Flux Power Holdings, Inc.

Greetings and welcome to the Flux Power Holdings First 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 would now like to turn the conference over to Peter Gentile, Director of Product Development and Marketing. Peter?

Hello, everyone. Your hosts today, Ron Dutt, Chief Executive Officer, and Chuck Shiawee, Chief Financial Officer, will present results of operations for our first quarter of fiscal year 2023, ended September 30, 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, fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that the statements made on the following 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 of 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, Peter, and good afternoon, everyone. I'm pleased to welcome you to today's first quarter fiscal 2023 financial results conference call. Firstly, please note for a moment that on slide three, 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, supporting solar energy storage, port authority equipment, and other applications with new and clean technology. Now on to our Q1 results. Our first quarter reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders In Q1-23, revenues were $17.8 million, up 184% from $6.3 million in the prior year, marking our 17th consecutive quarter of year-over-year revenue growth. Sequentially, by quarter, revenues were up 17% from $15.2 million in the fourth quarter of fiscal 22. In the first quarter, fiscal 23, we received $9.7 million in customer purchase orders from existing and new Fortune 500 customers, reflecting the timing of deliveries with customer new forklift orders. To highlight the importance of building strong relationships with our existing customers, over 90% of revenue during the quarter was contributed from customers with whom we have long-term relationships. Our strategic focus is on relationship business with an emphasis on price, service, and quality and meeting ongoing new purchase needs and service requirements. We believe business from our installed base will help drive new customers to our technology. And developing our technology internally also ensures our customers have the most up-to-date products and services. For the first quarter, our customer order backlog decreased from 35 million to 26.9 million as of September 30th and was helped by ongoing efforts to fulfill timely shipment of our orders and improvement in sourcing actions to mitigate part shortages we've experienced. This bodes well for increased confidence in future supplier performance. Our strategic initiatives, including accelerating backlog conversion of orders to shipments, and also our increased inventory turns reflect recovery actions from the supply chain disruption. These initiatives are also increasing gross margins that will lead to profitability. New orders for Q123 decreased 17% to 9.7 compared to 11.6 million in Q422 due to the lumpiness from timing of deliveries of customer new forklift orders, although not reflecting slowing of customer demand. We were pleased to see that our supply chain disruptions continued to abate during the first 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 first 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 in-house automated cell module production to manage module skills and accommodate secondary cell suppliers. We also leveraged increased sales volumes to resource steel and board components to low-cost regions and higher volume suppliers. During the September ending quarter, we began achieving lower shipping costs as carriers became more competitive. And we are utilizing lower costs, more reliable, and secondary suppliers of key components that meet required specs. Although our supply chain disruptions have improved, we've increased our inventory of raw materials and component parts to 18.9 million as of September 30th. In order to mitigate supply chain disruptions that we do have and support timely deliveries, our inventory turns during the quarter increased from 3.4 turns to 3.6 turns as improved manufacturing capacity and production processes, including progress implementing lean manufacturing, helped increase throughput, reducing the time to fulfill customer orders. We have introduced new product designs based on the new modular platform for our battery packs to address customer needs. Some of the improvements include higher capacities for more demanding shifts, easier servicing, lower total cost of ownership, and other features to solve a variety of existing performance challenges of diverse customer operations. At the same time, Our new designs provide margin enhancement, part commonality, and improve serviceability. We're now building the first few models of our new platform and scheduling UL listing, also forklift OEM approvals, and UN 38.3 certification. The quarter also saw the development of an in-house vibration table and temperature control unit for battery testing enable lower cost and expedited UL and UN 38.3 testing. While supply chain disruption is abating, although challenging, our profitability improvement initiatives have shown positive results and continue to improve margin of ship packs. Our rate of cash burn fell again this quarter and decreased 87% compared to the quarter a year ago. This is helped by higher revenue, design cost actions to lower material costs and assembly, and other improvements in gross margins. Improved production processes, including progress implementing lean manufacturing, as mentioned previously, have resulted in increased efficiency and inventory turns. 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 are executing our specific supply chain and cost reduction initiatives to continue this momentum. We implemented a $5 million line of credit facility on May 11th, 2022, that included $4 million of signed committed credit availability. As of November 7th, our availability, our available working capital facility was supported by a third amendment just filed today. specifically continuing our $8 million revolving line of credit with Silicon Valley Bank. Current availability of the SVB line is $1.4 million, along with the $4.1 million subordinated line of credit, which is unused. They both provide total cash availability of $5.4 million. Our current potential pipeline of customers continue 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 of multiple sectors, all of whom are seeking lower cost and yet higher performance lithium-ion battery packs. Our experience has been receiving orders to install our packs on new forklift deliveries. And we anticipate a more meaningful trend of orders to replace lead acid batteries at the end of life as customers expand demand for lithium ion packs. We have taken actions to restore our gross margin improvement path. As highlighted on slide nine, Our gross margin improves sequentially to 22% in the first quarter of 2023 from 20% in the fourth quarter of fiscal 22 and 15% from the third quarter of 2022. All reflecting progress and restoring our gross margin trajectory as shown on slide 9. Our improvement initiatives include a number of actions that have begun to impact gross margin. Price increases on new orders flowing through, increased pack volumes, more competitive shipping costs, lower material costs, more reliability, and secondary suppliers of key components. Improved manufacturing capacity and production processes as well. 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 have improved, as mentioned earlier, we have also achieved production process improvements and better supply chain management. During the quarter, inventory increased to 18.9 from 16.3 at June 30th to mitigate supply chain disruptions and support time deliveries, as I mentioned previously. And inventory turns, as mentioned as well, have continued to improve from 3.4 to 6 point to 3 point from 3.4 to 3.6 turns during the quarter, reflecting the sourcing and production improvements I have highlighted. 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, delivers battery-packed data to optimize performance and customer fleet tracking. I'm happy to report that customer feedback remains very positive with FluxPower as a leader of the technology for these applications. Looking beyond reaching profitability and building on our success in the material handling industry, we're focused on broadening our reach into related verticals, such as robotics, which leverage our infrastructure. With our operational strategy, including our six assembly lines we are well positioned to continue to leverage our capabilities as the adoption of lithium energy solutions just continues to accelerate with that i will turn it over to chuck shywe our chief financial officer to review the financial results for the quarter ended september 30 2022 chuck yeah thanks ron

