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Home · Blog · Blog : Q2 ’16 Q&A with CEO Ron Dutt

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1.     Congratulations on UL Listing.  What is the revenue opportunity going forward for your UL LiFT Packs?

A:     First off, the significance of the UL Listing cannot be understated for we have emerged from an intensive six month process with a substantially enhanced product, that is now the first-ever UL 2271 listed lithium-Ion battery on the market.

The UL listing confirms to all customers that our packs have been rigorously tested and meet the highest industry standards for safety. This validation, combined with OEM approvals for LIFT Packs designed in 2014, our growing industry reputation and the very clear performance and cost of ownership benefits of lithium vs. lead acid should provide a powerful stimulus to our sales and marketing efforts when we initiate commercial shipments this spring. 

As for the revenue opportunity, the total addressable market for walkie pallet jack forklifts is approximately $400 million, and that’s really just the entry level opportunity in the overall forklift market which we believe is $1 – $2 billion in total potential. So, there is plenty of opportunity for our company in just this first target market, and pursuing the balance of the opportunity is very much our objective going forward. 

Near term, we believe that Flux is well positioned to achieve revenues of between $3 million and $6 million in the first 12 full months of the UL Listed LiFT Pack commercialization. And we look to begin shipping UL Listed LiFT Packs in our fourth quarter ending June 2016.  The first few million dollars in sales are the hardest, so from there we think revenue could scale even faster as there will be a growing base of visibility and technology corroboration – from some of the biggest names in beverages, food and grocery, and other logistics-intensive industries.

A key factor in our future revenue performance is our ability to access capital to properly fund our business. We have become very good at moving the business along with limited capital via modest draw-downs on our credit line, but to achieve the sorts of sales targets I just referenced, we’re going to need additional capital. We’ve been working on this effort for some time and are optimistic that our UL listing and the near-term launch of that line allow us to close on some growth capital on terms that are favorable for our shareholders.

 

2.     What are you doing on the pricing and margin front with your new UL Listed LiFT Pack Line?

A:     The simple answer is that we have a very clear plan for building our gross margin in this product line, and we do intend to shift pricing into better alignment with the substantially increased value of our UL packs. The hard part is to predict the timing of our margin enhancements as they depend on a range of factors including the status of our funding and our production volumes.  We have identified a range of design enhancements, component and procurement changes and volume economies of scale aimed at achieving a solid and sustainable gross margin of 30% or more. It will take time to implement all of these initiatives, but the good news is that we do have a very clear and achievable plan to get there that is linked to additional funding.

As I said, we do plan on some pricing increases to reflect the quality and durability of our LiFT Packs. However, as we remain in the launch stage of our product, we plan to be as aggressive as possible on pricing and discounts, to make initial sales and trials as attractive as possible. What we’ve found is that once you can get a customer to try our lithium packs, they quickly recognize the benefits and in 80% + of the cases, they really want the solution. Our job is to help facilitate the initial purchases so that we can overcome the normal institutional reservations around buying a new product from a new vendor. So combined with progress on the costs of goods sold, we also see pricing moves that should get us to the economics that make sense for this kind of business. 

As capital sourcing is very hard to predict, particularly in the very challenging microcap market of the past few months, we have developed a few different business plans that are based on differing levels of investment.  The more capital we can secure, the more rapidly we can move on building out the business but with greater near term operating expense, that raises the cash flow breakeven hurdle. And in the worst case, if we are compelled to operate in a more lean fashion, we have experience running a very lean organization to keep our use of cash in line with our resources.

 

3.     How much sales do you estimate you will need each quarter to break even on a cash flow basis?

A:     That’s a difficult question to answer this early in the business as it depends on a range of factors including to what extent we have been able to fully implement our margin enhancement programs. As I mentioned, we have different models for the business that are based on differing levels of investment – the more capital, the more rapidly we can move in building out the business – and the greater the operating expense required and therefore the higher the cash flow breakeven hurdle. 

It may be counter intuitive, but I do think Flux’s best chance at building a very large and successful company are rooted in higher levels of spending that will push out breakeven further into the future. While we might be able to hunker down and work to cash flow breakeven sooner, by limiting the capital nourishment of he firm – we’ll be limiting its growth and increasing the potential for other players to enter the market and become formidable competitors.

