Flux Power Holdings, Inc. (FLUX) Q4 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Flux Power Fiscal Year 2021 Financial Results and Company Update Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Justin Forbes. Please go ahead.

Thank you. Good afternoon, and welcome to Flux Power's Financial Results Call. This is Justin Forbes, Director of Marketing and Investor Relations for Flux Power. Ron Dutt, CEO; and Chuck Scheiwe, CFO, will present results of operations for our fiscal year 2021 ended June 30, 2021. Now I'd like to read our Safe Harbor statement. Our discussion 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 revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, we will tend 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. A copy of our press release and financial tables can be viewed and downloaded on the Flux Power Investor Relations Web site at fluxpower.com/investors. And with that, I'll now turn it over to Ron Dutt.

Good afternoon, and thanks, Justin, for the introduction. As you may know, we issued our press release on fiscal year '21 financial results on Wednesday, September 22, to support executing a registered direct offering which closed earlier today. We announced on Thursday, September 23, are entering into a securities purchase agreement with institutional investors with H.C. Wainwright acting as exclusive placement agent. Earlier today, we closed on 2,142,860 shares of common stock with 50% market coverage at a purchase price of $7 even per market share and associated warrant which generated gross proceeds of $15 million. The securities were issued pursuant to our shelf registration, which has been effective on October 26, 2020. We plan to use these proceeds to support our current rapid business growth, to provide capability to accelerate our path to profitability, and to exploit market opportunities. As our key customers are typically Fortune 500 companies with large material handling fleets, they require suppliers who have financial underpinnings and have the capability to deliver quality product on time. After all, it's disruptive to chain suppliers, especially given complexities and purchasing service and at the same time support expansion of lithium adoption across their fleets, which happens over a multiyear period. And to recall from last year, we uplisted on the NASDAQ Capital Market in August 2020, including raising 12.4 million in equity capital. Turning to our financial results for fiscal year '21. We increased revenue by 56% from the prior year to a record $26.3 million. This growth reflects continued momentum from the prior year despite the headwinds of supply chain disruption, and a continued impact of COVID-19. We launched our next generation battery packs with a high volume Class 3 End Rider product line, and there has been a very positive response to the quality and performance of these new packs. Deliveries of several of our product lines were initiated with the world's largest meat processor, along with several major customers in industries including paper products, chemical manufacturing, and packaging. We made good progress acquiring these and other new major customers that are currently working on bringing on more. We are experiencing the impact of growing awareness and acceptance of the lithium value proposition, and the reputation of Flux Power to satisfy Fortune 500 customers. We've resumed deliveries to a global airline that were [trans-whatever-deferred] [ph] during the disruptions caused by COVID. And a partnership agreement was signed with CLARK Material Handling, adding another sales channel. And we initiated deliveries of a new proprietary high voltage battery pack to a prior provider of autonomous electric shuttle vehicles. All of this revenue expansion resulted in surpassing 10,000 battery packs in the field as of this past July. We believe this is an indicator of our market leadership in the lithium powered material handling and ground support equipment sectors. The widely reported supply chain disruption has caused us slower deliveries from vendors, especially lithium-ion battery cells, and scarcity of electronic components. Pricing has skyrocketed for steel and shipping costs. We have experienced delays in meetings some customer delivery dates, but have not lost any orders; only had deferred delivery timing. This is evident in our current backlog of open sales orders, which now total over $18 million. Fortunately, our packs accompany orders for new forklifts, which are also experiencing delays, mitigating misalignment of delivery timing to customers. Increased pricing of steel, shipping and some other components have put pressure on us, causing us to recently announced price increases. Material handling sector has seen price increases announced broadly in response to the widespread raw material increases. This component of pricing pressure has had some adverse effect on our gross margins, especially since last June. While it is unlikely that supply chain delays and increased pricing will abate suddenly, we are seeing indications that recovery will be coming. And finally COVID-19 continues on with the Delta variant. However, we follow California Department of Health and CDC guidance and have had no production stoppages. We made substantial progress on our gross margins during fiscal '21, increasing from 13% last year to 22.1% this year. We continue implementing specific plans to achieve 30% gross margins with intent to target 40% after that. Chuck will provide more detail on gross margin and operating expense shortly. We also made progress on technology with the introduction of our telemetry product, which offers real-time reports on battery packs state of health for access by customers located anywhere at any time. Our telemetry has been enthusiastically received by customers to embrace the added value to managing their fleet. We do have three patents in process that support our state-of-the-art BMS or battery management system. Our new feature capability with that is expanding and represent a platform for offering power by the month in a bundled package of energy for fleets. And we added EVE as a supplier, a highly regarded Chinese battery cell manufacturer to ensure timeliness and quality of supply. We continually research and assess emerging cell technologies and potential cell suppliers. Our fiscal '21 Q4 revenue of 8.3 million increased 33% from 6.3 million last year, representing our 12th consecutive quarter of year-over-year revenue increases. We made progress during the quarter on initiating shipments of recently developed 400-volt battery packs for autonomous electric shuttle vehicles, as I mentioned earlier. We believe there's an opportunity for applications for high voltage equipment, including larger capacity forklifts and material handling, especially those located at ports of entry, which supports our goal of offering a full line of energy storage solutions. And airports and ports of entry are reporting goals of carbon reduction, which favor lithium adoption. We believe that achieving our goal of leading lithium-ion adoption will be enabled by our ongoing efforts to expand technology leadership and synergistic partnerships with customers and suppliers. As I have mentioned, our telemetry products are currently leading the way with real-time reports via the cloud. And examples of our partnerships include Beam Global and their solar powered EV charging stations; CLARK Material Handling and their forklifts; our private label with a top five forklift OEM and a battery cell manufacturer. We continue to leverage our reputation to expand relationships and build scale. I'll now turn it over to Chuck Scheiwe, our Chief Financial Officer.

