Greetings, and welcome to the Flux Power Holdings First Quarter Fiscal 2023 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'd now like to turn the conference over to Peter Geantil, Director of Product Development and Marketing. Peter?

Hello, everyone. Your host today Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present the results of operations for our first quarter fiscal year 2023 ended September 30, 2022. A press release detailing these results crossed the wires this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of our company's website. Before we begin the formal presentation, I would like to remind everyone that the 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.

Thank you, Peter, and good afternoon, everyone. I am pleased to welcome you to today's first quarter fiscal 2023 financial results conference call. Firstly, please note for a moment that on Slide 3, if you’re following the deck, there's a short reminder of what we do. That is electrifying commerce. We are powering material handling, airport ground support, supporting solar energy storage, Port Authority equipment, and other applications with new and clean technology. Now on to our Q1 results. Our first quarter reflected a consistent trend of strong revenue growth as we continue to focus on fulfilling orders. In Q1 '23, revenues were $17.8 million, up 184% from $6.3 million in the prior year, marking our 17th consecutive quarter of year-over-year revenue growth. Sequentially, revenues were up 17% from $15.2 million in the fourth quarter of fiscal '22. In the first quarter fiscal '23, we received $9.7 million in customer purchase orders from existing and new Fortune 500 customers, reflecting the timing of deliveries with new forklift orders. To highlight the importance of strong relationships with our existing customers, over 90% of revenue during the quarter came from customers with whom we have long-term relationships. Our strategic focus is on relationship business, emphasizing price, service, and quality, and meeting ongoing new purchase needs and service requirements. We believe that business from our installed base will drive new customers to our technology. Developing our technology internally ensures our customers have the most up-to-date products and services. For the first quarter, our customer order backlog decreased from $35 million to $26.9 million as of September 30, aided by our ongoing efforts to fulfill orders on time and improvements in sourcing to mitigate parts shortages. This bodes well for increased confidence in future supplier performance. Our strategic initiatives, including accelerating backlog conversion of orders to shipments, reflect recovery from supply chain disruptions. These initiatives are also increasing gross margins, which will lead to profitability. New orders for Q1 '23 decreased 17% to $9.7 million compared to $11.6 million in Q4 '22, due to the timing of customer forklift order deliveries, although this does not reflect slowing customer demand. We were pleased to see that supply chain disruptions continued to ease during the first quarter while we pursued strategic initiatives for supply chain and profitability improvements. We made significant progress with new accounts in the first quarter by adding two new Fortune 500 customers, each with seven-figure revenue potential. Over the past 12 months, we have made aggressive efforts to address supply chain issues. We launched a project for in-house automated cell module production to manage module skills and accommodate secondary cell suppliers. We also utilized increased sales volumes to source steel and board components from low-cost regions and higher-volume suppliers. During the September-ending quarter, we saw lower shipping costs as carriers became more competitive, and we are using more reliable and cost-effective secondary suppliers for key components that meet our specifications. Although supply chain disruptions have improved, we have increased our inventory of raw materials and components to $18.9 million as of September 30. To mitigate any remaining supply chain disruptions and support timely deliveries, our inventory turns during the quarter increased from 3.4 to 3.6, aided by improved manufacturing capacity and production processes, including advancements in Lean Manufacturing, which enhance throughput and reduce customer order fulfillment time. We have introduced new product designs based on a new modular platform for our battery packs to meet customer needs. These improvements include higher capacities for more demanding shifts, easier servicing, lower total cost of ownership, and additional features to address existing performance challenges of diverse customer operations. Meanwhile, our new designs offer margin enhancement or commonality and improve serviceability. We are currently building the first few models of our new platform and scheduling UL listing, as well as forklift OEM approvals and UN 38.3 certification. The quarter also saw the development of an in-house vibration table and temperature control unit for battery testing, facilitating lower costs and expedited UL and UN 38.3 testing. While supply chain disruptions are easing, our profitability improvement initiatives are showing positive results and continue to enhance the margins of shipped products. Our cash burn rate decreased 87% compared to the same quarter last year, supported by higher revenues, cost-cutting actions to reduce material and assembly costs, and overall gross margin improvements. Enhanced production processes, including progress in implementing Lean Manufacturing, have led to greater efficiency and higher inventory turns. Our focus on increasing revenue and improving margins, especially for adjusted EBITDA, is illustrated on Slide 7, which shows an upward trend over the past fiscal year. We are actively executing specific supply chain and cost reduction initiatives to maintain this momentum. We established a $5 million line of credit facility on May 11, 2022, including $4 million of committed credit availability. As of November 7, our availability under this working capital facility has been supported by a recent third amendment filed today, which continues our $8 million revolving line of credit with Silicon Valley Bank. Current availability from the SVB line is $1.4 million, along with a $4.0 million subordinated line of credit that remains unused. Together, these provide a total of $5.4 million in cash. Our current potential customer pipeline continues to grow with the addition of two new Fortune 500 customers this past quarter, supported by a full product line designed for large fleets seeking a reliable partner to meet their ongoing needs. These customers represent a diverse base across various sectors, all looking for lower costs without sacrificing performance in lithium-ion battery packs. We have observed a trend of orders for our packs being installed on new forklifts, and we anticipate a growing demand for replacing lead-acid batteries as they reach the end of their lifespan. We have taken steps to restore our path toward improved gross margins. As indicated on Slide 9, our gross margin increased sequentially to 22% in the first quarter of 2023 from 20% in the first quarter of fiscal '22 and 15% from the third quarter of 2022, reflecting our progress in restoring our gross margin trajectory. Our improvement initiatives encompass several actions that are beginning to positively impact gross margins: price increases on new orders, higher back volumes, more competitive shipping rates, reduced material costs, and enhanced manufacturing capacity and production processes. New product designs aimed at reducing costs and the transition of product lines to a new modular platform are integral to our strategy for accelerating gross margin improvement. With supply chain disruptions easing, we have achieved production process improvements and better supply chain management. During the quarter, inventory rose to $18.9 million from $16.3 million at June 30 to support timely deliveries, as mentioned earlier, and inventory turns improved from 3.4 to 3.6, influenced by the sourcing and production enhancements I have detailed. On the technology front, customer interest in our proprietary Sky BMS telematics product continues to grow, enabling remote fleet management and monitoring to optimize performance and track customer fleets. I am delighted to report that customer feedback remains very positive, positioning Flux Power as a leader in this technology space. Looking beyond just profitability, we are focused on expanding our reach into related verticals, such as robotics, as we build on our success in the material handling industry and leverage our existing infrastructure. With our operational strategy that encompasses six assembly lines, we are well-positioned to capitalize on our capabilities as the adoption of lithium energy solutions accelerates. With that, I will turn it over to Chuck Scheiwe, our Chief Financial Officer, to review the financial results for the quarter ended September 30, 2022.

