Greetings. And welcome to the Flux Power Holdings Fiscal Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to hand the call over to Justin Forbes, Director of Business Development at Flux Power. Justin.

Good afternoon and welcome to Flux Power’s financial results call. Today’s conference call is being recorded. Your host today, Ron Dutt, CEO; and Chuck Scheiwe, CFO, who will present results of operations for our fiscal year 2022 second quarter ended December 31, 2021. A press release detailing these results has crossed the wires this afternoon at 4:01 p.m. Eastern Time and it’s available in the Investor Relations section of our company’s website, 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 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 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’ll now turn the call over to Flux Power CEO, Ron Dutt.

Thank you, Justin, and good afternoon, everyone. I’m pleased to welcome you to today’s second quarter 2022 financial results conference call. Our second quarter continued our trend of strong revenue growth and customer demand for lithium-ion battery packs, along with the addition of new customers and product improvements. Revenue increased 19% to $7.7 million, compared to a year ago’s $6.5 million, marking our 14th consecutive quarter of year-over-year revenue growth. In the second quarter, we received $19.8 million in customer purchase orders from existing Fortune 500 and new customers, an increase of 51% from the first quarter of fiscal 2022 and over 200% from the same period a year ago. Meanwhile, shipments increased 24% over prior quarter Q1 2022 and 23.8% compared to the year-ago quarter. Highlighting a few of our successes, we received multiple orders for our large Class 1 X-series battery packs from a global consumer appliance manufacturer and a new order for GSE or airport ground support equipment battery pack from an additional large domestic airline. We also received multiple orders for our C-Series battery pack, designed for our solar-powered EV charging station partner, Beam Global, who recently reported record deliveries, pipeline, and backlog. For the second quarter, our customer order backlog increased to a record $31.4 million as of December 31, 2021. This reflects the growing demand for our products from new and existing customers, and our continued expansion into new verticals. Additionally, in January, we also strengthened our corporate governance with the appointment of Cheemin Bo-Linn, a 25-year global technology veteran to our Board of Directors as an independent director and to serve as a member of the audit committee, compensation committee, and nominating committee. Welcome, Cheemin. As we put our fiscal Q2 results in perspective, for the full year of 2021, the December ending quarter reflected the impact of the global supply chain disruption that everybody is familiar with, increased shipping delays of key parts throughout the year, which triggered delays in production and increasing purchase orders from growing customer demand, as I’ve alluded to. This resulted in a pre-purchasing of inventory due to production delays. While we did not lose customers or orders, the increase in inventory spending was fortunately supported by our capital raise of $14 million in September. Related to those delays, we experienced increases in the prices of steel, electronic components, and shipping, which impacted Q2 gross margins. While we implemented a price increase in Q2 2021 on new orders, we continue to ship orders from our backlog that were ordered prior to the increase at the higher component costs. This supply chain impact occurred as we were supporting product design changes for new cells that will bring lower costs and better features in 2022. I will outline actions to restore our gross margin improvement path, as highlighted on slide five for those of you on the webcast. In addition to the price increase, we also initiated a design cost reduction project to improve gross margins across our product line. We took actions to improve our supply chain efficiency and supplier management, such as vendor metrics, better tracking and accountability, and alternate suppliers to replace vendors that we have outgrown. In fiscal year 2022, we have made changes to our ERP purchasing methodologies to avoid excess inventory, particularly in the race to find parts that are available. Also to rebalance the supply chain to leverage low-cost sourcing and to improve payment terms with our suppliers. Given the recent growth of our product lines, an impactful action has been taken to better align our suppliers to meet our production demands while taking into consideration the current supply chain disruptions. Additionally, we are pursuing sourcing strategies in Mexico and selecting other vendors to better align with our growing needs and increasing timing demands. We’ve been aggressively resolving supply chain issues with our vendors. Our pricing actions with customers have a delayed effect due to the buildup of open sales orders already received. However, our price increases with customers are intended to help offset cost increases already incurred from suppliers, and our design cost reductions from our 10-year accumulated pioneering experiences with lithium-ion technology are meant to provide the remaining element of achieving our gross margin targets. Our strategy for the past several years has been to capture leadership in the lithium-ion sector for industrial and commercial equipment. We are pleased to be chosen by Fortune 500 companies as their supplier of choice. This refers to customers, as shown in our website presentations, such as Delta Airlines, PepsiCo, Caterpillar, and several other household names. Our vision is to be a leader in providing best-in-class product and service in material handling, energy storage, and related sectors. We have confidence in these goals, and the credibility and sustaining relationships I have mentioned with those household names. At the same time, we’re committed to reaching profitability as soon as possible. While our strategy continues to aggressively maintain our leadership position and invest in our growth, we are equally as aggressive at improving our gross profit margins and preserving our cash while pursuing cash flow breakeven. I’m pleased with the specific initiatives and actions we have taken to meet that goal. Our vision is to then move forward to expand, bringing our