Thank you, Ron. As Ron mentioned, as you guys know, we got listed on NASDAQ last year, which elevated our ability to raise capital, increase shareholder base, expand our messaging and exposure. We raised over 12 million in capital and secured a 50 million shelf registration, including a $20 million ATM at the market facility, which we've utilized to raise smaller, lower cost equity capital levels on a very opportunistic basis. We converted 5.2 million of debt to equity, which eliminated all debt on our balance sheet. We further strengthened our capital structure and positioned for continuing our strong business growth. Additionally, we secured a working capital line with Silicon Valley Bank and that’s there available to support surges in purchasing from large orders. Turning to gross margin, it improved in fiscal year 2021 from 13% to 22.1% reflecting benefits of our sourcing initiatives, lower prices from higher volume purchasing, and rolling out some design cost reductions. The supply chain disruption that we talked about and price increase in the past months have put pressure on margin, and we're working hard on passing some of those on with price increases as mentioned earlier. While it's difficult to predict when supply chain issues will abate, we do see indications of some mitigation in the coming months. Our ongoing gross margin improvement efforts included a major platform redesign that is already underway, that will benefit most all of our product lineup. We believe our specific margin initiatives will drive us to 30% margins in the coming year. We will then continue to pursue 40% margins, implementing further actions under review. Our working capital needs, especially supporting inventory management, is currently a challenge. But these pressure points for market conditions are accelerating the maturity of our processes as we expand our business. We are focused on improving inventory turns to lessen working capital demands. Operating expenses increased for fiscal year 2021, but decreased as a percentage of revenue from 87% to 73% reflecting productivity gains as part of our long-term strategy. Our operating expenses reflect an infrastructure not for our current $26 million revenue business but built to deliver Fortune 500 customer quality, timeliness and responsiveness that is leading us to 100 million plus annual revenue and beyond. To build scale, some expenses need to proceed revenue. Our growth momentum continues off of our recent 50% to 60% annual revenue growth rates. We do not give guidance yet as it is difficult to forecast the pace of growth when you're growing as quick as we are. Our cash flow breakeven target is a major priority as we are committed to profitability, yet aggressively growth to exploit the current lithium-ion opportunities. We believe the growth opportunities for lithium-ion batteries and material handling and adjacent energy storage sectors continues to represent ever increasing momentum, enabling building, scale and just further improvement margins as we continue. Now I'll turn it back to Ron.

