Good day, and thank you for standing by. Welcome to the Flux Power First Quarter 2022 Financial Results and Company Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Justin Forbes. Thank you. Please go ahead.

Good afternoon, and welcome to Flux Power's financial results call. This is Justin Forbes, Director of Marketing and Investor Relations for Flux Power. I'm joined by Ron Dutt, CEO; and Chuck Scheiwe, CFO, who will present results of operations for our fiscal year 2022 quarter one ended September 30, 2021. Following — I'd like to read our safe harbor statement. Our discussions 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're 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, 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. A copy of our press release and financial tables can be viewed and downloaded on the Flux Power Investor Relations website at fluxpower.com/investors. And with that, I'll now turn it over to Ron Dutt.

Good afternoon, and thanks, Justin, for the introduction. Our headline story this quarter is continued revenue growth yet again, along with a $28 million current order backlog. That's more than all of last year's total revenue for the year, which ended June 30. So this $28 million backlog is as of November 10. It's about $2 million less than due to the supply chain disruption affecting everybody. The backlog reflects orders principally in the material handling sector, which is a multibillion-dollar addressable market, along with the remainder primarily from the airport GSE market, which is now back in gear. This represents our 13th consecutive quarter of year-over-year growth. We're growing current customers, and we added new customers in the quarter in material handling. The material handling industry, while it typically has single-digit growth, has seen double-digit adoption of lithium and is increasing its pace. As I mentioned, there's a renewal of the airport GSE activity in our packs for them, particularly with our key customers who are one of the largest global carriers in the world. They are pleased with our packs and are also purchasing them for their warehouses. We're expanding our relationship with Beam Global, where we're an exclusive provider. They have the mobile charging station platform for vehicles. For all this growth, we have production capability for over $100 million in revenue annually, and we will be ready to add a second shift this coming spring with multiple assembly lines. Our service capability is also expanding with server partners, a new call center, added training videos, all of which ensure maximum uptime for customers. Turning to profitability, we have begun a new broad-based initiative to develop a more efficient platform for our packs. We're targeting cost reductions, fewer parts, driving lower inventory, faster assembly, easier service, and more flexibility to introduce other related new products. We began rolling this out later on next year and will go into phases well into 2023. A big element of our cost is the battery cells that we source from China. We continue to look at suppliers regularly for their costs, reliability, quality, and risk. China is producing a lot higher vendor sourcing than in the past. In the process of this past year, we added a new supplier. We do not want a single source for something that ranges from 30% to 50% of the bottom of our pack. All of this is driving towards building scale in this business. Our target market is the Fortune 500 companies, and we want to be a vendor that can play at their level as they have many requirements to meet. Not only building scale, we've got to achieve profitability. We're targeting margins of over 30% in the near term. In fact, we have a path with some of the things that I mentioned, along with other projects, to target over 40%. We believe we've got to target that to ensure healthy profitability in the near future. We are beginning to see operating leverage with our infrastructure. We've built it for several years now, an infrastructure of production, service ISO 9000, and other elements to ensure that we can not only sell packs to these Fortune 500 companies, but we can be their vendor of choice as they order packs each year and every year. We also want to leverage technology for the benefit of our customers. We want to be a leader in this. Our product recently rolled out last year, SkyBMS, which is the telemetry product, offers real-time reports. We understand from our customers that ours is better than anybody else's, although there's a lot of telemetry out there. We see this as a platform for the future and being able to offer one or more new features each year. It's based in the cloud and serves many interests for customers to help them manage their business. We're also engaged in building high-voltage capability. Our packs range from 24 to 80 volts and cover the industry sector we're in. We have developed a 400-volt battery pack and are now beginning deliveries to an electric autonomous shuttle provider. These high-voltage products will open the door to many other opportunities as we build scale. As part of building scale, we've got to ensure quality. We have ISO 9001 certification, which we've had for several years. We're now aggressively implementing lean manufacturing to achieve efficiencies for scale and can translate these back to our customers for timely deliveries. The other item I want to talk about is how we're doing building our brand and reputation. Our target audience, the Fortune 500 companies, really do their due diligence on who they will have as a vendor because they're committing millions of dollars of business to managing these large fleets, and they have a regular cadence for ordering new packs for new forklifts and replacement. Our packs drop in for replacement. We've won business with Fortune 50 and other Fortune 500 companies who have very disciplined demands from vendors and want to migrate to lithium. Most of the new customers we talk with are convinced that the value of lithium over other sources and are planning to convert their fleet into the future. Another element we deal with is ESG. We've all heard a lot about it, and it's a high priority for groups like SEC, NASDAQ, and many Fortune 500 companies and institutional investors. Our products hit the sweet spot of this concern and allow our customers to address many environmental concerns. Specifically, we have a paradigm shift that includes no required OSHA reporting for hazardous acid spillage, much higher efficiency of packs, drawing power from the grid, saving tons of carbon dioxide for our customers. This often equates to hard cost savings, and we do not rely on government incentives. Finally, an extremely important element to our brand and reputation, which drives our ability to continue to add large customers, is building a culture of trust—not only with ourselves, but also the value we provide: product quality, service, and ease of doing business for the complex requirements from large fleets, including timeliness. With that, I will now turn it over to Chuck Scheiwe, our CFO, who will provide more detail on the numbers.