proprietary energy storage products to serve the rapidly growing applications of lithium-ion technology, as most of you know, and to lead the innovation of energy storage solutions, including engaging partnerships to leverage our resources. During the second quarter, we experienced the full impact of the supply chain disruptions but without time to build and collect from the order backlog. We are pleased to report that we have a line of sight to accelerate our trajectory to cash flow breakeven. We do acknowledge the unprecedented level of supply chain uncertainty and its potential for continuation. Accordingly, we have chosen to report our FY 2022 Q2 10-Q going concern language. Finally, we increased our purchasing and related inventory to $9.6 million at December 31, 2021, to mitigate supply chain disruptions from increasingly hard-to-acquire microchips and electronic components while utilizing, as I said earlier, our capital raised $14 million in September. These actions were taken to protect customer orders and customer relationships, which are long-term for us. With our recent production throughput improvement, including launching lean manufacturing, a second chip to launch this month, and a major quality initiative to reduce costs, we expect to achieve quicker turns on this customer backlog. A strategic decision was made to secure inventory to align our backlog to deliver our customer requirements. While this is well outside our inventory turnover goals, we felt it was necessary to secure this inventory given the current supply chain inconsistencies to achieve our future financial goals and meet our customer expectations. Looking beyond the remaining 2022 fiscal year and building on our success in the material handling industry, we intend to broaden our reach to include stationary energy storage and related sectors. We are focused on delivering our stationary energy storage products globally for solar-powered EV charging stations. With our operational investments, we’re positioned well to continue to support this sector as EV adoption continues to accelerate. On the technology front, we have commenced deployment of our SkyBMS Telematics product for remote fleet management and monitoring that delivers battery pack data to optimize performance and customer fleet tracking. I’m happy to report that customer interest has been very positive. Now, turning to review our financial results for the quarter ending December, revenue grew 19% to $7.7 million in the quarter, compared to $6.5 million in the year-ago quarter. Revenue grew 27% to $14 million for the six-month period ending December 31, 2021, compared to $11 million in the six-month period ended December 2020. The increased revenue was primarily driven by sales of battery packs, with higher selling prices of products sold, including greater sales to existing customers, as well as initial sales to new customers. In the second quarter of 2022 alone, we booked $19.8 million in new orders, while there can be some seasonality with orders, clearly strong customer demand continues. Gross profit margin decreased to $1 million in the quarter or 13.6% in the fiscal second quarter of 2022, compared to a gross profit margin of $1.5 million or 23% in the same year-ago quarter. Gross profit margin increased to $2.5 million or 18% for the six months ended December 2021, compared to the gross profit margin of $2.4 million or 22% for the six months ended a year ago. Gross profit in 2021 was affected by higher costs for steel, electronic components, and common off-the-shelf parts during the quarter, partially offset by higher revenues associated with increased product sales. Taking a look at our gross margin trajectory, as illustrated on the slide for those watching, our gross margin improvement was impacted by the pandemic during the last two quarters. While the supply chain disruption hit us hard, we’ve taken aggressive actions with our suppliers, our pricing strategies, product redesigns, and manufacturing initiatives to regain our previous trajectory. Selling and administrative expenses increased to $4 million in the fiscal second quarter of 2022 from $3.1 million in the same fiscal period of 2021, reflecting increases in outbound shipping costs, personnel-related expenses, insurance premiums, and sales and marketing expenses. R&D expenses increased to $2.1 million in the second quarter, compared to $1.6 million in the quarter a year ago, primarily due to new product development activities and their related OEM and UL certifications. Cash usage, as described earlier, supported our actions to protect our customer orders given the global product shortage and delivery delays. We’re actively working to reduce inventory balances as we move through this pandemic-caused disruption. We ended the second quarter with $7.9 million in cash and additionally drew upon our credit line with Silicon Valley Bank, with the line recently increased from $4.0 million to $6.0 million, as an alternative resource to manage working capital needs. With $19.6 million in product inventory, we will do everything in our power to build, produce, and deliver products timely. In summary, we are well-positioned to create long-term value for our shareholders. Looking ahead into 2022, we’re intensely focused on our strategic initiatives to increase profitability, mitigate ongoing global supply chain disruption, and deliver upon our record customer order backlog. We’re seeing strong interest from both investment funds, customers, and vendors for products and businesses that align with ESG or environmental social governance values that impact. Well, Flux Power is at the forefront of sustainable products, saving customers tons of carbon dioxide from our efficiency, empowering our drive to create more sustainable material handling and GSE solutions as we continue expanding into emerging applications in adjacent verticals. I look forward to providing our shareholders with further updates in the near term as we continue to leverage our first mover position in lithium-ion technology solutions. With our growing list of new and diverse large customers, which provide validation of our strategy. We also hope to see some of you at the upcoming 34th Annual ROTH conference in March and also our investor analysts’ facility tour planned this year at our headquarters in Vista, California. I thank you all for attending. And now I’d like to turn the call over to the operator to begin our Q&A session.

