Flux Power Holdings, Inc.

Greetings and welcome to the Flux Power Holdings first quarter fiscal year 2024 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 Maria Rico, Marketing Manager. Maria?

Your hosts today, Ron Dutt, Chief Executive Officer, and Chuck Shiley, Chief Financial Officer, will present results of operations for the fiscal first quarter ended September 30, 2023. A press release detailing these results crossed the wires this afternoon at 4.01 p.m. Eastern Time and is available in the Investor Relations section of our company's website, 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, 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, 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 Dutch.

Ron Dutch Thank you, Maria, and good afternoon, everyone. I'm pleased to welcome you to today's fiscal first quarter 2024 financial results conference call. Firstly, please note on slide three, if you're following the deck, for those of you new to our story, here's a short reminder of what we do in electrifying commerce. We are powering material handling, airport ground support, solar energy storage, port authority equipment, and other applications. with new and clean technology. Our products and services are focused on the growing demand from large nationwide fleets that are pursuing a better return on investment and a positive environmental impact compared to lead-acid batteries. We are the leading lithium-ion supplier providing full service to the nationwide large fleets who require the best both now and with future deliveries in product, technology, service, and ease of doing business. Our reputation and brand are critical as we target household names, which I'll point out shortly. We must have a strong reputation and solid track record to reliably satisfy these large fleets that have hundreds of facilities and need their batteries for new equipment or existing equipment delivered on time without difficulty. Fortune 100 companies demand suppliers that are transparent, experienced, and accountable as they transition their fleets to new and clean technologies which puts us in a very strong position in the electrification market. And we have a trend of, on average, adding two large new customers per quarter and without losing any of our installed base customers. Now, on to our first quarter results. Our business priority this past fiscal year focused on progress to cash flow breakeven. while continuing to capture increasing demand for lithium-ion batteries. During the first quarter of fiscal 2024, and including this past October, we remained encouraged by the underlying growth during the entire year, past year, of our products and also by the momentum toward cash flow, break-even, and profitability. Revenue for the first quarter of 2024 decreased 17% to $14.8 million compared to $17.8 million in the first fiscal quarter of 2023. Due to fewer units of lithium-ion packs sold during the current quarter as a result of ongoing shipment deferrals related to oak OEM forklift delivery delays, along with some seasonal reduction in orders. We continued to improve gross profit, which increased 9 percent to $4.3 million, compared to a gross profit of $3.9 million in the first fiscal quarter of 2023. Gross margin improvement initiatives contributed to a 700 basis point increase in the first quarter to 29% up from 22% in the prior year quarter. This very notable increase reflects the operational efficiencies we have been achieving in sourcing, design costs, lean manufacturing, and improved pricing. Adjusted EBITDA loss improved to 1.2 million in the fiscal first quarter of 2024, as compared to a loss of $1.5 million in the fiscal first quarter of 2023, driven by the improved gross margins and holding operating expenses in check. For the first quarter, our customer order backlog declined from $28.5 million at June 30 to $21.8 million as of September 30, 2023. reflecting timing delays in receiving purchase orders. As of November 2nd, though, backlog had increased to 31 million, reflecting continued and expanded ordering from the airport GSE market and some additional pickup in forklift delivery timing. We've made progress on a number of our growth initiatives that will have near-term and long-term impacts. Our new series of heavy-duty models will be added to most of our product segments, and along with a new OEM private label program, will both address strong market demand and launch beginning in early 2024 calendar year. And our automated assembly of cell modules is tracking similarly in timing. We plan to launch the industry's first integrated telematics fleet-wide program with a Fortune 100 customer later in 2024 calendar year. We believe that our leadership in telematics will serve as a continuing platform to introduce new features for operating performance and asset management that are highly desired by our customers. Also, we're exploring with partners