Yes. Thank you, Ron. As Ron mentioned, we achieved another quarter of year-over-year growth. We did $4.5 million a year ago in Q1 2021, and we just closed on $6.3 million in Q1 of 2022. As we have increased sales of our larger battery packs, some packs are seeing higher per-unit pricing, and we are benefiting from our recently launched larger battery packs for Class I and II forklifts and airport ground support equipment. Our customer base continues to increase, along with new customers added each quarter. Our order backlog is $28 million, which supports our sales trajectory. Our focus is on large fleets that order new forklifts throughout the year, and we're seeing continued success with orders received from them. Our gross margins increased from 19.4% in Q1 of 2021 to 21.3% in Q1 of 2022. Our ongoing cost reduction actions, which include larger battery packs for higher margins, design cost reductions, and vendor volume pricing, were largely offset by the supply chain disruption we are experiencing, which includes higher costs for steel, electronic parts, and common off-the-shelf parts, as well as inbound shipping costs. In response to that, we've increased prices in early October, but it will take several months before we see more than limited benefits as we work through our backlog. Our selling and administrative costs increased from $2.9 million in Q1 of 2021 to $3.5 million in Q1 of 2022, primarily due to higher outbound shipping costs, nearly doubling over the past year. We've seen significant increases in insurance costs for D&O and others. R&D expense increased from $1.5 million last year to $2 million this year due to new product development efforts, including our UL certification expense on the packs as we're working with second source battery sales. Our anticipated improvement in net loss was offset by the supply chain-related price increases we mentioned earlier. We executed a registered direct capital raise of $14.1 million in net proceeds in September. That raise is an important element to support our business plan and to reach cash flow breakeven. It also protects us from any unknown supply chain issues that might arise. We also increased our Silicon Valley Bank line from $4 million to $6 million to support our backlog for working capital needs, and we have not drawn on that facility yet. Additionally, we continue to have availability on our ATM line of $5.7 million. Now I'll turn it back to Ron.

Thanks, Chuck. While we continue to track on our business plan, the leadership and adoption of lithium-ion battery packs in our market sectors, the pressures from COVID-19 and supply chain disruptions are widespread and challenging for us. However, they have served to make us perform better. Our supply processes and vendor selections have been improved to keep pace with our growth, along with several other operational elements. In this current competitive market for talent, we've taken steps to ensure that Flux Power is a great place to work, with an exciting future in a culture valuing competence, high engagement, and trust. We continue to expand our presence in the marketplace, building scale, exploring partnerships, and leveraging relationships with OEMs and our customers. We are very optimistic. Flux is on track for yet another record year of growth. Our $28 million order backlog is a strong indicator in that regard. While material handling is a multibillion-dollar addressable market, remember, the material handling sector has single-digit growth. However, we are seeing double-digit adoption of lithium, which is increasing yearly. We also have a growing presence in adjacent high growth markets, including the vehicle charging sector and autonomous shuttles. We continue to study these adjacent markets. That concludes our prepared remarks. Now I'll turn it over to questions.

Your first question comes from Chip Moore with EF Hutton.