Our first question is from Craig Irwin with ROTH Capital Partners. Please proceed with your question.

Good evening and thanks for taking my questions. First, I should say congratulations on that $20 million in purchase orders. That is a big number and quite an accomplishment. I wanted to start by asking if you could maybe give us a little bit more of a breakdown. What was the relative contribution maybe from airlines and your other major customer groups to that $19.8 million you recorded? And as a second part of the question, the $31.4 million backlog, how much of that approximately is deliverable over the next 12 months?

Thank you, Craig, for being here. Regarding the backlog, we expect to handle most of it with deliveries by the summer, specifically by the end of June. This means we have a busy schedule at the start of the year and need to accelerate our production. Our key customers are receiving their forklifts and other equipment, which are also awaiting batteries. Fortunately, there is a significant wait time for forklifts as well. In terms of our backlog, Delta Airlines represents a significant portion, over 10%. Electrolux contributes even more than that, and PepsiCo, our largest account, adds considerably more. Caterpillar is also an important customer, along with several others. I previously mentioned that we have doubled their order pace and we deliver packs to them weekly. We are seeing increasing opportunities and are optimistic about this situation. Does that answer your question, Craig?

That definitely does. It's encouraging to see wide-based Tier 1 customers, many of whom you’ve been pursuing for a long time, finally beginning to yield results. I wanted to inquire about the transition into the March and June quarters as you approach the end of your fiscal year. I understand that this environment presents challenges in terms of overall visibility, but with your investments in the raw materials to fulfill deliveries and a slight increase in customer confidence, how do you perceive the growth curve as we head into the third and fourth fiscal quarters?

We are struggling to produce packs quickly enough to meet demand, which leads to strong financial results. However, as we experienced this past quarter, the shortage of electronic components, particularly isolator chips, is significant, and many companies are competing for them. This situation impacts our potential revenue for the quarter, and I have emphasized this point repeatedly. It appears that the disruption in the supply chain is not yet resolved, though we do observe encouraging signs of our suppliers and our team working diligently to address these challenges. We are seeing some signs of decreasing steel prices, but there are still delays caused by a backlog of chips at the port. We are actively managing that backlog for the next two quarters and shipping as much as we can. We want to avoid acquiring significantly more materials and inventory than what we can handle given supply chain constraints. It's a delicate balance. We continue to receive orders weekly and even beyond this year, indicating growth. We are adopting lean manufacturing and several other strategies as we develop as an emerging growth company. We are continually enhancing our processes and the quality of our workforce, which is very exciting. Does that answer your question, Craig?