We have a fabulous opportunity to exploit our leadership position in lithium batteries for forklifts, and it is the Board’s preference to source more capital, sooner to allow us to move as quickly as possible to convert our customer relationships and product leadership into a powerful franchise.

Currently, our ongoing operating expenses have averaged $550,000 per quarter on a cash basis over the past two quarters, so to get to cash flow breakeven at this level we need to generate revenue of about $700,000 per month at a 25% gross margin. Of course gross margin is a key factor in this equation and so we need to move as quickly as possible to get into a favorable position there.

Certainly, our preference is to have the capital to really ramp all aspects of the business sooner than later. While that will negatively affect cash flow and profitability near term, it gives us the best opportunity to ramp sales, take market share and solidify Flux’s leadership in the market – all of which provide the greatest potential to drive shareholder value.

 

4.     How much additional financing over what time period will you need to reach break even?

A.     We have a few different plans based on different levels of investment.  At a base level, we’d like to secure $2-3M in additional capital but on the high end we have a plan that utilizes $5M over the next 12-18 months.  The funding is targeted both for supporting a rapid ramp in inventory and receivables as well as additions to our team to enhance operations, R&D and Sales and Marketing.

 

5.     What other business opportunities are you considering in addition to Walkie pallet jacks?

A:     We have several different initiatives underway however our resources are principally focused on our Walkie pallet jack line. We expect to modify our line of LiFT Packs to power End Rider pallet jacks (still in development) in the coming months to incorporate design enhancements from our UL listing effort.  End Riders are larger, heavier and more powerful than Walkies, requiring a more robust energy storage solution.  Flux has been working on a development model for an End Rider packs for the last year and choose to move cautiously and responsibly to make sure we met our internal demands for quality control.

In addition to forklift opportunities, we are working with a key supplier to the airline industry that sells lead-acid batteries and other equipment to multiple national carriers. One major airline carrier in particular has asked this supplier for an alternative solution to lead-acid and Flux is therefore finishing design of a lithium-based solution for airline ground support equipment and baggage carriers. In coordination with this trusted supplier to the airline industry, we expect to deliver beta units for piloting in the next few months.  It’s difficult to predict but early indications are that a lithium battery solution as an alternative to lead-acid may be well received by multiple national airline carriers for certain applications.

Beyond these nearer-term opportunities, we can expand on previously developed storage solutions for robotic mining equipment, solar storage for military or commercial use, and portable power sources for remote use in a variety of applications, principally as a replacement for portable generators.

 

6.     Can you comment on costs in Q2 related to customer service and warranty issues?

A:     Certainly. We have invested significant resources in supporting our current customer relationships and addressing performance issues with certain packs. As in all technologies, the first generation product helps you identify design issues that need to be corrected in subsequent product versions. We have a better understanding of the truly punishing conditions to which our LiFT Packs are subjected, which are unlike most other battery applications. These vehicles operate without any suspension or air-filled tires, creating very harsh conditions for our Battery Management System (BMS) circuit boards, which we have addressed through a number of design and vendor changes. We feel we have most of these challenges well addressed and that belief was confirmed by the very rigorous UL testing that included aggressive vibration testing on three different planes (the x, y & z axis).

Given my career experience working with very large companies like Ford and DHL, I understand the incredible importance of customer support and so when there is an issue with a customer, particularly the very large organizations that have purchased or are piloting our batteries, we need to resolve it promptly, at whatever cost. This dynamic has also caused us to move more slowly with each customer, as we don’t want to ship a large quantity of units, only then to identify a quality issue. Commitments to our customers will not be compromised.

Through our responsiveness to customer issues, I feel we have been able to establish solid relationships that position us well for the launch of our second generation UL Listed LiFT Packs.

Fortunately, most of the issues we have faced with our products and warranty issues relate to design and production launch issues that we feel were well addressed in the UL process. So we are very confident about the reliability and performance of what is really our second-generation technology.  Importantly, Flux is probably the only company to work on these challenges and certainly the only one to develop a pack to meet UL’s rigorous testing.

We are very grateful to our first customers for deployment or trial of our packs and now we are in a position to deliver a solution that incorporates the feedback we have garnered from each of their experiences with our product.

