Flux Power Holdings, Inc. (NASDAQ:FLUX) Q3 2023 Earnings Call Transcript May 12, 2023
Operator: Greetings and welcome to the Flux Power Holdings Third Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call over to Sean Stewart, Financial Planning and Analyst Manager. Sean, you may proceed.
Sean Stewart: Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present results of operations for our third quarter of fiscal year 2023 ended March 31, 2023. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern Time and is available on 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 may 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 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 a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. At this time, I will turn the call over to Flux Power Chief Executive Officer, Ron Dutt.
Ron Dutt: Thank you, Sean and good afternoon everyone. I am pleased to welcome you to today’s third quarter fiscal 2023 financial results conference call. Firstly, please note that on Slide 3, if you are following the deck, there is a short reminder of what we do, calling out, Electrifying Commerce. We are powering material handling, airport, ground support equipment, solar energy storage, port authority equipment and other applications with new and clean technology, and our products and services are focused on very large fleets, including those located nationwide. Now on to our Q3 results. Our third quarter reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In Q3 ‘23, revenues were $15.1 million, up 14% from $13.2 million in the prior year, marking our 19th consecutive quarter of year-over-year revenue growth.
We also continued to improve gross profit in the third quarter, up 146% to $4.7 million, and a gross expansion – gross margin expansion of 16 percentage points to 31% compared to the prior – to the year ago period. Our revenue growth and gross margin expansion provide continued operating leverage given our modest increase in operating expense of only 5% for that period. Adjusted EBITDA loss was $700,000 and $3.1 million for the 3 and 9 months ended March 31, 2023, an improvement from adjusted EBITDA loss of $3.4 million and $11.9 million for the 3 and 9 months ended March 31, 2022, respectively. Adjusted EBITDA loss has declined 24% on a sequential basis from the 3 months ended December 31. For the third quarter, our customer order backlog decreased from $30.4 million to $25 million as of March 31, 2023, reflecting continued lithium adoption, although partially impacted by timing delays of production of some forklift models.
In the third quarter fiscal ‘23, we received $9.8 million in customer purchase orders from existing and new Fortune 500 customers. New orders were down for the quarter due to supply chain issues, increasing lead times on some new forklifts and ground support equipment product lines, which all caused delays in anticipated orders and existing orders to be pushed out. We anticipate these extended lead times continuing, although diminishing in the coming months as supply factors normalize. To highlight the importance of building strong partnerships 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 of the foundation for long-term, sustainable relationships with our customers.
Our emphasis on product quality, technology and service continues to support ongoing new purchase needs and service requirements. We have experienced 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. We were pleased to see that our supply chain disruption continued to abate during the third quarter, while at the same time, we continue to pursue strategic supply chain and profitability improvement initiatives. Also, and importantly, we made progress with new accounts in the third quarter, with 2 new customers with large fleets added, and we have other new large customers in our pipeline planned for shipments in the coming months.
For the past 12 months, we have taken aggressive efforts to mitigate supply chain issues and also to build scale with our business. We have leveraged increased sales volumes to re-source steel and board components to low-cost regions and to higher volume suppliers. We have also implemented inventory kitting process improvements that have provided sustainable productivity enhancements. We are progressing on new product designs based on a new modular platform for 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 the diverse customer operations we serve. At the same time, our new designs provide a reduction in a number of parts, achieving commonality across models.
We’re now building and shipping the first few models of our new platform, having recently received UL certification on models of the new platform. We are now pursuing forklift approvals and UN 38.3 certification, which is required for shipping compliance. We also expanded our in-house testing and production validation capabilities with all the equipment needed to satisfy the UL requirements and UN 38.3 compliance testing, including an onsite vibration table therefore eliminating the need to outsource any aspect of the testing for either UL or UN certifications which all expedite the process. Achieving in-house testing under UL oversight reflects successful building of both our technical experience and recognized confidence by UL. Our efforts to scale our business have included implementing lean manufacturing process, enabling us to more quickly monetize backlog and increase output with existing resources.
On May 1, we opened a new facility in Atlanta to supplement our customer sports services and help support our 18,000 packs we have in the field. The investment in the Atlanta office broadens our geographic footprint to bring comprehensive and responsive services to customers in the eastern half of the United States while also, and importantly, resulting in lower service logistics costs associated with personnel travel and shipping the batteries to and from our California facility. The Atlanta facility augments our current partnership with Arcon Equipment located in Cleveland, Ohio, which operates as a service facility, which includes use and repair of our packs. As supply chain disruption is declining, our profitability improvement initiatives have continued to gain momentum.
For the first 9 months of fiscal ‘23 cash used by operations declined by $14.1 million or 73% from fiscal 2022 to a level of $5.2 million. In the quarter, we also saw sequential and year-over-year improvement in gross margins from cost and price initiatives. This was helped by design cost actions to lower material cost and assembly and reduce inventory requirements. Improved production processes, including progress in implementing lean manufacturing, as I mentioned previously, have resulted in increased efficiency and higher throughput. Availability as of May 10 this year under our new – our two credit facilities totaled $7.8 million, which includes $3.8 million remaining balance under our renewed revolving line of credit with First Citizens Bank and secondly, $4 million available under our subordinated line of credit.
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 are executing our specific supply chain and cost reduction initiatives to continue this momentum. Further, our realized successes are being applied across various customer applications. Our current and potential pipeline of customers continues to expand this past quarter, with two new customers having large fleets. Our full product line caters to large fleets to seek a relationship partner to meet current and future needs. These customers represent a diverse base in multiple sectors, all of whom are seeking lower cost during the life of the product and higher performance from lithium-ion battery packs.