Yes. Absolutely. So last question if I may. Your SG&A growth seems to be outpacing your revenue growth and we could call this maybe a little bit material. Can you maybe break out any items you would call one-time items as far as your certification costs or other items that are unlikely to repeat in the next couple of quarters?

Yeah. Are you referring to just SG&A or all of operating expense?

Well, we could do either, right. SG&A was $4 million, up from $3.1 million. R&D was $2.1 million from $1.6 million? Both of them had fairly substantial growth compared to your 19% top line?

It's a good question and a frustrating one as well. There are several factors to consider. First, insurance premiums have significantly increased, as many are aware. Our expenses as a public company ensure we stay connected with the market, and that has contributed to our costs. There’s a slide on our website that illustrates how our products are distributed across the country, which means we need to provide support for them. We rely on equipment dealers and battery distributors to assist us, which requires more effort from our side. To alleviate some of these SG&A costs, we're expanding our certified personnel in those regions to avoid the expenses of shipping products back and forth. Looking ahead, we have typically forecast our operating expenses to remain stable and to benefit from revenue growth. However, in the past quarter, that did not materialize as expected. For example, our research and development costs have risen because we transitioned from power cells to E-cells, which incurred about $1 million, mostly in this quarter, but this is a non-recurring expense. Another significant factor has been a 100% increase in shipping costs, as all outbound shipping expenses fall under operational expenses, and this has had a considerable impact. We anticipate that this situation will improve and don’t expect these high costs to persist. Some of these issues are temporary, and we hope they will be alleviated as supply chain disruptions ease.

Thanks again for that color, and congratulations on the nice revenue this quarter.

Yeah. Thanks, Craig.

Our next question is from Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Yeah. Thanks, Ron. Thanks, Chuck, for taking my questions. The inventory of $19.6 million, how much of that is finished goods inventory and what proportion of that is the inventory that you’re experiencing supply chain problems with, for example, the electronics and the chips, can you give us that?

Yeah. Yeah. The finished goods is probably $2 million or $3 million of that. And the mix of other components itself is probably the single biggest one; electronic components and steel, are next in line. So they take a big chunk of that. They’re longer-lead items. And there are some parts of the electronic parts that there have been such as those that have been in high demand. We have our engineers been out and bought some of those and put them into consigned inventory so that when our Board assemblers need them, they will have them, and then we won’t run out. So that’s part of our mitigation strategy that we probably wouldn’t have had; there's, I don’t know, a couple million of that.

Yeah. $1.3 million just stuff bought from other vendors.

Right. Right. So then, just digging a little bit deeper there, when you bought these or when you built up this inventory, were the prices already elevated or was it before you saw increases in prices?

The price increase, when COVID emerged in March 2020, initially didn't have a significant impact, and there seemed to be a delay in our suppliers adjusting their prices in response to the other factors at play. It wasn't until June that we really began to notice these effects more prominently. Chuck, what do you think?

Yeah. Yeah.

In June and then it really started to accelerate in October, November, December. And I think that period, hopefully, is the hardest hit, but we’ll see. Who knows? But those prices were definitely going up through that period. And so we have a very significant price increase to our customer in October. But, again, there’s a lag with that, as I mentioned.

Yeah.

Right. Great. So then just combining your earlier answer about the $31.4 million backlog, a significant portion of that to be delivered before June. And juxtaposing that with the $19 million minus $3 million or $4 million of finished goods inventory, it seems like for the rest of the fiscal year, you do have inventory enough to satisfy the backlog. Am I reading it right or am I missing something?

