Flux Power Holdings, Inc.

Greetings and welcome to the FlexPower Holding 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 would now like to hand the call over to Shawn Stewart, Financial Planning and Analysis Manager. Shawn?

Your hosts today, Ron Dutt, Chief Executive Officer, and Chuck Shiley, Chief Financial Officer, will present results of operations for our second quarter of fiscal year 2023 and December 31st, 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 turn the call over to Flux Power Chief Executive Officer, Rhonda.

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 three, 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 23, revenues were $17.2 million, up 123% from $7.7 million in the prior year, marking our 18th consecutive quarter of year-over-year revenue growth. In the second quarter fiscal 23, 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 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 experience that 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 on a sustainable basis. For the second quarter, our customer order backlog increased from 26.9 million to to 30.4 million as of December 31st, 2022. Our strategic initiatives to improve sourcing actions, to mitigate part shortages, accelerate backlog conversion to shipments, and increase inventory turns have helped to mitigate backlog expansion. These initiatives are also increasing gross margin that would lead to profitability. New orders in Q2 23 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 continued 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 cell suppliers. We also leveraged increased sales volumes to resource steel and board components to lower cost regions and to higher volume suppliers. Recently, we expanded our in-house testing and product validation capabilities with all equipment needed on site to satisfy UL 2530 that's UL Underwriters Laboratory, and UN 38.3 compliance testing, which included an on-site vibration table being added to the other equipment and 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 achieving lower shipping costs as supply chain disruption eased, 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 31, 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. 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 UN 38.3 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 shift 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 23, 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 7, 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 11th of 2022. That included $4 million of signed committed credit availability. We recently announced an amended agreement to increase the 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 increased customer demand. The current availability on the SBB line, along with the $4 million of subordinated line of credit, provides the working capital needed to meet our goals. Our current 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 cost 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 life. We have taken actions to restore our gross margin improvement path. As highlighted on slide nine, 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 in restoring our gross margin trajectory. Our improvement initiatives include a number of actions that have begun to impact gross margins. Price increases on new orders. Increased pack 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 have 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 toward 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 FlexPower 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 are 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 Chuck Shiawe, our Chief Financial Officer, to review the financial results for the quarter ended December 31st, 2022. Chuck.

Thanks, Ron. Now, turning to review our financial results in the quarter ended December 31st, 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 to existing and new customers. Gross profit for the fiscal 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 admin expenses increased to 4.3 million in the fiscal second quarter of 2023, compared to $4 million in the fiscal second quarter of 2022. This is 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. compared to 2.1 million in the fiscal second quarter of 2022. And this was primarily due to lower staff-related expenses and timing of expenses related to development of our new products. You know, our adjusted EBITDA loss was 900K for the three months ended December 31st, 900,000. For December 31st of 2022, this was an improvement from the 4.7 million for the three months into December 31st, 2021. And it was 2.4 million for the six months into December 31st, 2022. That's a 71% improvement from an adjusted EBITDA loss of 8.5 million for the six months into December 31st 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 the 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 into 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 in cash, and we have our $14 million working capital line of credit from Silicon Valley Bank, as well as our $5 million credit facility, which there's $4 million assigned committed debt availability. These are both used as resources to manage working capital needs. We believe that our existing cash and additional funding available under our SBB credit facility and our subordinated LLC 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 improvement 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 to Ron to offer some closing remarks.

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 want the benefits of lithium ion technology can 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 shift build out, that's beginning, and lean manufacturing 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 cost, we are encouraged by strong purchase orders, improving backlog, and continued expansion of margins through improved sourcing and supply chain management, continual process improvement, and pricing. We continue to Execute actions to approve 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?

Thank you. We will now 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 yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, Laro Weepo, for questions. Our first question comes from Emmet Bell with HC Wainwright. Please go ahead.

Thank you. Good afternoon, everyone. So, Ron, 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?

You know, Amit, as you probably know, 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 flux at this stage. But I think we can give you the direction here that you probably figured it out yourself. You can see our trajectory on gross margin. That's continuing. We're executing to a very specific set of actions. They're going to get us profitability. We meet every week on this. There's a lot of opportunity on supply chain, design cost reductions, and other actions. As a growing, emerging company like we are, as we build volume, that really enables us to lower costs in all those areas I mentioned. So run that trajectory. And then look at the other trajectory on our revenue. And our revenue 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 of 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 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. You know, the forklift manufacturer, 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. you know, quarter to quarter. But we're very confident on the longer-term annual pace of our business and the customers. So run that line out, and you'll see that when you do that, it's in the very near future. You see the very impressive growth quarter over quarter, quarter over prior year increases in our margin. And, you know, getting to that break-even is a combination of continuing a 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.

Thank you for that, Ron. And then just, you know, in the press release, you highlight that a lot of business is still coming from existing customers. Is there sort of any risk of sort of saturation, reaching saturation with those customers, or is that runway still, you know, pretty strong for you?