 

7.     Why has the forklift industry failed to adopt the next generation battery storage solutions that have been fueling the mobile device and automotive industry?  What makes you feel they are ready and willing to make the change from lead-acid?  How do you unseat the incumbent lead-acid providers and infrastructure?

A:     First off, forklift customers are without question eager to try alternatives to lead-acid power due to a variety of limitations and general dissatisfaction with that incumbent technology.  They are anxious to find a better solution but have moved cautiously the last few years due to some level of disappointment with alternative sources of motive power that were introduced prematurely.  The discontent with lead acid however, plays right into the value proposition of our LIFT Packs.  There has not been a compelling or viable alternative to lead-acid until very recently so the status quo has remained with lead-acid owning the market. With no other solutions, I think companies have just put up with the costs and performance limitations of lead-acid because they had no other choice. These lead acid markets are very mature and are viewed, I believe, as commodity products that have sales and marketing structures based on promoting customer relationships rather than innovative and disruptive products.

The arrival of new battery technologies has been focused on markets where their capabilities have enabled new products and markets. The technology was integral to the creation of new revenue streams – not as a replacement alternative for a market that is already spoken for, and for that reason it became the first point of focus for the capital and R&D. 

The second part is now that markets for lithium power (such as mobile applications) are established or underway, the next area of opportunity was to pursue a large existing market that was utilizing an inferior solution.  That is Flux’s vision; introducing our lithium solution to the forklift and materials handling market..

However, one can never underestimate the challenge of getting established industrial processes to consider something new. While from our perspective, the decision is obvious – why wouldn’t a company deploy a better technology that will improve efficiency and performance at a lower total cost over time? No one has ever lost their job for not being the first to try a new solution, whereas, that’s what happens if you do try something and it misses the mark. Large companies are risk and change averse – they move slowly and carefully and rarely jump into anything. 

That is very apparent from our financial performance the past two years as we worked to break through those barriers and mindset. It requires patience and persistence, and you have to listen well to the customer to identify those who could be early adopters vs. those who are not.

We’ve invested a lot of time getting to understand the thinking of the 30 national companies who have either purchased or piloted our LiFT Packs and help them understand our value proposition.  This cohort doesn’t include the dozens of regional end-users who are evaluating our pack technology. As a result of our intense outreach with the help of dealers and distributors, we’ve planted the seed from which a large-scale technology conversion can take place. We need to continue to tread carefully and remain very focused on each customer’s experience and needs.  If we do that, we feel certain that there is enormous deployment potential for our solutions.

And why do we think they will make the move?  Logistics intensive businesses – such as food or beverages – have enormous supply chains that they have worked to optimize over the years.  Flux can now offer them a clear way to reduce cost while also enhancing the efficiency and productivity of the teams and their fixed assets.

This is a concept that is at the top of the list of their materials handling management – because the benefits are clear and real and even if they don’t want to try a new technology, the fear of competition will push them in our direction as they can’t afford to pass over the same cost and efficiency benefits as their competition.

Outside of just our opinion, I can tell you countless stories of forklift drivers and logistics managers that just love our product.  They even fight over who gets to use the lithium pack – because the performance is significantly better and the workflow is far more streamlined.

These benefits versus current lead acid packs include:

  • Opportunity charging during breaks
  • No required post-charging cool-down period – which can be as much as 8 hours for lead acid. So a Flux battery can operate two of three shifts per day compared with only one for lead acid.
  • No requirement for a charging room or special ventilation for lead acid
  • Virtually no maintenance and definitely no need for personnel to monitor and manage water levels in lead acid.
  • Our LiFT Packs have built-in chargers that let you charge them anywhere, without removing them from the forklift, whereas lead-acid batteries – which weigh at least 500 pounds, are normally removed from the vehicle and replaced with a recently charged battery.
  • Our LiFT Packs last 5-7 years versus 18 months to 2 years for most lead acid, so you spend less time on procurement activity
  • While our packs cost more initially, their longer life, improved performance and limited maintenance yield a lower total cost over many years than the cost of several lead acid batteries over the same period.

Bottom line – better performance at a lower cost and with enhanced safety and environmental issues make Lithium-ion energy storage a clearly superior solution – one we feel very confident will displace much or all of the market over time.  It’s our job to make that happen and happen quickly. 

Thank you for the questions and the interest in Flux Power.

Sincerely,

Ron Dutt

Flux Power CEO

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