opportunities on fast charging technology and internal international sales opportunities. We're highly focused on achieving cash flow breakeven during this fiscal year 2024. Key drivers of the improvement include gross margin expansion and supported by steady operating leverage from slow growth of operating expense over the year. Our cost and price initiatives mentioned earlier contributed to gross margin improvements to 29 percent in Q1-24 compared to 27 percent in Q4-23. Also, our inventory balances have been stable, reflecting higher inventory turns from improved operational processes and lean manufacturing implementation. Taken together for those two, we are executing operational efficiencies on our strategy for cash flow break-even and sustained profitability as we continue to drive expansion of our product lineup and service networks. And we estimate our manufacturing capacity in our current facility could support a doubling of our current annual revenue. In the long term, our strategy revolves around building scale to sell our products to large fleets, building on our momentum in revenue, gross margin, and operating leverage. Concurrently, Currently, we are growing organically within our capital resources, but have begun to explore and develop strategies, including those already mentioned, to build partnerships that can leverage revenue growth, technology, and profitability, and achieve our goal, building scale to meet the needs of our top-tier customers. 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 and momentum toward breakeven. That decline in Q1 24 is directly attributed to the quarterly revenue decline tied to seasonality historically in that quarter. and along with shipment deferrals. We believe our historical trajectory to profitability is continuing, given our installed base of customers and consistent acquisition of new customers. Additional enablers include expansion of high demand models and continued operational and volume related supply chain cost reductions. Our current and potential pipeline of customers continues to expand with two new customers this past quarter and six new customers total in the calendar year 2023 year to date. Our full product line caters to large fleets who seek an ongoing relationship partnership to meet current and future needs. not just one-time transactional purchases. These customers represent well-known household names, having large fleets who require high-performing suppliers. While the forklift growth rate has historically been single-digit, the adoption of lithium-ion reflects a double-digit rate. Goods and materials need to be transported in all economic conditions, and this speaks nothing of opportunities in adjacent product sectors. The trajectories of our revenue and gross margin on slide nine speak for themselves. We have taken actions to restore our gross margin trajectory that was interrupted by the pandemic, but our highest priority now of achieving sustained profitability this fiscal year. Our ongoing improvement initiatives include a number of actions, that are now impacting gross margin. They are price increases to offset commodity increases, increased pack volumes, more competitive shipping costs, lower costs, more reliable and secondary suppliers of key components, expanded manufacturing capacity and production processes, and transition of product lines to a new modular platform which has more efficient design for both assembly and service. All these initiatives are part of our plan to accelerate gross margins as our target is to reach 40% gross margin. Slide 10 highlights our backlog and inventory level trends which are reflecting a more predictable pattern in recent periods. especially compared to the strong upward revenue trend of our revenue and gross margin mentioned earlier. As of November 2nd, our backlog increased to 31 million, as I mentioned, with two new customers contributing to this increase. Our run rate of backlog does vary at any point in time, but as a pattern, running ranging from 20 million to 38 million, depending on timing of orders. Beyond our backlog of open orders, we're working on a pipeline of high probability orders of well over 100 million, which does stretch beyond the current fiscal year ending June 30th. We monitor the multi-billion addressable market material handling market for economic trends, new entrants, and customer demand trends. And we believe this market to provide a very positive growth environment with a strong, stable undercurrent, especially given the recognized double digit growth of lithium ion solutions in the sector. Our strategic initiatives also include sourcing actions to mitigate part shortages, accelerating backlog conversion to shipments, and increasing inventory returns. With that, I will turn it over to Chuck Shiawe, our Chief Financial Officer, to review the financial results for the quarter ended September 30, 2023. Chuck. Thanks, Ron.