Thanks, Ron. Now turning to review our financial results for the quarter ending September 30. As Ron mentioned, revenue for the fiscal first quarter of 2023 increased by 184% to $17.8 million, compared to $6.3 million in the fiscal first quarter of 2022. This was driven by increased sales volumes and models with higher selling prices. Gross profit for the first fiscal quarter of 2023 increased to $3.9 million, compared to a gross profit of $1.3 million in the fiscal first quarter of 2022. Gross margin was 22% in the fiscal first quarter of 2023, as compared to 21% in the fiscal first quarter of 2022. This again is reflecting a higher volume of units sold ending with higher gross margins. Selling and administrative expenses increased to $4.5 million in the fiscal first quarter of '23 from $3.5 million in the fiscal first quarter of '22. This was reflecting increases in outbound shipping costs and certain personnel expenses, temporary labor, and an increase in insurance premiums. Research and development expenses decreased to $1.2 million in the fiscal first quarter of '23, compared to $2 million in the fiscal first quarter of '22, primarily due to timing of expenses related to our development and testing of new products. Adjusted EBITDA loss was $1.5 million for the fiscal first quarter of '23, an improvement from an adjusted EBITDA loss of $3.8 million for the fiscal first quarter of '22. This is an improvement of 61%. Net loss for the fiscal first quarter of '23 decreased to $2.1 million from a net loss of $4.1 million in the fiscal first quarter of '22. This is principally reflecting the gross margin profit from higher revenue and partly offset by increases in operating expenses and interest expense. The cash used in operations in fiscal '23 for the first quarter declined by 87% compared to Q1 a year ago. We ended the fiscal quarter of '23 with $300,000 in cash and have our $8 million working capital line of credit with Silicon Valley Bank, of which $1.4 million is currently available, and our $5 million LOC facility of which there's $4 million of signed committed debt availability. These are both resources to manage working capital needs. We believe that our existing cash and additional funding available under the credit facility from SVB and our subordinated LOC will be sufficient to meet our anticipated capital resources to fund the planned operations for the next 12 months. We fully intend to avoid raising equity capital prior to reaching profitability. We are on track executing our gross margin improvement and our cost control initiatives. We're also exploring increases to our working capital availability. And I would like to pass it back to Ron to offer some closing remarks.