Yeah, you know, 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 pencil that out quite a few quarters and years, and particularly as they convert all their facilities. And then you get into round two of another vintage year when those have to be replaced. And that's not to mention that the forklifts, particularly larger ones, the forklifts last longer than the batteries. So I think as the operations, we think... that we will start seeing more replacement of lead-acid batteries as the lead-acid batteries, which typically have a shorter life, need replacement. And once they see and get comfortable with the operating benefits and operating environment of the lithium, some of that will begin. So we see that continuing. And I'd say secondly, and probably as important as anything, just fly into LAX, New York, or any place. Look down and see the massive amounts of warehouses, and those are just all over the country. We're just beginning to scratch the surface here. The bankers tell us that maybe 7%, 8% penetration of lithium is the current status. of electric forklifts. Uh, and so there's a long way to go. We're just beginning this. We're just scratching the surface and it, and, uh, um, there's a lot of low hanging fruit. Um, but we have, you have to execute and, and that, and that's, that's what we're doing. So we believe our new customer outreach, outreach, uh, and acquisition, um, it's very promising. And, uh, The other key of that, any of those large customers, like investors, don't want to be the first one in a deal. Some of the customers we have, as shown on one of our slides, that's a great leverage point.

Thank you for that. Just one last one for me, Ron. In the last earnings call, you highlighted product opportunities in adjacent areas. Has there been any progress on that front or any revenues coming from new adjacent product opportunities?

You know, other than ground support equipment, which is really gaining lots of momentum, we have felt we needed to focus on our number one priority right now, which is growing that core business that we have. There's a lot of momentum, a lot of opportunity using existing sales channels, production processes. So we have focused on those. I think to expand the way we see we want to expand in the future, which is building scale. We've been saying this for eight years and being the – leading supplier to these Fortune 100 companies, we're going to have to build scale to do that. So to do that, we need to be profitable. We take capital to grow like that. We don't want to raise equity capital at this point for all the obvious reasons. The market is not attractive. And we feel that we're on a very positive track. We're excited about reaching profitability and then going into that next phase of growth, which will include a lot of these adjacencies that we've been looking at. We have been exploring. We did projects on 400-volt autonomous shuttle vehicles. We've done projects on solar backup. We have the technology. We have the capability. but growing scale in any of those sectors is going to take some capital commitment. So we're excited about that, real excited about that. But I hope that explains to you why we haven't been ringing the bell on adjacent revenue the past few quarters.

I appreciate that, Ron. That's all I have. I'll take my other questions offline. Thank you.

Our next question comes from Chip Moore with EF. Please go ahead.

Hey, thanks. Hey, Ron and Chuck. Congrats on the continued great growth and all the progress on profitability. I wanted to ask about the rollout of new designs. It sounds like you're shipping some new models out to OEMs now. I mean, just maybe give us a sense of when you might start to see some of that benefit the margins and how we should think about that rolling through the rest of the portfolio?

Yeah, no, good question. We're real excited about that. You know, we started doing this eight years ago, and we were just innovating, exploring, and being a first mover, we've been able to have a lot of experience, a lot of battle scars, what works, what doesn't, knowing our customers. There's just so much to learn. Like in every industry, on the inside, knowing the customer and what they want and the wide operating conditions. So we have leveraged those lessons. We've been shipping a new, we call it G80 pack, 80-volt, 200-amp-hour and 400-amp-hour versions, and shipping those. Those in particular have been going to the ground support equipment sector. They're very modular. A very impressive decrease in part count, serviceability, and the ability to produce. So that modular type, you know, where it's a little bit like Legos, you link the The battery cells together in modules and either parallel or series, a number of them to get, you know, to serve the whole spectrum of different power capabilities. So we've got, we're using that, those basic modules and technology to develop tax for, you know, for our full product lineup needs of material handling and ground support equipment. So we're working on those. Most of our packs, particularly all the material handling packs, we sell with the underwriters laboratory or UL listing, which certifies for durability and safety. We found a long time ago the large customers want that, and that gives us an advantage in those sectors. It also gives us an advantage. Our packs are durable and safe. And so we're in the process of each of those models, and typically in families, a model, we run them through that UL listing, which we're doing right now. And we'll get a big chunk of that done very soon. And then we need to have the forklift OEMs. review that from an engineering standpoint because it's going in their forklifts and it's all part of the customer experience for them and relationship with them so they want to be confident of what they have. So that takes some time too. So all this takes a little more time than just designing a pack and assembling it and shipping it. But what it does is It takes a little more time, but those aspects of it provide great or very convincing to the OEMs that are in customers that they can be comfortable with the products that we're putting out. So look for that during this year, over the course of this year, to get all those out. Just calendar.

Got it. That's helpful. And safe to assume that not having to outsource the UL listing process that speeds things up a bit?