Now turning to review our financial results in the quarter ended September 30th, 2023. As Ron mentioned, revenue for the fiscal first quarter of 2024 decreased by 17% to 14.8 million compared to 17.8 million in the fiscal first quarter of 2023. This is due to fewer units of storage packs sold during the current quarter, And this was the result of ongoing deferrals related to OEM forklift timing delays and some seasonal reduction with certain customers. Gross profit for fiscal Q1 of 2024 increased to 4.3 million compared to a gross profit of 3.9 million in fiscal Q1 of 2023. Gross margin was 29% in fiscal Q1 of 2024, as compared to 22% in fiscal Q1 of 2023. This is reflecting greater gross profit and lower cost of sales as a result of the gross margin improvement initiatives that will help us achieve profitability. This was also partially offset by lower number of units sold. Selling and administrative expenses were at 4.7 million in fiscal Q1 of 2024. up slightly from 4.5 million in the previous year quarter, and this is showing the contributions to operating leverage we see. Research and development expenses increased slightly to 1.3 million in fiscal Q1 of 2024, compared to 1.2 million in fiscal Q1 of 2023, and this was primarily due to staff-related expenses. Adjusted EBITDA loss improved to $1.2 million in fiscal Q1 of 2024 from $1.5 million in fiscal Q1 of 2023. And as we talked, this was mostly driven by the improved gross margins we're seeing. Our continued initiatives, business growth, and operating leverage all contribute to drive this trajectory. Net loss for fiscal Q1 of 2024 was 2.1 million. Very similar to a net loss of 2.1 million in the fiscal Q1 of 2023. The nominal improvement was principally reflected increased gross profit offset by increased operating expenses and interest expense. Cash on the balance sheet was 1.1 million at September 30, 2023. as compared to 2.4 million at June 30th of 2023. Please note that the cash balance will vary depending on timing of payables, receivables, and our borrowing on the working capital line. Net cash used in operating activities increased to 3.1 million for the three months ended September 30, 2023, compared to 600,000 for the three months ended September 30, 2022, And this is primarily due to growing the business, the timing of receivables, and other working capital timing. We recently announced a new $15 million credit facility from Gibraltar Business Capital. This is to fund working capital and to refinance our existing credit facility with Silicon Valley Bank. This facility is intended to help meet our anticipated working capital needs to fund plan operations to meet the demands of our growth trajectory for the foreseeable future. The facility is structured to expand to $20 million if needed for additional growth. Our available funds include our line of credit as of November 2, 2023, under the $15 million credit facility from Gibraltar Business Capital, as a remaining available balance of $2.9 million, and that has the additional $5 million if needed under the expandable provision. We also have the $2 million available under the new subordinated line of credit. I'd now like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. Looking at the positive momentum of our existing customer base and new customer acquisitions, we're confident that we're on a strong trajectory toward reaching sustainable profitability during this current fiscal year. Our steady ongoing gross margin improvement reflects our goal to reach 40% gross margin, leveraging our cost, operational, and pricing initiatives. Our long-term plans include to focus on the strong demand of the market for sustainable energy, especially in our industrial sector, where there's no reliance on incentives but only on ROI, We believe the combination of existing customer orders and the acquisition of new customers who want the benefits of lithium ion technology can drive continued revenue growth. We're seeing strong progress with our growth strategy, including the introduction of new heavy-duty models to be launched in 2024, a new private label program to be launched with a major forklift OEM. and a potential partnership on fast-charging proprietary technology, along with the automation of battery cells into modules. Partnering with a Fortune 100 company on the industry's first telematics integration for an entire fleet. And lastly, developing partnerships for international sales channels. And our current... Production facilities should support annual revenues up to $150 million, given our facility footprint, second shift build-out, and full lean manufacturing implementation. As I mentioned previously, we announced recently an improved capital structure that includes a working capital line of credit of $15 million with Gibraltar Business Capital to support current and planned growth. with provisions to increase to $20 million, and a new $2 million subordinated credit facility with Cleveland Capital with an extended maturity to August 15, 2025. In summary, we are well positioned to execute our strategy of electrifying commerce as we offer customers deep experience as first movers in this sector and validation by Fortune 100 customers to entrust their migration to lithium solutions to us. I look forward to providing our shareholders with further updates in the near future as we strengthen our leadership position in lithium ion technology solutions with our growing list of new and diverse large customers. I thank all of you for attending, and now I'd like to hand 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 cell will indicate that 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 star key. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Good afternoon. Hi, Rob. Hi, Rob. I just want to talk a little bit about the orders. It sounds like the run rate picked up after quarter end. How is that kind of looking going into the next quarter here, and what's sort of the dynamics in the market at this point?