When considering the inventory situation, one might wonder why it's not sufficient. The straightforward explanation lies in the complexity of our purchasing process and the distinction between long lead items and those that are not. Not all of our purchasing commitments translate into contracted inventory purchases. We are actively working to extend some of the purchase order commitments with our suppliers. However, this is not feasible in every situation. Thus, there will be some procurement for future needs and certain parts that are difficult to source, which we may acquire at the last minute.

Right.

And some for parts that have been hard to get that we get at the last minute.

Right. And from a monetary standpoint, these are small parts – these are connectors or some...

Yeah.

...all items that we’re chasing down. We’re getting more and more confident. We’re going to find. It’s not big dollars.

Right. Great. No. Thanks for that color. And then the gross margin improvements you’re targeting. Of course, it will come from recovery of some of the gross margin headwinds that we have faced now. But it seems you’re also working on lowering material costs and improving design. And I think there was also some talk about adding production lines in the past?

We are adding a second shift this month. While it won't be a full second shift yet, it will significantly increase our production of large dollar high-volume packs, including our Class 1 X-Series and battery packs over $20,000 that are used on airport trucks. This has been a critical area where we urgently need to boost production, and I'm very pleased with this progress. Our VP of Operations is doing an excellent job with this initiative, along with implementing lean manufacturing to help recover many months of production time.

Okay. Thanks for that color. And just one last one, you briefly mentioned SkyBMS. Can you give us a little bit more color on what kind of customers you’re talking to, what the level of talks are and when should we start seeing initial revenues and then significant revenues?

Yeah. I’ve been talking about that for a number of quarters. We initially started delivering that last August to some customers and then it was really more of a pilot phase with PepsiCo. We had used it ourselves internally just to track packs out there, our engineers to monitor and know what’s going on with the packs. But PepsiCo said they looked at a lot of telemetry and ours is the best they’ve ever seen. So they wanted it on all their larger packs. Everything but the Walkies, the Walkie pallet jack. So we’re putting that on there. We’re charging for it. What we try to do is we’re really moving towards like your XM radio where you get it and then if you want to keep it, you have to pay for it because once we found that, once customers see this and understand it, because everybody’s heard of telemetry, we got telemetry all over the forklifts and half the time the customers don’t use them. But we found that once they see it, they love it and want more; they get customized reports, they get real-time reports, which we don’t know of any of our competitors in lithium-ion doing that. I’m sure they are, they’ll be catching up. But we see that as a platform to expand, adding new features on a regular basis, downloading updates, downloading new calibrations for different applications that the packs may go through in corner cases or extreme conditions. So we’re really excited about it and see that as a differentiating feature.

Great. Thanks a lot, Ron, for taking my questions and congratulations on a great quarter despite the headwinds. Thanks.

Yeah. Thanks, Sameer.

Our next question is from Chip Moore with Hutton. Please proceed with your question.

Hi. Thanks for taking the question. I wanted to follow up on gross margins, right? So number of actions underway, whether it’s pricing or product design or supply chain. So maybe you can help us first set out sort of near-term next couple of quarters getting product mix and backlog and things like that versus a bit mid-term and sort of line of sight on 30% margins if you could?

Yeah. Yeah. Let me start out with that and then I’m going to ask Chuck to fill in the blanks.

Fill in the blanks.

Gross margins are an important topic. We announced pricing changes in October and see the potential for another adjustment now, though some judgment is involved. Everyone is facing price increases and material costs. We believe addressing these will significantly contribute to our recovery, but it will take time. We currently have a substantial backlog of orders to fulfill before we can fully implement these changes. Our engineers are actively working on reducing costs associated with steel, welds, and sourcing materials from Mexico. Our VP of Operations has extensive experience with high-quality vendors in Mexico, which will help us lower these costs while maintaining a strong supply partnership. In Q4, some of these initiatives will require time for implementation and launch. As I'm discussing them now, we are making progress, but we need to manage the timeline. Chuck can provide more details on our projections, which are based on the current backlog. We're anticipating a significant increase in large packs that typically have higher prices and margins. We expect to see a notable positive impact from this, particularly in our Class 1 and airport GSE offerings. Chuck, could you add more details?