Our primary revenue has come from orders of our packs on new forklift deliveries. As customer adoption of lithium solutions increases across fleets, we anticipate increasing orders to replace lead acid batteries reaching in device prior to forklift in device given the generally longer life of lithium versus lead acid. We have taken actions to restore our gross margin trajectory. As highlighted on Slide 9, our gross margin improved sequentially to 31% in the past third quarter from 24% in the second quarter of fiscal 2023 and from 22% in the first quarter of 2023. Our improvement initiatives include a number of actions that have begun to impact our gross margin. Price increases to offset pandemic-related commodity increases continue to impact the results.
Other drivers for margin include increased pack volumes, more competitive shipping costs, lower unit costs, more reliable and secondary suppliers of key components, improved manufacturing capacity and production processes and transition of product lines to a new modular platform, all of which are part of our plan to accelerate margins both now and moving forward. During the third quarter, our backlog was reduced to $25 million, partially reflecting extended delivery times for some models of forklifts and GSE equipment. Normalization of global supply chains, as I’ve mentioned previously, and ongoing adoption of lean manufacturing principles are driving throughput and capacity improvements as we continue to monetize a healthy customer backlog.
Our strategic initiatives are also improving sourcing actions to mitigate part shortages, accelerating our backlog conversion to shipments and increasing inventory turns to help mitigate inventory expansion. These initiatives are key drivers of gross margins, along with operating leverage discussed previously. Although our supply chain disruptions have improved, we have increased our inventory raw materials, finished goods and component parts to $21 million as of March 31, 2023. In order to mitigate supply chain disruptions and accommodate delays of forklift deliveries, as previously mentioned. With that, I will now turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended March 31, 2023.
Chuck?
Chuck Scheiwe: Hey, thanks, Ron. Now, turning to review the financial results in the quarter ended March 31, 2023. As Ron mentioned revenue for the fiscal third quarter of 2023 increased by 14% to $15.1 million compared to $13.2 million in the fiscal third quarter of 2022. This was driven by increased sales volumes and models with higher selling prices. Gross profit for the fiscal third quarter of 2023 increased to $4.7 million compared to a gross profit of $1.9 million in the fiscal third quarter of 2022. Gross margin was 31% in the fiscal third quarter of 2023 as compared to 15% in the fiscal third quarter of 2022. This reflected a higher percentage of units sold at new, increased prices and lower cost of sales as a result of our gross margin improvement initiatives.
Selling and administrative expenses increased to $4.7 million in the fiscal third quarter of 2023 from $3.9 million in the fiscal third quarter of 2022. This reflected increases in marketing expenses, commissions, insurance premiums, depreciation and outbound shipping costs. Research and development expenses decreased to $1.2 million in the fiscal third quarter 2023. This is compared to $1.7 million in the fiscal third quarter of 2022, primarily due to lower staff-related expenses and lower expenses related to the timing of development of new products. Adjusted EBITDA loss decreased to $700,000 in the fiscal third quarter of 2023 from $3.4 million in the fiscal third quarter of 2022. For the 9 months ended March 31, 2023, adjusted EBITDA loss decreased 74% to $3.1 million compared to $11.9 million in the 9 months ended March 31, 2022.
Our continued initiatives, business growth and operating leverage all contributed to drive this trajectory. Net loss for the quarter – for the fiscal third quarter of 2023 decreased to $1.4 million or a net loss of $3.7 million in the fiscal third quarter of 2022. This principally reflected the increased gross profit. Net cash used in operating activities decreased to $3.3 million in Q3 of ‘23, which is compared to $3.9 million in Q3 of 2022 and to $5.2 million for the 9 months ended March 31, 2023 compared to $19.3 million for the 9 months ended March 31, 2022. The net cash decreases were primarily due to a decrease in net loss and increase in accounts payable. We recently announced a renewal of available credit under our existing facility with Silicon Valley Bank, which is now a division of First Citizens Bank, at renewal of $14 million to support the working capital requirements related to our customer demand.
First Citizens Bank is a top tier financial institution, and we are pleased to now be partnering with them on our revolving credit line. This renewal, along with our existing cash, will continue to meet our anticipated capital resources to fund planned operations. On a longer-term basis, we also continue to explore alternative capital opportunities to enable us to meet the demand of our aggressive growth. Now, I’d like to pass it back to Ron to offer some closing remarks.
Ron Dutt: Thank you, Chuck. While we’re on track executing our gross margin improvement and cost control initiatives, we are exploring increases to our working capital availability. Looking ahead, we believe the combination of existing customer orders and acquisition of new customers, who want the benefits of lithium-ion technology business can drive, continued revenue growth. Product quality, leading technology and service are key factors as to why we continue to win and maintain business relationships and we ensure our goal to continue our growth trajectory. And our current production facility also should support annual revenue up to $150 million given our current facility footprint, second shift build-out and lean manufacturing implementation.
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, initiatives to ensure leadership in technology that expands product and service value to our customers. In summary, we are well positioned to execute our strategy of Electrifying Commerce as we offer customers stored energy solutions to increase productivity at lower cost during our product’s life. 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 improve 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 high performance and lower cost of ownership. I look forward to providing our shareholders with further updates in the near future as we continue to leverage our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers. I thank you all for attending. And now, I’d like to hand the call over to the operator to begin our question-and-answer session.
Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question comes from Chip Moore with EF Hutton. Please proceed.
Operator: [Operator Instructions] We have a question from Matthew Galinko with Maxim Group. Please proceed.
Operator: [Operator Instructions] There are no further questions in queue. I would like to turn the call back over to Mr. Dutt for his closing remarks.
Ron Dutt: 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 or if you have further questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thank you.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