Now turning to review our financial results in the quarter ending September 30th. As Ron mentioned, revenue for the fiscal first quarter of 2023 increased by 184% to $17.8 million compared to $6.3 million in the fiscal first quarter of 2022. This was driven by increased sales volumes and models with higher selling prices. Gross profit for the first fiscal quarter of 2023 increased to $3.9 million compared to a gross profit of $1.3 million in the fiscal first quarter of 2022. Gross margin was 22% in the fiscal first quarter of 2023 as compared to 21% in the fiscal first quarter of 2022. This, again, is reflecting higher volume of units sold and higher gross margins. Selling and administrative expenses increased to $4.5 million in the fiscal first quarter of 23 from $3.5 million in the fiscal first quarter of 22. This was reflecting increases in outbound shipping costs, there are certain personnel expenses, temporary labor, and an increase in insurance premiums. Research and development expenses decreased to $1.2 million in the fiscal first quarter of 23 compared to $2 million in the fiscal first quarter of 22. This is primarily due to timing of expenses related to our development and testing of new products. Adjusted EBITDA loss was $1.5 million for the fiscal first quarter of 23, an improvement from an adjusted EBITDA loss of $3.8 million for the fiscal first quarter of 22. This is an improvement of 61%. Net loss for the fiscal first quarter of 23 decreased to $2.1 million from a net loss of $4.1 million in the fiscal first quarter of 22. This is principally reflecting the gross margin profit from higher revenue and partly offset by increases in operating expenses and interest expense. The cash used in operations in fiscal 23, the first quarter, declined by 87% compared to Q1 a year ago. We ended the fiscal quarter of 23 with $300,000 in cash and have our $8 million working capital line of credit from Silicon Valley Bank, of which $1.4 million is currently available, and our $5 million LOC facility, of which there is $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 the credit facility from SVB and our subordinated LLC will be sufficient to meet our anticipated capital resources to fund plan operations for the next 12 months. We fully intend to avoid raising equity capital prior to reaching profitability. We are on track executing to our gross margin improvement and our cost control initiatives. We're also exploring increases to our working capital availability. Now I'd like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. As Chuck mentioned, I want to reemphasize we fully intend to avoid raising equity capital prior to reaching profitability, and profitability is currently our top priority. Looking ahead, we believe the combination of existing customer orders and acquisition of new customers who want the benefits of lithium-ion technology business can drive continued revenue growth. Price, service, and quality are key factors as to why we continue to win business and ensure our goal to continue our growth trajectory. Our current production facility should support annual revenue well beyond $100 million, given our facility footprint, our second-shift build-out, and lean manufacturing implementation. In summary, we are well-positioned to execute our strategy of electrifying commerce as we create long-term value for our shareholders. We are encouraged by strong purchase orders. improving backlog, continued expansion of margins through improved sourcing and supply chain management, continual process improvement, and pricing. We continue to execute actions to improve adjusted EBITDA as shown on slide seven, 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 a lower product lifecycle cost. I look forward to providing shareholders with further updates in the near term as we continue to leverage our leadership position in lithium ion technology solutions and 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? Brendan?

Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 2. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question comes from Chip Moore with EF Hutton.

Thanks. Good evening. Hey, Ron, Chuck. Thanks for taking the question.

Congrats on very strong growth. Ron, on your comments on demand not slowing, you know, given the macro and just the order flow in the quarter, maybe you can expand on some of that lumpiness, you know, quarter to quarter on order flow. And then I think last quarter you talked about a Fortune 100 customer, LOI. Any material orders in the backlog there yet? And how do we think about order flow there? And then, of course, the two new Fortune 500 customers you've

Yeah, yeah, thanks, Chip. Thanks for the question. That's a good question. Yeah, we did mention lumpiness. You know, we've had a lot in the past. It's smoothing out somewhat in the past year or so, but it does happen. All of our orders, or virtually all of our orders, are tied to deliveries of forklifts, new forklifts. They put our facts on these new forklifts. And the timing of that has been very, very lumpy, and that's one of the principal things driving this. And, you know, we, like everybody else with the supply chain disruption, are dealing with that, trying to support it without inventory going through the roof. So that is happening. You mentioned the LOI. We mentioned an LOI. One of our largest customers gave us letters of intent for 23 and 24 so they could reserve position because they know that Uh, lead times for everything, forklifts, everything else you can think of is a lot longer. Um, and, uh, they want to get their place in line to ensure when they get, when they do get the delivery of, uh, forklifts, they have battery packs, uh, to put on them. So that's very understandable. I mean, it's always in the context of, um, our, our primary exposure here is material handling and airport ground support equipment. And, uh, particularly material handling, there's a constant need for batteries because the forklifts last only so long. The batteries, they need new batteries for the new forklifts. And all because I talked about electrifying commerce. Well, all these goods in the country still have to move. And, you know, unless we enter the Great Depression again, where it will be more of a dip, I don't want to say for a recession that we can avoid a recession in this business. But these sectors are recession-resistant, we think. And we read a lot about that. So I think we need to put that in the context of this demand. The other context... is that the adoption of lithium with these large fleets, particularly with multiple shifts, is in great demand. We can't deliver packs fast enough. And bringing on new customers, again, that puts added stress. Now, the other context here is we are very determined to reach the profitability. We've got a game plan forecast, very detailed initiatives. And, you know, he talked a lot about here today to do that in the very near future. And that will position us well for our next phase of our growth, which is really exploiting this rapidly growing demand for lithium around the country and providing that because we spent a lot of time and money building infrastructure to do that. So kind of a long-winded answer, but there you go, Chip.

Yeah, that was great, Ron. I mean, yeah, so if I summarize sort of orderly, you could see some buffiness, but medium term, your visibility is getting much better is what I take away. Okay. And so, and then to your point on sort of, I know profitability is the focus, but in terms of expanding into new markets, you mentioned robotics, just Any updates on what we would take there? I think you also talked about maybe being able to get some more working capital availability. Would that be part of it? And then just existing sort of adjacent markets, you know, ground support equipment and things like that. Any update there? Thanks, guys.