Thanks, Chuck. To conclude our remarks, I would like to say I'm proud of our grid and persistence in facing the headwinds of the supply chain disruption and COVID that we've seen. These pressure points while aggravating are making us a stronger company, increasing the pace of maturing our processes company-wide, binding by necessity new and innovative solutions. Such fallout includes first improvement to purchasing and inventory management for working capital efficiency, sharper focus on design cost opportunities, and operating cost reductions. We believe we have leadership in lithium pack sales in the United States for material handling and ground support equipment. And we are relentless in our strategy and execution to keep that leadership as the lithium-ion batteries segment continues its double digit growth. And that concludes our prepared remarks. Now I will turn it over to questions.

Thank you, sir. [Operator Instructions]. We have your first question from Allen Klee. Your line is open.

Yes. Good afternoon. You mentioned that you're implementing price increases. Can you tell me when that's going to go into effect roughly and to what extent all else being equal that the impact that would have on gross margins? And then you also had mentioned that you saw some signs that the -- I forget the wording -- that margins could maybe alleviate or there could be some alleviation. Could you talk about what that is? Thank you.

Yes. Sure, Allen. Thanks for the question. Yes, we haven’t increased price for a couple years and you know what's going on overall. Everywhere you turn, there are price increases. And we've seen them. Many others in this sector, we see the same thing. We're finally catching up. We announced some price increases earlier this month. Of course, as is customary, any of our purchase orders we have are held harmless from that. But our bidding and new sales we’re going after will include those price increases which cover most of our product lineup. So given there is a lead time in the sale, so we don't expect to see a significant impact of that until the beginning of the calendar year. And we think that that is being well received generally and is important to maintaining our position and also competitiveness in the marketplace. Your other question, gross margin alleviation, I'm not sure what you meant by that. Could you clarify that, Allen?

I'm sorry. You mentioned something that some of the pressures you were seeing on costs and maybe supply chain might be alleviating in the somewhat near term. That's what I was referring to, if you could go into some detail on that.

Yes, steel prices have doubled, tripled. And while all of that isn't passed through to us, a big chunk of it is. We don't see steel prices plummeting. We think it's going to happen slowly or at least not quickly, put it that way. I don't think anybody has a crystal ball on steel prices. We talked to a lot of people, our sourcing folk talked to a lot of people and we're just going to have to grit through it. The other one is electronic components. A lot of those components are smaller dollar components. But you've got to have them. Our sourcing people continue to chase sourcing up components all over the world, like many other companies are doing. So that's going on. Another one is the shipping. If you were to read the Wall Street Journal this morning, they talked as a frontline from article, 60 ships backed up out of the ports of Long Beach and LA, transit times going from what had been under normal times 40-day transit to now up to 80 days. So that backup there at the ports certainly backs up delivery times, increases inventory levels, all of this increase the cash demands on working capital management. But we see this getting through. We've seen that pressure on gross margin really beginning last -- in particular last June, as our suppliers had absorbed a lot of that up until that point, but it just became too much and passed on to us. So it is a bit of a crystal ball as to the extent when and how much that gets alleviated. But we feel our pricing has covered us in a reasonable manner and judicious manner, and we will certainly do our very best to continue to manage that.

Thank you. I had a few financial questions and then I'll jump back in the queue to ask a couple more after. But I was wondering when the 10-K would come out. And some numbers that I would like from there that maybe you could share is what the stock-based compensation was, expense for the quarter? Where you see the share count now? What CapEx was for the quarter? And any view with CapEx and stock-based comp of maybe directionally how they may go next year relative to where they were in your prior fiscal year? Thank you.

