Greetings, and welcome to the Flux Power Holdings Fiscal Third 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?

Thank you, and good afternoon. Welcome to Flux Power's financial results call. Today's conference call is being recorded. Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present the results of operations for the fiscal year 2022 third quarter ended March 31, 2022. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern Time and is available in 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 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'll 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 now turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Thank you, Justin, and good afternoon, everyone. I'm pleased to welcome you to today's third quarter 2022 financial results conference call. Our third quarter demonstrated strong revenue growth driven by customer demand for our lithium-ion battery packs, the addition of new customers, and product improvements. Revenue rose 89% to $13.2 million compared to $7.0 million in Q3 of 2021, marking our 15th consecutive quarter of year-over-year revenue growth. In this quarter, we received $20.5 million in new customer purchase orders from existing Fortune 500 clients and new customers. Notable successes include an order for our Class 1 X-Series battery packs from a new wastewater treatment customer, multiple orders for GSE battery packs from an established large domestic airline customer, and an order for our C-Series battery packs from Beam Global, which recently reported a record pipeline. Our customer order backlog reached a record $38.6 million as of March 31, 2022, indicating growing demand for our products from both new and existing customers while we continue to expand into new verticals. Moreover, we've received a nonbinding multi-year letter of intent from one of our large Fortune 100 customers, expressing interest in preserving build slots as they transition their fleets to lithium. In March, we launched three new models at the MODEX 2022 Material Handling Trade Show. These include the L36 lithium-ion battery pack, a 36-volt option suited for three-wheel electric forklifts, the C48 lithium-ion battery pack for automated guided vehicles and autonomous mobile robots, and the S24 lithium-ion battery pack that delivers twice the capacity for Walkie Pallet Jacks. Additionally, we strengthened our corporate governance by appointing Cheemin Bo-Linn, a veteran in the global technology industry, to our Board of Directors. As we reflect on our third-quarter performance, it's essential to consider the ongoing impact of global supply chain disruptions, which led to increased shipping delays for key parts and production delays amidst rising purchase orders. This created a need for pre-purchasing inventory in response to these challenges. We also witnessed significant cost increases for steel, various electronic components, and shipping, which surpassed our recovery in pricing from shipped units during the quarter. We have taken aggressive measures to mitigate these supply chain issues by sourcing more competitive carriers and utilizing lower-cost steel suppliers that still meet our specifications. Our new product designs cater to customer requests, including enhancements for higher capacities, ease of servicing, lower ownership costs, and other features to address various performance challenges. We also made strides in attracting potential new customers, especially those with large multi-shift fleets benefiting from lithium technology. Our inventory levels increased to $20.9 million as of March 31, 2022, primarily to navigate supply chain disruptions and ensure timely deliveries while we work on initiatives to reduce inventory. Our inventory turns improved from 2.0 to 2.5, based on cost of goods sold divided by total inventory. While supply chain challenges persist, our strategic supply chain and profitability improvement initiatives are showing positive results. Enhanced production processes, including lean manufacturing practices, have led to increased efficiency and improved inventories. We expect inventory levels to decline as we aggressively ship backlogged orders and our strategic initiatives gain momentum. Recently, we implemented a $5 million credit facility on March 11, 2022, which includes $4 million in committed credit availability. This facility, combined with our working capital line totaling $6 million from Silicon Valley Bank, with $2.5 million available, will help address unforeseen needs amid ongoing supply chain disruptions. We're observing moderate improvements in supply chain issues internally as we focus on manufacturing processes, procurement, and cost efficiencies while working toward cash flow breakeven and profitability. We have taken action to restore our gross margin improvement path, with our gross margin improving sequentially to 14.6% in the third quarter from 13.6% in the prior quarter. This indicates initial progress in restoring our gross margin trajectory. Our initiatives to improve margins include implementing price increases, utilizing alternate vendors and lower-cost suppliers, designing new products to reduce costs, simplifying part counts and complexity, and enhancing pack serviceability. Despite continued supply chain disruptions, we managed to keep inventory levels relatively stable, increasing to $20.9 million. Securing this inventory was necessary given current supply chain inconsistencies to meet our future financial goals and growing customer delivery requirements. Looking beyond fiscal year 2022 and building on our material handling industry successes, we are also focused on expanding our reach into warehouse robotics and related sectors. Our operational strategy positions us well to support these sectors as the adoption of lithium energy storage accelerates. Furthermore, we continue to observe customer interest in our proprietary SkyBMS telematics product, which is designed for remote fleet management and monitoring, providing battery pack data to optimize performance in fleet tracking. Customer feedback remains very positive. 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.