Yeah. Yeah. No, good question. You know, we're in the warehouse of all these large companies. I mean, you saw our customer list. They got warehouses all over the country, high demand, typically high at least two, usually three shift operations. They need the performance to achieve their performance and cost goals. And I think they're finding lithium is a great answer. Now, as we expand, you know, our assembly lines I mentioned, we are working with a customer to deliver packs for warehouse robotics. and that is really gaining a lot of traction out there. So, being in the warehouse already, it's kind of a natural. You know, I always talk about product adjacencies. Well, this is very much a product adjacency that can utilize our assembly lines. Our new products are very modular. So, you know, I don't want to say it's as easy as Legos, but That's a picture that comes to mind doing that. There are other adjacent markets that we sent projects on, which include autonomous vehicle shuttle vehicles, solar storage, and solar backup. And the other area that's really beginning to get traction now, as people are even more hungry for lithium, it's the heavy-duty applications. There's big forklifts that typically operate outside, and require more power, and specifically we're finding the ones that require 80 volts, which is the next layer up, are interested in heavy-duty forklifts, and we have the 80-volt packs to go with them. And we've had a lot of experience because all of our airport ground support equipment are 80 volts. So that now is really starting to develop. It's really encouraging. It certainly plays to our sweet spot of offering the kind of energy and power that our battery management system and our mechanicals support.

Interesting, yeah, and higher margin too, right? Okay, I'll take the rest of mine offline, but congratulations, Kim.

Yeah, you know, it's like cars. Chip, the bigger cars, the SUVs, the luxury cars have higher margins. It's, you know, it's the same. It's a very similar case here. So, no, we're very keen on it. People are saying, look, lithium, you know, lithium technology and costs are all becoming more favorable. These big companies see it, and they don't like the disadvantage of lead acid, and we can provide that. the energy solution for that. So I think that's an exciting area of growth that we've been seeing this past year particularly.

All right. Thanks again. Thanks, Jeff.

Thank you. As a reminder, if you wish to ask a question, please press star 1. Our next question comes from Ahmed Dayal with HC Wingrate.

Hi, guys. Thank you for taking my questions. You know, just to begin with, you know, Ron, the two new customers, which industry are these guys from? Is it material handling or something else?

One is the fifth largest can manufacturer in the world for beverages, so various types of cans and bottles. And one is... I guess retail. Yeah.

Consumer products. Consumer products. So it really fits into, you know, our customer slide there with the categories of the different sectors. So we're finding, yes, these two fit in those categories. But our salespeople are working on a number of other companies. You know, the long lead takes a while. And we're finding – potential customers that we're working on in all those categories.

Understood. Thank you. Thank you for that. I know you're talking about product adjacency and new opportunities coming up, but we're also seeing sort of the R&D spending has gone down. I'm just trying to make sense of how much more mileage you can get from the existing portfolio and you know, with your ambitions to move into sort of other offerings and applications, you know, how we should think about R&D spend going forward?

Yeah, yeah. No, the R&D is an interesting area. We have, I think most importantly, you know, we've been doing this for eight years and we've learned a lot and we're into another generation of PACs that really brings, you know, better features for the customers and lower costs. However, at the same time, even the industries we're in, there are just continuing to be a number of opportunities to expand offerings, maybe fill in some gaps. I mean, there's something like 400 different types of forklifts. So fill in some of those gaps. There's a few gaps to fill in as well. And the timing of our R&D, we don't see R&D expense declining over time. We can have a little, again, I hate to use the word lumpiness, but a lot of it's written by, well, how much are we testing? How much do we have? Some expensive product development costs in a quarter versus another quarter. And... As we plan to grow, you know, you go back to our strategy, and it's to be a leader. To be a leader, we do need to be a built scale. We're billing it. We have first mover positioning and growing as fast or faster than anybody I know in this sector, and we want to continue to do that. To continue to service those customers on that slide, those are Fortune 500 customers with with hundreds of thousands of packs. And we have to be able to provide to address all their needs, from cost to service, serviceability, ease of doing business, and on and on to telemetry and so forth. And our strategy to do that is to grow in sensible factors that satisfy our business cases, that hopefully leverage the infrastructure we have channels to market, and as we grow beyond that, we will do that at the pace that we can be successful. The demand is there. You know, we've had more requests to go into this and that, whether it's golf carts, you name it, hockey arena equipment, Zambonis, you could go on and on. And our challenge, and given the experience, is to choose those that are going to make sense, leveraging the resources we have and building that scale. Chuck, do you have anything to add on the R&D expense? Because it's a good question there.