Yes. I'm going to turn this over to Chuck to give some more color, but just released the K shortly before this call started so that's out there.

Yes, the K should be out there, Allen, and we can talk about that later in terms of getting into super details if you want in terms of what the K is -- what you're not finding on the K.

Thank you.

We have your next question from Craig Irwin. Your line is open.

Hi, yes. Thanks for taking my questions. So, Chuck, can you give us the cash and debt at June 30 just for our models as we're waiting for the 10-K?

I’m sorry.

The cash and debt at June 30?

The cash indebted?

No, the cash and debt.

As of June 30, there was zero cash and 4.7 million in [debt] (ph).

Okay, excellent. So then one of the items I wanted to talk about was research and development was up by about a third sequentially. You guys hadn't signaled big increase in sort of the number of packs you're certifying or anything out there. Can you maybe talk us through the programs that you're funding? Are a good portion of these items sort of one-time in nature where you're using external consultants, like you do sometimes for your pack qualification, et cetera? How can we think about R&D spending over the next couple of quarters?

Yes. During this past year, we did use external source to help design our new End Rider pack. That was a full new redesign. There were a lot of synergies in that whole effort as well. We had to spend money on UL listing of most of our lines, because we've converted from [indiscernible] cells to EVE cells. So there's a minor amount of engineering modification along with UL listing. So that has -- we've experienced that for quite a few number of months. We have a little bit more of that to do. We will always be focused with R&D expense on being a leader in technology and also the performance of our products. So it may involve bringing on some new products, either in some few of the sectors we haven't covered in forklifts or in related matters such as that 400-volt high voltage product we have as well. So we see continued effort in R&D in the coming quarters. As you know, we typically don't give guidance on that, but I'd say those reflect an ongoing effort to continue to be a leader of product in this sector, which our Fortune 500 companies expect us to do.

Excellent. Thank you for that. So another question that I had that maybe we can discuss a little bit more detail is the airport ground equipment market seems like it might be positioned to take off, given the airline traffic is rebounding out there. This has been an area where you've had some really exciting activity over the last couple of years. Can you maybe update us on your customer conversations? Are some of the customers where you were actively engaged previously maybe coming back? And is there a possibility for a broader swath of customers to execute orders with Flux over the next few quarters?

Yes, we're just happy to see orders coming back. Our largest customer in GSE is on the largest airlines in the world and they’re back ordering. We're building, we're shipping. They're continuing on their quest to convert to lithium, which is exciting. And without giving names, they're certainly one of the leaders -- known as one of the leaders in technology in the airline business. We work through a distributor who is very knowledgeable in the airline business. And they have been having our packs downloaded by a number of the airlines over the past couple years. Of course, COVID had slowed down [ph] really to -- really turned off the spigot with that, so to speak. But the indications are there are going to be more airlines, again, adopting lithium. We can't give out any guidance on that, but we see that. I don’t want to say it’s inevitable. Nothing's inevitable. But all these airlines and airports are all faced with clean tech sustainable mandates. And lithium really does provide an answer to that carbon reduction and emissions and avoiding lead acid issues at airports and diesel and others. So it's coming and we are certainly ready to take that on.

Excellent. Last question, if I may, inventory was up a couple million dollars sequentially. I can understand if you're maybe doing something intentional there given supply chains are stretching out. But can you talk us through inventory? Do you expect us to stay high for the next few quarters? And is there may be a large finished goods component or is this mostly raw material work in process?

Most of it is raw. We are building up more finished goods than we have in the past, but we're covering ourselves. That's our job as a company is to buy inventory, because we don't know what's happening right now. So we're going to run a little larger on inventory, hope to drop that down in the next couple of quarters. But yes, it's going to be there for a little bit, because our job is to protect our customers.