Yes, thank you, Ron. As we turn to review our financial results in the quarter ending March 31, revenue grew 89% to $13.2 million in the fiscal third quarter of 2022. This was compared to $7 million in the same year-ago quarter, and the Company grew by 71% from $7.7 million in the fiscal second quarter of 2022. The increased revenue was primarily driven by our sales of a higher mix of the large packs we sell that have higher selling prices. This was combined with the higher volume of units sold to both existing and new customers. In the third quarter of 2022 alone, we booked $20.5 million in new customer orders, as mentioned. While there can be some seasonality with orders, strong customer demand continues. Although gross profit was higher in the fiscal third quarter at $1.9 million compared to the same quarter a year ago of $1.7 million, the gross profit margin decreased to 14.6% in the fiscal third quarter of 2022 as compared to a gross profit margin of 24.1% in the same year-ago quarter. Gross profit was impacted by higher costs for steel, electronic parts, and common off-the-shelf parts that occurred during this quarter. Those were partially offset by higher revenues for the quarter. Selling and administrative expenses increased to $3.9 million in the fiscal third quarter of 2022 from $3.1 million in the same fiscal period of 2021. This reflects increases in outbound shipping, higher insurance premiums, and higher personnel expenses. Research and development expenses increased to $1.7 million in the fiscal third quarter of 2022 compared to $1.5 million in the fiscal third quarter of 2021. Those increases were primarily due to expenses related to new product development, UL certifications, and UN 38.3 testing that we conduct. The cash usage, as we discussed previously, has supported our actions to protect our customer orders, given this global product shortage and delivery delays. We are actively working to reduce inventory balances as we move through this pandemic-caused disruption. We ended the third quarter with $3.8 million in cash. As Ron mentioned previously, we have our $6 million working capital line of credit with Silicon Valley Bank, of which $2.5 million is still available. Additionally, we recently closed on a $5 million credit facility, of which we currently have $4 million of committed signed debt availability. These are resources that help us manage our working capital needs. This added credit facility, along with progress on our initiatives, has led to the removal of the going concern clause we had in our SEC filings. Now I'd like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. In summary, we are well positioned to create long-term value for our shareholders. Our strategic initiatives have been deployed, positioning us to work towards mitigating ongoing global supply chain disruptions and executing on our record $38.6 million customer order backlog; and finally, generating cash receipts to accelerate our trajectory to cash flow breakeven and profitability. Looking ahead, we continue to focus on increasing our energy storage solutions to new existing customers who are eager to realize the benefits of lithium-ion technology and also to focus on expansion into emerging sectors such as warehouse robotics and high-voltage applications. We continue to see strong interest from both investment funds, customers, and vendors for products that are aligned with ESG values, that is environmental, social and governance. Flux Power is at the forefront of sustainable products with technology that avoids tons of carbon dioxide emissions due to higher efficiency and reduced energy consumption for the same work requirements as done by other sources of energy. I look forward to providing our shareholders with further updates in the near term as we continue to leverage our leadership position in lithium-ion technology solutions with our growing list of new and diverse large customers, as shown in our slide and our website. We also hope to see some of you at the upcoming H.C. Wainwright Global Investor Conference in two weeks, and the L.D. Micro Conference in June and also our investor analyst facility tours that we're planning for the period this coming July through December held at our headquarters facility, Encinitas, California. I thank you all for attending. And now I would like to hand the call over to the operator to begin our question-and-answer session.

Our first question is from Amit Dayal with H.C. Wainwright.

Ron, regarding margin improvements, you mentioned that steps have been taken in that direction. We noticed a 100 basis point improvement sequentially this quarter in gross margin. What level of improvement can we expect over the next few quarters?

