with respect to margin improvements, I know you highlighted you've taken steps to move in that direction. How much improvement, I know you saw 100 basis point improvement sequentially this quarter on the gross margin front. How much improvement should we anticipate over the next few quarters to come through for you guys?

Yeah, I am. And thanks for the question. You know, we're extremely focused on that. And we've got a lot of aggressive actions, as I mentioned. I think this past quarter was just trying to dig out of the December quarter where we really felt the full impact of the increased prices, delays against preordering. I mean, it just hit its full throttle. You know, while we still have supply chain shortages and delays, During the quarter, we're starting to gradually work out of that. It went up a point. Of course, we would like more, but we're confident here in tracking all that we're doing that that rate of increase is just going to continue significantly as we go month to month and quarter to quarter as we go forward from here. As you know, we don't give out guidance on that. But when you look at the, when we tally, we share our tally. We'd be glad to talk to you offline if you want a little more color. But we have very significant increases from, you know, steel is one of the things that hit us the hardest. You know, it's gone up several hundred percent. And so during this time while we're being hit, we develop sources. We're now starting for some parts getting sources from China. with very significant decreases, and from Mexico as well. There are some very good sources in Mexico that our head of operations is very familiar with, with lower cost and also a little more timely delivery as well. The logistics are a factor too. And, you know, we're designing a whole new platform that has a very, very significant cost rate. When you start illuminating about half your parts, you really get some significant cost directions, kind of one-on-one of manufacturing. So those things just don't all of a sudden pop in in like one month or one quarter. But the effect of those continues, unabated in the months and quarters ahead, the several quarters ahead where it should really begin, will begin to report the kind of numbers I think we're all more happy with. So it's starting now. It has started. It's gaining momentum, and we're excited about it. Despite all the headwinds of the supply chain, we're raising those margins anyway. Pricing effect, a lot of that backlog was negotiated before we got the onslaught of the price increases that we sent out last fall and in April. So that will start coming in on new orders. just particularly the second half, but really it's already started, but it's going to gain that momentum that I'm really trying to mention.

Understood. Thank you for that, Ron. And then, you know, you had a really strong sequential increase in revenues. How should we think about, and your backlog grew as well. So, I mean, is this sort of the new quarterly levels we are potentially delivering? or we may see a sequential drop in revenues? In terms of just the cadence over the next few quarters, how should we think about revenues coming for you guys?

Yeah, I know you looked at $38 million and shipping that, monetizing it, if you will. The LOIs that I'm referencing, and we're capacity constrained right now. So we're increasing our capacity. We've got a second shift that we're starting to build up to provide the same kind of throughput as our first shift, particularly on the big packs. Our increase in revenue is primarily coming from these larger packs, which we're thrilled for, as Chuck had mentioned. They have higher prices, higher margins, and very glad for those. I think, to your point, the revenue, we see this momentum just continuing. We don't see any indication of our momentum abating, both in terms, of course, the orders we're receiving, $20 million during the quarter. Now, those orders received will be shipped not during that quarter, of course, but shipped over several quarters, up to several quarters. based on the timing of those. But we see it continuing, and we have relationships in place where we see ability to leverage those relations to get other companies. You know, our channels to market are through the national account sales reps at at the forklift OEMs, the Toyotas of the world, Crowns, Raymond, and so forth. Also, some of their very large dealers as well. They already have the accounts we're after. So as we perform on the large accounts, that leads to other large accounts. It's a great leverage point with lots of synergy. We see that dynamic just continuing actually to accelerate. So it all bodes well. We still have a little bit of lumpiness to things once we get beyond the backlog, but that certainly has been abating dramatically versus the last few years.

Understood. Is there any revenue concentration with any specific customer?

With specific customers?

Yeah, I'm just trying to see if there's any revenue concentration, you know, for you guys right now.

Yeah, you know, it's good news and bad news, Emmett, really. We have three or four customers that provide the majority of our revenue, and as they continue to convert their very, very large fleets, these are Fortune 50, Fortune 100 companies, It bodes well for just continuing orders each quarter out as far as you can think about as well. We are tracking our VP of sales is giving us updates on quite an impressive list of other customers that were working through stages of the sales cycle with them. And I'm really looking forward to that because I think the customer concentration, reduced customer concentration, will give us assurance in our financial forecasting and planning. I will say that of all these large customers, we haven't lost any, this is a relationship business. So we're very, very focused. very intent on ensuring that we build and strengthen the relationships of these companies because they have just ongoing, ongoing, ongoing needs for our PACs, and they are typically very influential in their sectors as well. Does that help?

Yes, thank you so much. That's all I have. I really appreciate your time. Thank you.

Okay. Thanks, Amit, for the question.

Thank you. Our next question is from Chip Moore with EF Hutton. Please go ahead.

Hi. Good evening. Thanks for taking the question. So, congrats first on the continued quarter momentum. Great to see. Was curious on the new multi-year LOI. It's very interesting. Great to see a large customer looking to lock off slots. I assume those units get priced as they commit, but maybe you can expand on the mechanics there and any sense of how big that opportunity could be.

Yeah, no, Chip, thanks for the question. Yeah, you know, I think it's really the first LOI of this sort that we've seen. You know, it really reflects this is starting to happen in the industry because the supply chain, when they commit forklifts, they've got to have the batteries. And these large companies want lithium. They don't want to have to go back and stick a lead-acid battery in a new forklift that's going to these very large fleets that want the performance. So the... It's very likely that's going to continue. So this LOI is locking in that space. It's one of our largest customers, and so it really reflects not an unusual event. We were pretty confident that the level of ordering that's happening was going to happen because we know the size of their fleets. We know their commitment to us. We believe the relationship is strong, although we have to perform each quarter, each month, believe me. There's no guarantees in any orders in this sector, in this business, in material handling, like a lot of other businesses I've been in as well. So you've got to perform, but it's not a huge surprise. I will say, just to give you an idea, I don't really want to quote the number because I It's not an order, but it covers two years, and each year is in the low eight-figure dollar level category.