So great to see the record backlog. Can you talk a bit about how fast do you think you can get through those orders just given some of the supply chain constraints currently? And then maybe you can give us some insights as to the composition of the backlog, particularly as it relates to pack size and margins.

Yes. That's a good question. We mentioned that during Q1, it didn't affect our numbers dramatically from what we were expecting. But the whole supply chain disruption is impacting us. It's the 60 shifts at Long Beach. I'm just stating what you all know, trying to find electronic components, paying $50 for a $5 component that is difficult to find. We haven't mentioned that in migrating to a new sales supplier, we've had to run a number of models through a limited number of UL certification exercises, so all that's come when everybody—the UL people, our vendors, us—are being impacted by the supply chain. Everything is slowing down. Two of our major forklift manufacturers have lead times of 80 weeks and 60 weeks. So everything is moving at a slower pace, and so are we. The backlog that we now have represents delivery to occur this month, next month through March, and I think a couple of months beyond that. That's based on the orders we have in hand. We continue to get new orders each day. The bulk of that backlog is in the bigger packs—those GSE packs, which are 80 volts and our Class I and II packs as well. We have a new customer putting in an order for material handling Class I, and our existing customers are continuing to order as well. The margin should be helped by that. We put out pricing to offset as much as we could the hopefully temporary doubling of steel, doubling of shipping costs, and other component costs. The timing of how much we are able to ship this quarter is hard to predict. It's principally dependent on getting parts in here. We have the production capability.

Yes. I think that backlog will definitely be done, and the target is FY '22 for sure. It's just going to be in the latter part, most likely. We do have quite a few cells coming in right now, so we're getting ahead of the supply chain fairly well at this point.

Got it. Makes sense, and that's helpful. And maybe just if I could sneak in one more. You talked about adding a second shift in the spring and some of the initiatives you're doing in terms of more modular platform. How should we think about any sort of OpEx ramp for some of those initiatives as we move forward?

No, not at all. I mean your second shift is using the same equipment we've got on site here. There really isn't anything we need to add CapEx or OpEx other than just production bodies, which are going to hit costs through that process. So we don't see a lot that we need to add to any of our areas.

Your next question comes from the line of Amit Dayal with H.C. Wainwright.

Ron, in the pipeline, aside from the airlines, are there any other end markets that you are seeing some traction in?

Well, I just remind everybody, material handling has been our primary focus because it's so big and there's a lot of low-hanging fruit, and we're making headway with our assembly line, the GSE, the vehicle charging stations, and the shuttles. The one that we talked about before and that we continue to look at, and I think there's real future there is robotics as well. Robotics is starting to catch on. Part of the issue there is ensuring that the business case is well crafted and profitable. We want to be attentive to margin. We're not just going to buy revenue to get into robotics. The right applications must be selected; say no ten times more than we say yes to, as that’s part of our strategy. Everyone here is jazzed about the opportunities because new ones continue to emerge.

Okay. And then the relationship with Beam Global, has that translated into revenues yet? Or is that something that you might see come through this fiscal year or starting to…?

Yes. We've been shipping packs to them for 1.5 years. It's been a steady flow of packs each month, but not huge. They are very good with press releases announcing contracts. They're working with municipalities and cities and government all over the country. We have a great relationship with Desmond Wheatley, their CEO. It just takes time for many of these government entities to ramp up and generate revenue. However, we ship to them every month, and as they start their installation work, we will see our packs increase because we are their exclusive provider.

Okay. Okay. Understood. With respect to sort of the supply chain-related pressures right now that everybody is going through, I mean, would it be fair to assume lower margins over the next few quarters? Will potentially then margins recover towards the latter half of the fiscal year?

Yes. That's exactly what we're forecasting. This quarter is going to be tough, but we think that we'll see some traction with steel coming back into play. Supply chain efforts are ongoing.

A lot of different pockets, it's like expedited shipping, okay? If we don’t get a certain type of cell module on time, we've got to ship it by plane. It goes on and on like that. So yes, Chuck's spot on here.

Your next question comes from the line of Allen Klee with Maxim Group.

Following up on the margin question. You mentioned that your charging margins are over 30% now, and you have a path to over 40%. When you say you're charging over 30% now, does that mean on a couple of things you do or overall? And how do you think about the timing to that over 40% comment?