Yes. Amit, thanks for the question. We're extremely focused on that. We've got a lot of aggressive actions, as I've mentioned. I think this past quarter was just trying to dig out of the December quarter where we felt the full impact of the increased prices and delays against preordering. It hit us full throttle. While we still have supply chain shortages and delays during the quarter, we're starting to gradually work out of that. So it went up one point. Of course, we'd like more, but we're confident in tracking all that we're doing that that rate of increase is just going to continue significantly as we go month-to-month and quarter-to-quarter from here. As you know, we don't give out guidance on that. When we tally, we'll be glad to talk to you offline if you want a little more color. But we have very significant increases; steel is one of the things that hit us the hardest. It's gone up several hundred percent. During this time, while we're being hit, we developed sources. We're now starting for some parts, getting sources from China with very significant decreases and from Mexico as well. There are some very good sources in Mexico that our head of operations is very familiar with, with lower costs and also more timely delivery as well. Logistics are a factor too. We're designing a whole new platform that has a very significant cost. When you start eliminating about half your parts, you really get some significant cost reductions, kind of 101 of manufacturing. So those things don’t all of a sudden pop in, in one month or one quarter. But the effect of those continues unabated in the months and quarters ahead, where it should begin to report the kind of numbers we're all more happy with. It's starting now. It has begun. It's gaining momentum, and we're excited about it. Despite all the headwinds of the supply chain, we're raising those margins anyway. The pricing effect, a lot of that backlog was negotiated before we got the onslaught of the price increases that we sent out last fall in April. So that will start coming in on new orders, particularly in the second half, but really it's already started; it's going to gain that momentum that I'm really trying to emphasize.

Understood. You experienced a significant sequential increase in revenues, and your backlog also grew. How should we view this as potentially establishing new quarterly levels for delivery? Should we anticipate a sequential decline in revenues? Regarding the rhythm over the next few quarters, how should we consider revenues coming in?

We are currently capacity constrained, but we're working to increase our capacity, including starting a second shift to match the throughput of our first shift, especially for the larger packs. Our revenue growth mainly comes from these larger packs, which is great news as they offer higher prices and margins. We expect this momentum to continue, as indicated by the $20 million in orders we received during the quarter. These orders will be fulfilled over several quarters based on timing. We have established relationships that enable us to leverage opportunities with other companies. Our marketing channels include sales representatives from national accounts at forklift OEMs like Toyota, Crown, and Raymond, along with their large dealers who already have the accounts we want. Performing well with major accounts often leads to additional large accounts, creating a beneficial synergy. We anticipate this positive trend will keep accelerating. While there may still be some fluctuations beyond the backlog, these have significantly reduced compared to previous years.

Understood. Is there any revenue concentration with any specific customer?

With specific customers? Yes, I'm just trying to see if there's any revenue concentration for you guys right now? It's good news and bad news, really. We have three or four customers that provide the majority of our revenue. As they continue to convert their very, very large fleets, these are Fortune 50, Fortune 100 companies. It bodes well for just continuing orders each quarter out as far as you can think about. We are tracking. Our VP of Sales is giving us updates on quite an impressive list of other customers that we're working through stages of the sales cycle with them. I'm really looking forward to that because I think reducing customer concentration will give us more assurance in our financial forecasting and planning. I will say that of all these large customers, we haven't lost any. This is a relationship business. So we're very focused and intent on ensuring we build and strengthen the relationships with these companies because they have ongoing needs for our packs. They are typically very influential in their sectors as well. Does that help?

Our next question is from Chip Moore with EF Hutton.

So congrats first on the continued order momentum, great to see. I was curious on the new multiyear LOI; it's very interesting. Great to see a large customer looking to lock up slots. I assume those units get priced as they commit, but maybe you can expand on the mechanics there? And any sense of how big that opportunity could be?

Yes. No, Chip, thanks for the question. Yes, I think it's really the first LOI of this sort that we've seen, and it reflects that this is starting to happen in the industry because the supply chain, when they commit to forklifts, they need to have the batteries, and these large companies want lithium. They don't want to have to go back and stick a lead-acid battery in a new forklift going to these very large fleets that want the performance. It's very likely that's going to continue. This LOI is locking in that space. It's one of our largest customers. It reflects not an unusual event. We were pretty confident that the level of ordering that was happening was going to occur because we know the size of their fleets, we know their commitment to us. We believe the relationship is strong, although we have to perform each quarter and each month. Believe me, there's no guarantees in any orders in this sector in material handling, like a lot of other businesses I've been in. So you have to perform, but it's not a huge surprise. I will say, just to give you an idea, I don't really want to quote a number because it's not an order, but it covers two years, and each year is in the low eight-figure dollar level category.

To add to your point, these are at higher pricing as well. This is not in the pricing we had a year; this is that increased pricing that we put in effect.

