Will Brown
CEO/Managing Partner

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FLUX February 2023 Update – Electrifying Commerce

On February 9th, Flux Power Holdings, Inc. (FLUX) announced earnings for the 2nd fiscal quarter of 2023 and for the calendar year 2022. It’s rare when we can say that every box was checked, and every goal was exceeded. However, from my perspective, Flux did so this quarter.

Flux’s recent quarter was filled with demonstrations of good business development and growing adoption of its mission to electrify commerce. On the earnings conference call, the company highlighted its successes and continuing opportunity for revenue growth from existing and new customers, many of which are Fortune 500 companies.

Flux was able to not only book record revenue, but also increase its backlog by $4 million to a total of $30 million. At first blush it is easy to make the mistake of thinking of a backlog as something that is merely work that has to be completed. In the company’s case, this is a scheduling opportunity for existing customers to get deliverables on a calendar basis. These kinds of companies do this for continuity and equipment rotation. Therefore, it is encouraging that the backlog is increasing because it does not indicate a lack of execution, but rather an illustration of ongoing and growing demand for Flux’s products.

To us, it seems the company is in no need of raising capital through issuing equity. It has ample fire power in its credit facilities, one of which was just significantly increased by the lender, which we see as further proof of the company’s improving financial condition. Moreover, execution is going well, and inventory has been seemingly well-managed despite a supply chain crisis of extraordinary proportions. It would appear that they have emerged unscathed or, perhaps, stronger. This is notable, considering the relatively small size of the company.

Though not providing specific guidance, Flux has also been able to map out when it thinks improving margins will create free cash flow. This is encouraging and if you look at the margin expansion on the income statement, it is not surprising that they are approaching a breakeven or better position in terms of both accounting earnings and cash flow.

The total addressable market that Flux currently serves (forklifts and airport ground service equipment) continues expanding, and there is no end in sight for demand for its technology and services. In fact, the situation is quite the opposite. On the conference call, CEO Ron Dutt stated that the company was working on a prototype for a 400-volt autonomous shuttle battery as part of its initiative to expand its market. Dutt remarked, prudently in my opinion, that as soon as margins and profitability were solidified in the core business Flux would pursue this new market rapidly.

Of other significant consequence is something that we have highlighted previously. Flux is growing faster than most of its competitors and yet the stock’s multiple, in terms of price-to-sales, is profoundly disconnected.

P/S vs. NTM Revenue ($M) 60 70 80 90
1 3.74 4.37 4.99 5.61
2 7.49 8.73 9.98 11.23
3 11.23 13.10 14.97 16.84
4 14.97 17.47 19.96 22.46
5 18.72 21.83 24.95 28.07
8 29.94 34.94 39.93 44.92

Moreover, Flux’s projected next 12-month sales figures seem realistic.

Scenario

Price Downside/Upside

Current price

6.19 0%
Worst Case

4.37

-29%

Base Case

9.98

61%

Best Case

19.96

223%

Analyst Target (Low)

9.00

45%

Analyst Target (High)

15.00

142%

Analyst Target (Average)

9.67

56%

Flux is not getting the same acknowledgment in terms of multiple-of-sales versus peers. One example would be versus ESS Tech, Inc (NASDAQ: GWH). The company has no meaningful revenue currently yet is priced by one sell side firm at 4x its projected 2024 revenues. This same firm values FLUX at a mere 2x its 2023 revenues.

It is our belief that these dislocated metrics could normalize over time and – if so – there should be an upside tailwind for the company’s share price, as indicated in the below tables.

Our worst case is that the company ceases to grow and the multiple compresses back toward its lows. Our base case is a continuation of current growth to $80m in annual sales and slight improvement in the multiple to two times revenue, while a best case is $80M in annual sales with the market giving the stock a multiple roughly in-line with peers.

P/S vs. NTM Revenue ($M)

60 70 80 90

1

3.74

4.37 4.99

5.61

2

7.49

8.73 9.98

11.23

3

11.23

13.10 14.97

16.84

4

14.97

17.47 19.96

22.46

5

18.72

21.83 24.95

28.07

8 29.94 34.94 39.93

44.92

Scenario Price Downside/Upside
Current price

6.19

0%

Worst Case

4.37

-29%

Base Case

9.98

61%

Best Case

19.96

223%

Analyst Target (Low)

9.00

45%

Analyst Target (High)

15.00

142%

Analyst Target (Average)

9.67

56%

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