Yeah, it does, because, you know, in the world of lithium, the underwriters' laboratories are being flooded with adding to tests to verify all kinds of different uses, configures of lithium from medical to you name it. And so we've noticed a slowdown in their response time. So our reaction was, well, We don't want to put up with that, and our answer was to, I mean, we've had a relationship with them since 2016, so we've done enough business, enough relationship. They trust us. They don't do this to anybody, but they will trust us based on our experience due to testing ourselves with their oversight, so we can do that. We can accelerate that very significantly. Perfect.

And another question, Ron, the two new Fortune 500 logos you talked about, is that incremental to, I think we talked about two wins last quarter. Is this in addition to that? First question.

Yes, yes, yes. We're pretty careful here to track new customers each quarter. You know, we tag our salespeople and incentivize them with this. And it's ones who we've shipped packs to that quarter, and we've secured the relationship with them to the point that we're confident it's a long-term relationship. We look at the size of their fleet and project that they're going to be a very large customer. So a small customer down the street, no, we don't count that kind of business. We're not even focused on that business. It's the ones that we get to that point in that quarter.

Perfect. And my follow-up there, Ron, is I think you talked about I think it was more than 95% of revenues coming from, you know, customers that have been around a while. How does that compare to backlog, particularly when we think about some of these, you know, new wins you've had in more recent times? Yeah, it –

The backlog really varies a lot. It varies from orders where the customer wants it delivered in six weeks or even less. In certain packs, we have a shorter lead time. To customers that are projecting out through the end of this calendar year. And the backlog, as a footnote, doesn't include letters of intent that we've received for large volumes in calendar year 2024 and 2025 who want to protect their place in the line and are some of our very large customers. To give you just a little more perspective on that, so we said our backlog is around 30 million. About a little less than 25% of that won't be shipped until July 1st through December 31st.

That's very helpful. Appreciate all the color. I'll take the rest of mine offline. Thanks.

Our next question comes from Matthew with Maxine Group. Please go ahead.

Hi. Thank you for taking my questions, and congrats on the strong quarter. I guess going back to the new large customer wins you announced this quarter, can you talk about, I guess, where those customers are in their adoption cycle of lithium ion and, you know, replacement of lead acid and, you know, highlight what, you know, how competitive was the the bidding process and what got you over the edge?

Okay, so if I understand the question is wanting to get some color on as we acquire these new customers. Sorry, my Apple Watch was trying to answer the question. New customers and some color on the acquisition of how that goes. particularly, for example, these two new customers we added to Discord? Is that the question I'm asking? I want to make sure I'm focusing.

Yeah, yeah, that's right.

So typically, our salespeople will collaborate with the OEM sales force of Toyota, Crown. They'll collaborate with major dealers, distributors, occasionally Goat. go direct and reach out to these customers or we've had customers reach out to us and say, Hey, we're interested in your packs, but, um, we'll, we'll, we'll want to demo a pack. And so our people work with them. Uh, what, what kind of pack is appropriate for what you want? They demo it. They, they, um, work with them some more to make sure they got the right power ratings. Um, and, uh, the right packs, and then they'll typically pilot some. And then they'll start ordering. And all of our target customers have many locations around the country, so they'll pick one location. And I say, all right, let's start putting lithium in that facility. And so that may be 10 or 50 or whatever. And they'll ship that. They'll get comfortable with how it works. The operating environment is a little bit different. We've got computers on backpacks. They need a whole giant room to charge lead-acid batteries. You don't need any of that but us. You've got to keep ours charged. The battery chargers might be a little different. So they get comfortable with all that, and the operators need to get comfortable with it. The warehouse people need to be comfortable. The finance and general management needs to be comfortable with it. And then once you reach that point, then our salespeople work with them to start planning their needs for the other facilities and what it begins to look like, when they're going to do it. You know, they have capital budget, expense budgets to deal with. So there's a fair amount of dependencies that drive the timing of that. And so it varies across company, but you can see – it's not like going out and buying a battery for your flashlight just to be absurd about it. So with these two customers, that was started quite some time ago. The good news is once they start down this road utilizing flux, this is a very sticky proposition unless we We have to perform. I mean, we could screw up and they could drop us and go with somebody else. But we haven't lost any customers. And it's very sticky. So anybody that's going to take business away probably has to do it from the standpoint either our service was terrible or our price was way, way too high. And we haven't been experiencing any of that. So there's a stickiness to it. So it can take longer. But once you get it, it's yours to lose, really. As a general statement, I'm simplifying somewhat, but that's actually what's been our experience.

Got it. That's a terrific caller. Appreciate it.

There are no further questions at this time. I would like to turn the floor back over to Mr. Dutt for closing comments. Please go ahead.

Thank you, operator. 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 question or address any of your questions, please reach out to our IR firm, MZ Group. who would be more than happy to assist you. Good day.

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