Yes. It's also for a couple of our product lines that have a higher margin already, so there's not as much risk. We're seeing signs of if you want to lock in price at this price, then if you want to share any risk to that, it's a lower price. The pricing in this inflationary environment is dependent on who is taking the risk on future prices. But on this particular one, we’re pretty confident with the pricing.

That's super helpful color, I appreciate that, and great to see. I guess a follow-on to that, you touched on the second line and the higher-volume pack capacity, and I think the mix is favorable this quarter. But maybe back to the first question on just sort of near-term cadence. Any thoughts on product mix the next few quarters that capacity should be ramping up?

Yes. As Chuck said, we're tracking just a very definite trend toward a higher mix of the bigger packs. For us, think of it simply as there's Class III, Walkie Pallet Jack, the lower price, although there are a lot of them. A few years ago, that was the only thing we sold. Of course, we built out the whole product line. But the Class I and II vehicles, trucks that we have packs for, we call it our M36 pack for Class II and X-Series for Class I. Those are the bread and butter, the lion's share of these big fleets; is where all the action is in terms of revenue and margin. Those two, and then the third one, that's central, it's like the big three. We're talking about the bigger packs for the airline, airport equipment, ground support equipment, the trucks that pull the baggage carts, cargo trucks, scissor lifts, and pushback tractors. Those are larger packs as well. We're seeing quite a bit of revenue come in from there with our largest customer, and we're now starting to see other airlines cement orders following their examples. So those are the ones we're pushing. We also have another pack, that high kilowatt; we call it an X80. There are a lot of these larger forklifts that are seeing lithium become economically attractive just in terms of cost savings. They could take some of these larger forklifts that are even outdoor forklifts and migrate from diesel or propane to lithium, gaining the advantages of better environmental impact. All our customers, there's somebody there that has an environmental incentive.

One thing I would add is that we're focusing on margins with the current backlog. We are not relying on the supply chain to improve on its own. This backlog allows us to place much larger purchase orders and establish blanket purchase orders, enabling us to make greater commitments with vendors, which significantly reduces prices, particularly for steel. Having the ability to order products six months in advance is a major advantage, as it takes time to integrate into the supply chain, but it is very beneficial.

That's nice. And then maybe if I could sneak one last one in. You highlighted sort of the focus on broadening reach, I think, several times, whether it's warehouse robotics. You talked about the momentum in the ground support equipment channel. So maybe just more expansion there. And then if you could touch on, I think one of your customers had acquired a storage play. Just any thoughts on that? It sounds like maybe they were still facing purchase orders, so just curious there.

Yes. I really just talked about the adjacent verticals here. We've been negotiating with a customer who is a division of a household name in robotics for their warehouses. It's a big provider of robotics, and we expect to kick in the first part of next year. It’s just a natural extension here. We deal regularly with these customers that have the warehouses. There is a level of robotics and automation happening, and putting lithium in there is what they're all driving towards. It provides a lot of synergy for us. Our strategy has always been to have a full product lineup because you go to these big customers, and they don’t want to have to go to five or six different companies to get their lithium products. So it's a natural extension; I think there’s a lot of synergy there. The other one I think you alluded to was Beam Global, who has the mobile charging stations that are solar powered and we provided the backup. We have a great relationship with them. I think it's going to be ongoing in some form or fashion. They felt it was necessary to bring into their own organization a battery cell supplier. They had dealt with one before and brought that in-house. So we will gradually see their needs turned over to them. I think that's helpful. There could be some future activity that comes with them, number one. Number two, it gives us experience in that sector, which is a natural extension for us to provide lithium energy storage for applications like that. We're also working on projects we've had in the past with high-voltage autonomous shuttle vehicles. We continue to look at alternatives for battery packs to come off our assembly lines that could be fit for that kind of usage, helping us build scale. That's certainly a very key part of our strategy. So, yes, we're continuing to look at that while also applying a business case to that. It’s got to fit with our near-term strategy of getting to profitability in the very near future. It's got to align with the business. But we say no to many more things than we say yes to. So as we grow and get positioned for profitability and even stronger growth, it will be very exciting for Flux Power.

There are no further questions at this time. So I would like to turn the call back over to Mr. Dutt for closing remarks.

Yes. Thanks, Peter. Thank you. I would like to thank each of you for joining our financial results conference call today. I look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please reach out to our Investor Relations firm, who would be more than happy to assist. Thanks again. Bye-bye.

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