I would agree with that. Congratulations on that strong revenue result. Despite this challenging environment, it's pretty impressive. Thanks.

Thanks, Craig.

[Operator Instructions]. We have your next question from Adam Eagleston [ph]. Your line is open.

Thank you, gentlemen.

Hi. How are you doing?

Yes, doing well. A few questions on the capital raise. Can you share who the investors were, strictly financial, any of these strategic partners, maybe any color you can provide there would be helpful?

Yes, Adam. This is Ron. It was all institutional players, half a dozen or so. And no, we don't share their names as is customary, but it was nice to get -- continue to get more institutional players as shareholders. When we uplisted last August, it was our first real collection of institutional players, which provide a lot of stability and credibility. So we had really new ones this time. So it's good to add to that. But we did that raise fairly quickly. The institutional players were there ready and able, and we actually raised a little more than we thought. Terms were good, interest was strong. Hope that helps.

That helps. Why this size at this time and how did you think about the cost of capital here?

Yes, good question. We had a lot of talk about that. We didn't think actually we’d have to raise money at this point as we started working our way through the summer. But as we talked about, the supply chain disruption has caused us to require more cash, more in inventory and a number of other uses of cash. And we looked at that as we felt let's go ahead and get something less than 10. And upon further reflection, not only were considered our own operating position and outlook, but certainly the image we present to our large Fortune 500 companies that as I mentioned in my words, as we're getting new customers and even the existing customers, they're banking a lot on us, because this isn't a transactional business. They're banking on us being their supplier of millions of dollars of assets each month, each quarter that get added and for many years. And I think we're well served by having a little more cash than we thought we needed. The markets have been soft, probably oversold, but we didn't want to be jumping in and out of the market over the coming months because we're growing very rapidly. Our kind of growth can need capital and we don't want to slow the train down. So it was part of several of those concerns and strategies, because we are very confident in continuing this aggressive growth. We're adding large Fortune 500 companies all the time. We need to present to them that we're just not doing some transactions here. We're somebody that has the bandwidth, the foundation to be a major supplier to them as adoption of lithium-ion battery packs continues to expand and gain momentum. I hope that helps.

I agree, and we continue to be impressed with the strong top line growth and understand the need to have a certain level of gravitas for these Fortune 500 companies. That still didn't quite answer the question about what the cost of capital was at this point. Also, I would ask, given that a lot of this was related to the supply chain and we understand those challenges and commend you for navigating those, there is if I recall a line of credit that's available for those purposes as well, that might have been less painful.

We can all weigh those all day long. You've got 8-K out there, you've got the 10-K, you can figure out what the cost of capital was. It's all disclosed. And as a company, we make our choices as to what the best thing was. So along with our Board, I don't know what else -- I don't know what you're looking for in terms of what the cost of capital was specifically.

There's another element of this that comes to mind, Adam, just as we sit here and talk about it. Cost to debt is deeper than cost to equity. Of course, we could have gone with debt. But I think one of my concerns, particularly after my days at Ford Motor and Ford Credit, we need to ensure that we have some strength in our capital position. And I think for us right now, this phase of our development that equity really represented a better positioning of this company going forward.

Again, perhaps at 7, what you said, reflected strong interest, clearly the reaction of the market based on the structure with the warrants invested immediately, the market is telling us a different story, respectfully.

Well, I think -- we went out at 7 with warrant recoveries to do Black-Scholes and stuff that really gets value in the market about 6. It's trading a little less than that. A lot of the input we get from bankers is that when you're going out for capital, there's the optics of dilution and there's some softness in that. So the bankers we talked to feel that this was a successful raise, not just bankers that did the deal for us. So I'm sure there's several sides of a perspective on this. I appreciate that, Adam.

Okay.

[Operator Instructions]. We have your next question from Allen Klee. Your line is open.