And I think to add to your point, too, these are at higher pricing as well. This is not at the pricing we had a year ago. This is at increased pricing that we put in the FEC group.

Yeah, and it's also for... a couple of our product lines that have a higher margin already, so there's not as much risk. I think what we're moving to and we're seeing, by the way, this may go beyond your question, but it's related. I'll just mention that. We're starting to see signs of if you want a locked-in price, it's this price. If you want to share... in any risk to that, then it's a lower price. So the pricing in this inflationary environment is dependent on who's taking the risk on future prices. But on this particular one, we're pretty confident with the pricing.

Yeah, that's super helpful, Collar. Appreciate that and great to see. And I guess a follow-on to that, and you touched on the second line and the higher volume pack capacity, and I think the mix is favorable this quarter. But maybe back to the first question on just sort of near-term cadence, any thoughts on product mix the next few quarters, particularly as that capacity should be ramping up?

Yeah, yeah, you know, as Chuck said, you know, we're tracking just a very definite trend toward higher mix of the bigger packs. And for us, think of it simply as that class three of Waukee Pallet Jacks is the lower price, although there's a lot of them. and a few years ago that was the only thing we sold and then we of course built out the whole whole product line but the class one and two vehicles uh trucks that we have packs for we call it our m36 pack for class two and x series for class one those those are the bread and butter the lion's share of these big fleets is where all the action is in terms of revenue and margin So those two, and then the third one, that's central. It's like the big three, if you will, and what we're talking about, bigger packs are these larger packs for the airline, airport equipment, ground support equipment, the trucks that pull the baggage carts, cargo trucks, scissor lifts, and pushback tractors. Those are the larger packs as well, and we're seeing... quite a bit of revenue come in from there with our largest customer with that. We're now starting to see other airlines submit orders following their example. Those are the ones we're pushing. We also have another pack that's high kilowatt. We call it an X80 and it's for There's a lot of these larger forklifts that they're seeing. You know, now that lithium has really become economically attractive, just in terms of cost savings, they could take some of these larger forklifts that are even outdoor forklifts and migrate from diesel or propane to lithium and gain the advantage of the better environmental impact because lithium Really, honestly, all our customers, there's somebody there that has an environmental incentive.

One thing I would add is we're working towards margins is to keep in mind with this backlog now, we're not waiting for the supply chain to correct itself in some miraculous way. We're taking this backlog and it gives us the ability to do much larger purchase orders, do blanket purchase orders, do much larger commitments with vendors that really drives the price down, especially on the steel side. So, you know, that's a big advantage to having that out there that we can order stuff for six months out, which is, you know, it takes time to get into the chain, but it definitely helps a lot.

Yeah, yeah, absolutely. That's nice. And then maybe if I could sneak one last one in. Just, you know, you made a lot of, you highlighted sort of the focus on broadening reach, I think, several times, and whether it's warehouse robotics, you talked about the momentum in the ground support equipment channel. So maybe just more expansion there, and then if you could touch on, I think one of your customers acquired a storage play, just any thoughts on that? It sounded like maybe they were still facing purchase orders, so just curious there.

Yeah, you know, just talking about the adjacent verticals here, I think we've been negotiating with a customer of a division of a household name on robotics where their warehouse is a big provider of the robotics and that we expect to kick in the first part of next year. So, you know, it's just a natural extension here. we deal regularly with these customers that have the warehouses. There is a level of robotics and automation that's happening. Putting lithium in there is what they're all driving towards. So it provides a lot of synergy to us. It's a little bit of, you know, our strategy has always been to have a full product lineup because you go to these big customers and they don't want to have to go to five or six different companies to get their their lithium products. So it's a natural extension. I think there's a lot of synergy there. The other one I think you alluded to is Beam Global that has the mobile charging stations that are solar-powered, and we provide the backup. And we have a great relationship with them. I think it's going to be ongoing in some form or fashion. They're located about 45 minutes from us. However, they felt it was necessary to bring into their own organization a battery cell supplier. They had dealt with one before and brought that in-house. So we will gradually, their needs will gradually be turned over to them. But I think that's been helpful there could be some future other activity that comes with them number one number two it gives us experience in that sector which is a natural extension for us to provide lithium energy storage to applications like that the project we had in the past with high voltage autonomous shuttle vehicles so we continue to look at a number of alternatives for battery packs to come off our aid assembly lines that could be fit for that kind of usage. It helps us build scale. It's certainly a very key part of our strategy. So, yes, continuing to look at that, but also applying a business case to that. It's got to fit with our near-term strategy of getting to profitability in the very near future. And so it's got to fit with the business. But we say no to many more things than we say yes to. So as we grow and get positioned at profitability, positioned for even stronger growth, it's going to be very exciting for Flux Power.

Perfect. I appreciate the very thoughtful answer there. I'll hop back in queue. Thanks.

Thank you. Thank you.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time, so I would like to turn the call back over to Mr. for closing remarks.

Yeah, thanks, Peter. Thank you. I would like to thank each of you for joining our financial results conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please reach out to our investor relations firm, MZ Group. We'd be more than happy to assist. Thanks again. Bye-bye.

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