Yes. No, Allen, thanks for the question. I don't want anybody to take that the wrong way. We're not at 30% margins now. We're like anybody with a small to large lineup of product; a smaller product has margins well below 30%. As we build up, some of our products exceed 30%. But the average, as you've seen from our reported results, particularly once we include all the costs, is well below that. We have a redesign of our platform, which we're looking to provide a very impactful increase to our margins. We've got other projects in the queue, and as Chuck forecasted, we're putting in plans to get us to 40% over time. We can't provide guidance on timing, but it will be in the near future.

To add to that, even in this last quarter, had it not been for steel increases, which have impacted us because of supply chain issues, we would have been much closer to that 30% today. However, since we can't control that, if we return to a more normal pricing environment, we got a chance to get to that 30%

Your next question comes from the line of Allen Klee with Maxim Group.

I asked my question. I'm not sure why I got asked again.

You can ask a second question, Allen.

All right. Well, you know what, I did—the new initiatives of more efficient platforms for packs and lower inventory seem pretty important. Could you maybe just go into a little more detail?

It's very important to us. I don't want to get carried away and say it's transformational, but it's kind of the excitement we have around it. Recall, we've been doing this since 2013, the first one to put packs out there. But honestly, we didn't know much back then because we were the first pioneer. We've learned many lessons, having over 10,000 packs in the field with different customers. Our engineers have developed expertise over the years. We believe it's time to take these things and create what we call an all-new product. It involves assessing and understanding durability and safety while satisfying customer expectations. We're focused on fewer bends in the steel to lower steel costs and outsourcing harnesses to manufacturers with more efficient processes. Also, the electronic components on our boards get cheaper every year, allowing us to design different modules for various types of packs. We aim for fewer parts, reducing complexity, and gain less working capital, while improving serviceability. Our customers desire no downtime associated with our packs. So our job is to consider all these elements. We think this new platform will elevate us significantly and provide a more attractive cost profile.

We believe this new approach could allow us to eliminate 60% of our current inventory items, significantly reducing the number of parts we have. This change would allow us to streamline our processes and focus on a single line of similar modules, which can go into multiple battery packs.

The assembly time will also be significantly reduced, translating to faster throughput. Given our growth rate—50%, 60% each year—we are preparing for continual greater throughput.

That's great. One thing that stood out when I heard you talking was the finished inventory issues you faced, trying to find that one part, and you've increased your personnel to try to do more sourcing. How do you feel about that issue today?

We've got three buyers on hand now and are catching up. We've learned a lot about reliable suppliers. While we've encountered some finished goods that are ready to go, we’re just waiting on a few parts for UL certification. We expect that situation to free up soon.

As a footnote, our inventory levels are much higher because of the supply chain disruption. We have internal targets on inventory and working capital turns and are working diligently to achieve those.

Your next question comes from the line of Scott Billeadeau with Walrus Partners.

Most of my questions have been answered. I was just going to dig a little deeper on the supply chain. Is there a specific module piece that you're having trouble with? Is it multiple components, or is it just shipping on a few essential parts?

Let me start, and Chuck can provide further insight. We have three or four parts typically on these packs, but it's about 5 or 10 components that occupy most of our attention. Getting cells from China and the electronic components are particularly challenging; we're struggling with components like capacitors and isolators. The vendor that manufactures the board requires all parts, and if they're missing any parts, we don’t have a board, meaning we can't ship a pack. We are working hard with our suppliers and have started to look for new contacts as we have outgrown some of them.

Yes. Many electronic components have been difficult to source. We've been proactive, actually buying parts for our vendors to support board assembly. Sometimes, we even need creative solutions—like utilizing our 3D printer for parts we can't acquire.

Yes. Our buyers and electrical engineers have been working closely together to source necessary components.

And there are no further questions at this time. I'll turn the call back over to management for closing remarks.

Okay. Well, thanks, everybody, for listening to us. We appreciate your time. Everyone here at Flux is very excited about our progress despite the challenges of the supply chain. It's an excellent time to be in this sector, and we feel fortunate to be in the right place at the right time, especially in a growth sector like this. Thank you for your support. Chuck and I are always available for follow-up questions. With that, thank you.

Yes. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.