You know, the shorter answer is it looks good. You can see some of the lumpiness. I mean, in the Q1 and most quarters, except for last year, was always a slow season due to some of our bigger customers who are busy in the summer with their operations and not ordering or installing new equipment or thinking about new orders. So, you know, we do experience that. We're seeing discontinued underlying demand in the market. There are two model lines that have some extended forklifts that have extended timing that has caused some of these delays for us, for our competitors, and for the OEMs, frankly. But We see that's more than offset by the growing demand that we have, and then the near-term initiatives we have in terms of new product lines that we couldn't offer before are going to start impacting this in the spring as we precede them.

Great. Thank you. And then could you elaborate on the new private label program? Kind of what, who's that, you know, how's that working and how's it incremental to what you've been doing?

Yeah, sure. No, you know, we've had one private label program in place for, you know, a number of years, the top five OEM, and it's proven to be very successful. It's in that class three space that Those forklifts are the smaller forklifts, a lower price. But that Class III space, the equipment, which is called a walkie-pally jack, but they're the most numerous by unit volume of any of the product lines, number one. So they're lower priced, but there's a lot of them. Number two, these large Fortune 500 fleets we go after that have tens and hundreds of offices across the country, most of them use these. And these large fleets like to buy packs from a variety of product line models. So the private label one is one for in that smaller class. It's viewed a little differently than the large forklifts. And we're seeing that a private label where the OEM is out there selling and distributing it through their equipment dealerships across the country is an effective way to go to market with that particular line. And it also, as with car dealers, they'll sell the small cars, but the customers come in and buy the SUVs and large cars as well. there's a little bit of that going on as well. So it's a way to efficiently cover the market, help us build scale.

Yeah, Robin, I'll add to Ron's comment that that product in the white label we currently have that's been there for quite a while is very predictable in terms of month-by-month ordering, which is really nice for us. It's something, one of the areas we can latch onto is very consistent ordering quarter-to-quarter, which is great.

Great, thanks for the color. I'll turn it over.

Thanks, Rob.

Thank you. Our next question comes from the line of Matthew Galenko with Maxim Group. Please proceed with your question.

Hey, thanks for taking my questions. Ron, I think you might have mentioned two new customers in the quarter. Did I understand that correctly?

Yes, yes, you did. We've got actually a few more than that. We try to, when we talk about this, you know, our target market are very large customers that have many locations across the country. And the other – there's a couple elements to this. Even the larger customers will start out with one or two locations and then feed their other locations to the point that – We now have a couple of our largest customers, which are household names, at the point where they're comfortable to completely migrate their entire fleet to lithium. So we're always glad to bring on new customers. Our customers typically resist us and anybody else in the industry mentioning their names. But if you look at our customers, We track, Chuck's got a list in front of me of what we've done this past year and into this quarter. And there's quite a few names, more than the two per quarter. But we do that to really message this impact that they have. And they come from all different parts of the country as well and different sectors. So does that help you, Matt?

It does. That's terrific. I guess my follow-up is on the fast charging partnership that you referenced. Is that coming from demand from existing customers, or is that something that could be, you know, just talk about what the incentive is there to move in that direction.

Yeah, sure. You know, I think all of us, when we think of fast charging, we think of, you know, you think of your Teslas and other electric cars, and you want them to charge fast. It's the holy grail in the automotive sector. It's not so much the holy grail in the industrial sector, aside from the Amazon and Walmart and a few plants that are these massive plants, and they actually use fuel cells. Because fuel cell charges in five minutes and they run three shifts, hot swap drivers, and don't have an hour or two or more to charge. But the rest of the industry isn't necessarily keen on that. But fast charging does have a place. It represents operational efficiency. It does have a distinct advantage in any very cold weather situation. given the nature of its thermal management. The fast charging also is a way to provide the kilowatts of energy, given that if you can charge a lot during the breaks and the lunch, you can get by with a pack for the whole day with less lithium in it. So, there's some advantages we're looking at. There are many technology innovations in the market. As you know, you can't pick up any literature without reading solid state, sodium, and so on and so forth. I would say, just to reiterate one of our points, we're agnostic with that. We apply the latest technology. We're exploring this one. It's a proprietary technology, and I think if there's some applications there that could make sense from a business case, you know, we will jump on it. We continually look at ways to provide leading technology to our large customers. because they demand it. When they choose a supplier, they want to know you have as good or better technology than anybody else and for the future. Otherwise, you lose confidence in a long-term relationship. So that element of our business is very important from that context. But we'll keep you apprised on this as it develops as well, Matt.