Yes, hi. So the sequential growth in your backlog was quite good. It went from -- I think in July it was around 13.7 million, now it’s 18 million plus. I'd be interested if there's -- if you can talk about it, what's in that? Is there certain areas that are over-weighted? And then just bigger picture how you think about the adoption of lithium-ion over the next year of the ability of it to continue to gain mind share and to gain market share and where you think you stand competitively and how competitive it is? Thank you.

Yes, good, Allen. Yes, a couple of items in there. One, backlog; the strength of that backlog is built on the larger packs, not the smaller walkie pallet jack packs. We're getting -- we have been getting very significant orders with our tax for the larger Class 1 and Class 2 forklifts and also with the reemergence of the GSE packs as well as also added significantly to that, which we're glad to see. Because as we move towards increasingly -- an increasing mix of larger packs, there's typically a bit higher margin on those and the large companies that we're dealing with have strong demand for those. So I think you'll see that shift. In terms of the overall demand for lithium, I’ve said it before. A few years ago we were trying to explain to companies why they would want to move from lead acid or propane to lithium. Now you don't have to do that. It's pretty self evident out there. There's enough larger companies, everybody's watching this, they understand it. The literature's out there. Collaterals are out there. Experience of customers they know is out there. We see it continuing to increase the GSE and clean tech momentum coming out of the federal government certainly adds fuel to the fire with that. And so we see it abundantly clear in material handling and, of course, in our other adjacent segments as well. I don't know that anybody has a particularly good forecast of that, except that you can see how we've been growing. We have good half a dozen or more companies that are offering similar products to us. About half of them are more focused on regional activity where getting UL listing, third party certifications and building scale is in their focus. We have a few competitors that have more of a similar focus to us. We pride ourselves in our reputation of being ones that these large companies can trust and just not to ship a pack that might work, but someone they can trust to deliver on time, service on time, ease of doing business and work with too in the multi-month, multi-year effort, ongoing effort to convert their fleets to lithium, get straight answers with and people who are responsive. So that's our goal in filling this increasing demand and a little bit on the competition as well. I've talked to nearly every head of our competitive group, I always wish them well. I wish them to have good products out there. We want to continue to give lithium a reputation that it deserves. It's got a computer. It's got chemistry that the other sources just can't match. Lithium can run circles around them from performance, all-in costs and safety as well. I hope that helps.

Thank you very much. One last question, telematics, could you give us an update? And since I know that this line of business is a much higher margin, so I'm curious if we should think about this becoming kind of a material impact of your business at some point in the near-term future? Thank you.

Yes, telematics, we’re very excited about that. Telematics is everywhere in the economy. We had a version that our engineers used when they were initially rolling out new packs over the past three or four years, and we decided to commercialize it and offer it as an option. And we're very, very excited about it. We're the only competitor out there that we know of that offers real-time reports that transmits data from our chips, from our computer in our battery pack via Wi-Fi or cellular to the cloud. And from there, we can provide any customized array of real-time info to our customers, also to our engineers. We've had cases where we download a fix to some issues before the customer even knew about it. So it's great. And because we're using software and transmission anytime, anywhere with GPS capability, we see the potential use of this and benefit of what we can give the customer and the different types of customers and their issues just unlimited opportunity. So we see it as the platform to be able to expand into different billing arrangements as they made service arrangements, which is particularly interesting because the big fleets we deal with have premium concern on keeping their equipment going constantly, which is kind of code for they need white glove service. And these tools we have here really provide that and really represent a source of -- it's not something you give away for free, mainly because there's such terrific value there. So yes, we want to offer that value and software based and also to more fully enhanced customer satisfaction as well. So we see increased proliferation of that and evolution of that as well. Okay?

That's great. Thank you so much.

Sure, Allen. Thanks.

I'm showing no further questions at this time. Presenters, please continue.

Okay. If there are no further questions, thanks everybody for listening in. It's an exciting time here at Flux, exciting time in the economy as you all know, but for us here at Flux very excited about the growth we have, the customers we're bringing on and the future we have. So Chuck and I thank you once again.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Presenters, please stay on the line.