Yeah. And I think that a lot of this is pack mix; and also, of course, like any business, we have fixed costs, like rent expense or something. So as revenue increases, that rent is still there, so gross margins are naturally going to go up based on some fixed costs that we have there as well. But definitely it’s heavily driven off of the pack mix, which is heading towards the bigger pack that have higher margins at least. So we can talk separately about this and get it a little more detail.

Yeah. That’s helpful. And just to walk through the different pieces?

And follow-up and....

And Chuck, one other thing that works, and honestly, I don’t know how big this is going to be, but it’s like the right thing to do. Everybody’s running into chip problems. And I’m not talking about you, Chip. But not very funny, but we’re trying to use Tesla’s playbook a little bit of, our engineers and supply guys trying to source some of these electronic components that are not in such high demand and/or scarcity so that we can get them. And so the engineers need to do a little development and testing modest work on our BMS or circuit boards to do that. So I show that a marginal example of the kinds of things we’re doing to shake the bushes to move this gross margin. And as I said before, we’re an emerging company, we’re pioneering these things, we’re looking at everything. We know that getting gross margins up is an extremely urgent matter of business, and that’s what we’re doing as well.

Okay. Got it. No. That’s helpful, Ron. Maybe one more on, given the inventory build that we’ve talked about and I think executing on the backlog here sort of front-loaded this fiscal year, how are you thinking about cash burn dynamics in the second half? I mentioned some of your customers, that’s an important thing, and you mentioned the going concern, so just curious if you could help us there?

Yeah. No. Cash burn is a big one. I mean, we’re trying to deal with this backup in the pipe here, if you will, from the supply chain and we’re going to do everything I can, as I said, to build and ship. Everybody’s learning more lessons and how to deal with the supply chain backup. And we believe we can with the added assembly line; our improved processes on dealing with scarcities and better planning given a better understanding of what can be late and what’s not late can tighten up some of that efficiency in the system. But Chuck’s got a forecast. We updated a lot, as you could expect; I think everybody is these days, but we’re doing everything in our power to use the capital that we have. And I think, Chuck, do you have anything to add on that?

I believe the main issue is uncertainty. We've faced situations where vendors assured us they would deliver on time, only to later say they couldn't because prior commitments weren’t fulfilled. It's not a cash flow issue but rather the uncertainty surrounding the supply chain's improvement. We'll navigate through this without difficulties; we have the necessary financial resources. However, we need to continuously evaluate the situation as there are risks involved. The situation in the supply chain remains unclear.

There’s another aspect to consider when we analyze the courses affecting us. We believe there is less necessity to overstock our inventory compared to the defensive stance we previously adopted. While some uncertainty remains, it’s somewhat reduced, which is significant. We are focused on effectively managing our inventory levels, setting aggressive monthly targets to decrease it, and adjusting our purchasing activities accordingly. We aim to maintain satisfactory cash flow and strive to reach cash flow breakeven. Our initiatives cover supply chain management, gross margin, and operating expenses, and we are committed to being efficient and lean in our operations. It’s essential to ensure the right people are in the right roles and to tackle any efficiency challenges we face. We are launching a major quality initiative and have recently appointed a highly skilled Director of Quality. All these efforts are designed to build momentum towards our objectives, as we have a promising future ahead and a clear vision to become the vendor of choice. In my experience with larger companies, achieving that goal requires efficiency and the implementation of strategies like the ones we are currently pursuing. We are on that path.

Absolutely. Great. I’ll take the rest of mine offline and echo congratulations on the great order flow.

Okay. Thanks. Thanks, Chip.

Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to Mr. Dutt for closing remarks.

Okay. Thank you. I’d like to thank each of you for joining our earnings conference call today and I look forward to continuing to update you on our ongoing progress and growth. It’s a very, very challenging, but exciting time, particularly when we day-to-day are working with our customers. If we were unable to answer any of your questions, please reach out to our IR firm, who would be more than happy to assist. Thank you very much.

Thank you.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.