Great. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Jeff Gramp with Alliance Global Partners. Please proceed with your question.

Good afternoon, guys. The PR mentioned some high confidence orders totaling, I think it was over $100 million, obviously well in excess of any backlog that you guys have had. Is are you guys seeing a change in terms of buyer behavior whereby they maybe feel the pressure to place larger orders ahead of time? Or is this just kind of more of an indication you guys want to give to the market that these are kind of recurring orders that kind of present themselves in the backlog on a periodic basis? Just trying to, I guess, understand how we should interpret that figure a little bit more clearly.

Yeah, yeah, you know, There had been some of that, particularly related to the supply chain shortage of some of our big customers gave us letters of intent. I think if you recall, we've mentioned that before. This is different. It's related to that. It goes to what I just said a minute ago. Actually, it was a nice setup, Jeff, for this question. We've got some some of our largest customers, our Fortune 50-type customers, 50 and 100, who are getting comfortable enough with the whole lithium experience because it's just not, hey, will the battery drive the equipment in my operation? It's the entire end-to-end, ordering them, delivering. Are you training our people? Is there service? What happens at End-to-Life? What happens... all along the way. Can you, are you reliable? Are you going to be around? What's the delivery experience and can, is there ease of business doing with you? I mean, these companies run very complex operations. And what we're seeing now, this 100 million is referring to one of our largest customers who are looking to convert their entire fleet in a shorter amount of time. You know, These companies have 30,000, 40,000 forklifts across North America. And they implement, they buy new forklifts over time. They don't do it all at once and be too disruptive to the operation. So it's over a period of a number of months to do this kind of thing. So this $100 million really reflects that beginning in – beginning in the March quarter, we believe we will start to see that. It's still a little premature. I'm not going to give out numbers, but they're very intent on it. The timing of the scale of that, as you could imagine, requires a good deal of settling down on their scheduling and plans. But we're delighted. We're delighted to hear this kind of thing. And it's been part of our vision, and we see it with this one big customer, and we see this as the kind of thing that can happen with many more customers.

Great. That's really exciting. Thank you for that. And my other question is on this telematics integration with the Fortune 100. I know you guys in the past have talked about some different kind of recurring revenue opportunities as it relates to BMS and telematics and things of that nature. Is that kind of progressing towards that type of opportunity with this specific application or is this just more of a kind of value add to engender better repeat business and things of that nature?

Well, it's really everything you mentioned. I'd say The big driver on it, you know, we talked about, we introduced telematics in this material handling sector three or four years ago. And the sector was used to telematics for their equipment, and it was all around plant maintenance. And so we've had to... go up the curve of these customers getting familiar with it. Are they really going to use it? There's a lot of things been sold to these people in forklifts that they don't ever use, include some of that telematics on equipment. And they had to see the real impactful value of this. So our sales of telematics, you know, have been slow, I would say slowly building, but we're seeing that accelerate now. And we have One of our largest customers here have finally gotten to the point that we believe is resonating, but they want to put it on all their packs. There's always some reason to know the health of it. Is there a problem coming? If you can tell a problem's coming, either we monitoring it or the customer monitoring it, they can go in and address a service issue before a pack goes down. remember that the biggest single sensitive point in this world is downtime of equipment. So this telematics is really providing the intelligence to address those issues. It's really the fundamental tool to improve asset management, to provide product support, and we see the opportunity to integrate real artificial intelligence in this because we have the sensors we have the data to direct very timely response to issues with their equipment so this one customer we're talking about is finally all over this they're believers and we're excited about it again this is this is a similar comment to before We're now seeing the kind of traction that was always part of our vision.

Great.

Jeff, just to add to that, as you were kind of leading to, everything we're doing with telemetry right now to new customers does include a monthly service fee of some sort. That's how we're approaching it as well. So just so you're aware of that, that's definitely on all new offerings.

Great. Understood. All right. Thank you guys for the details and the time.

Thank you. I would now like to turn the call back over to Mr. Dutt for his closing remarks. Thank you.

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 of your questions, Please reach out to our IR firm, MZ Group, who will be more than happy to assist you.

This concludes our call. Thank you.

Thank you. You may now disconnect your lines at this time. Thank you for your participation.