Yeah, no, great question. You know, as we mentioned in the script here, we brought in-house a vibration table and a freezer and some of the equipment we would In the past, we would ship our packs out to Southwest Research, mainly down in San Antonio, to do testing. And it's very expensive. You're shipping a number of packs. It's expensive to do it. We brought that in-house. So some of the R&D expense we had in the past is going to go away long-term by doing that in-house. And we're also speeding it up and expediting it for UL, UN certifications. And this equipment, we've brought it in, financed it, and it's within six months you're paying for it. It's a very quick payoff on some of this stuff. So that's going to be a long-term lowering of R&D expense to some degree.

Understood. Well, that's helpful. Thank you, guys. And just one last one, and I apologize if you've already addressed it. Backlog was lower at the end of this quarter. How should we think about order activity and you know, maybe backlog building up again going forward?

You know, I think, uh, uh, the backlog is one of those things we see surge. I mean, we, we know some more and more orders coming in. So whenever you, whenever you take a mark to market, if you own backlog, it, it, it, it does move around. Um, we are, have been very focused on, on our full fiscal year. Uh, and, uh, uh, have some of the benefit of having quite a, you know, pretty large backlog. So we know we have much higher confidence of, uh, what we have, what's expected, what we have to deliver and, and we can coordinate the efforts of salespeople and the production scheme and mix to, uh, adjust so that we can hit our, our, our budgeted goals for the year. And, uh, We have a good degree of confidence of that. Of course, we're in a very volatile period in terms of the market. But at the same time, we work very closely with those very large customers. And in terms of their forecasting of what they need, we may not get the order. So you look at the backlog or you go, oh, God, you guys are going to get the orders. That's an indicator, but it does not tell the whole story. They get the forklifts first, and then they put the battery orders to us. So we do have those letters of intent out there, but we are working with the key people at both those in-customers and in some cases the national account salespeople to to identify and flag the needs for many months out. So it's not like because there's no – the back order does not show the whole story of all the anticipated orders to come. And it's in the context of our relationship with those customers on that slide is the relationship. So they've chosen us not to bid every time they need an order in a month, and see who wins the bid, but an ongoing, as we perform, our ongoing ability to meet those needs. Does that help?

Yes, yes. Thank you, Rob. I'll take my other questions off right now. Appreciate it. Thank you so much.

Okay. Thanks, Amit. Talk later.

Thank you. Our next question comes from Matthew Galenko with Maxim.

Hey, good afternoon and congrats on the solid quarter. I guess apologies if you touched on this. I don't think you did, but with respect to the inventory build, what specifically are you concerned with enough that you're building additional inventory in? What sorts of components are Do you see it's risky that you need to, you know, stockpile?

You know, the latest stuff we're seeing is contactors, fuses. We've got some parts that we've, you know, used for a lot of electronic type stuff is still there. We're still tight on boards, wanting to get ahead on boards, and a lot of it is still chasing down little components to make the boards. So those are the ones that we're most concerned about right now. you know, it's, it's cells are doing fine. We're getting cells at a timely pace and doing well with that. Steel's coming down in pricing. We're not pushing, trying to get ahead of that. We're kind of playing that even to take advantage of lower prices as it comes down. But it's mainly those electronic parts. Yeah. It's, you know, a lot of the stuff you hear 52 weeks out and you get nervous and you say, well, we'll just buy what we can get and get it in the door.

Yeah, that's great. And then I guess on the SG&A line, kind of a high watermark. I think we were running around $4 million through most of fiscal 22. I think it was about $4.5 million in 1Q here. Anything unusual in the corridor or... Is that sort of the run rate we should be thinking about for this fiscal year?

I think that is the runway to be thinking about. The stuff that's happened recently is more based on significant increases in insurance premiums for DNO and property is really hitting everybody from talking with the insurance brokers. We're very comfortable with the personnel in hand. We're not adding bodies. We're going to continue as is, and I think that's a very good place to be. The only difference, there was some internal allocations between a few bodies as we reorganized one department, so some expense got moved to G&A from mainly RD. So there's been a little bit of that, but, you know, that should be a good runway going forward.

Great. Thank you.

Thank you. Ladies and gentlemen, this concludes today's question and answer session. I would now like to turn the call back over to Mr. Dutt for his closing remarks.

Thank you. I would like to thank each of you on the call 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 IR firm, MZ Group, who would be more than happy to assist. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.