Thanks, Chuck. As Chuck mentioned, I want to reemphasize we fully intend to avoid raising equity capital prior to reaching profitability. And profitability is currently our top priority. So looking ahead, we believe the combination of existing customer orders and acquisition of new customers who want the benefits of lithium-ion technology business can drive continued revenue growth. Price, service, and quality are key factors as to why we continue to win business and ensure our goal to continue our growth trajectory. Our current production facility should support annual revenue well beyond $100 million given our facility footprint, our second shift build-out, and lean manufacturing implementation. In summary, we are well-positioned to execute our strategy of electrifying commerce while creating long-term value for our shareholders. We are encouraged by strong purchase orders, improving backlog, continued expansion of margins through better sourcing and supply chain management, continual process improvement, and pricing. We continue to execute actions to improve adjusted EBITDA as shown on Slide 7, which is a key indicator of achieving profitability. Furthermore, we anticipate expanding into new markets having strong demand for our value proposition of high performance and service at a lower product lifecycle cost. I look forward to providing shareholders with further updates in the near term as we continue to leverage our leadership position in lithium-ion technology solutions and our growing list of new and diverse large customers. I thank you all for attending. And now I'd like to hand the call over to the operator to begin our question-and-answer session.

Thanks. Good evening, Ron and Chuck. Thanks for taking the questions. Congrats on a very strong growth. I wanted to ask Ron on your comments on demand not slowing, given the macro and just the order flow in the quarter. Maybe you can expand on some of that lumpiness quarter-to-quarter on order flow. And then I think last quarter you talked about a Fortune 100 customer LOI. Any material orders back up there yet and how we think about order flow there? And then of course, the two new Fortune 500 customers you disclosed today, how should we think about potential ramps on those types of customers?

Thank you for the question, Chip. Yes, we have acknowledged the fluctuations in order volumes. While we've seen some smoothing over the past year, variations still occur. Most of our orders are linked to the delivery of new forklifts, which need our battery packs, and the timing can be quite irregular. This inconsistency is a major factor for us. Like many others, we are navigating supply chain disruptions while trying to manage inventory levels effectively. Regarding the letters of intent, one of our biggest customers has submitted LOIs for 2023 and 2024, ensuring they can secure their place in line, given the extended lead times for forklifts and related products. They want to guarantee that when their forklifts arrive, they have the necessary battery packs available. This is particularly relevant in the context of our main focus areas—material handling and airport ground support equipment. There is a consistent demand for batteries since forklifts require replacements after a certain period as we move towards electrifying commerce. Unless we face a severe economic downturn, we believe these sectors are resilient against recessions, and this demand should remain strong. Additionally, the increasing adoption of lithium in large fleets, especially those operating multiple shifts, has created significant demand that we are struggling to meet. Attracting new customers adds further pressure on our capacity. We are committed to achieving profitability with a clear strategy and have been discussing our initiatives in this regard for most of the year. This will set us up well for future growth as we aim to meet the rising demand for lithium across the country, supported by the substantial infrastructure we have built. I hope that covers your question, Chip.

Yes, that was great, Ron. I mean, yes, so it’s like summary sort of quarterly, you could see some lumpiness, but medium term your visibility is getting much better when I take that away. Okay. And to your point on sort of—I know profitability is the focus—but in terms of expanding into new markets, you mentioned robotics. Just any updates on what would we take there? I think you also talked about maybe being able to get some more working capital availability with, would that be part of it? And then just existing sort of adjacent markets, ground support equipment and things like that. Any update there? Thanks, guys.

Yes, good questions. We're in a warehouse of all these large companies. I mean, you saw our customer list; they’ve got warehouses all over the country, high demand, typically operating three shifts. They need the performance to achieve their performance and cost goals. I think they're finding lithium to be a great answer. Now, as we expand, our assembly lines I mentioned, we are working with a customer to deliver packs for warehouse robotics, and that is really gaining a lot of traction out there. Being in the warehouse already is a natural fit. I always talk about product adjacencies. Well, this is very much a product adjacency that can utilize our assembly lines, and our new products are very modular. So I don't want to say it’s as easy as it goes, but that’s the picture that comes to mind doing that. There are other adjacent markets that we have sent projects on, including autonomous vehicles, shuttle vehicles, solar storage, and solar backup. The other area that's really beginning to get traction now as people are even more hungry for lithium is the heavy-duty applications as big port equipment that typically operates outside and require more power. Specifically, we're finding the ones that require 80 volts, which is the next layer up, are interested in heavy-duty forklifts, and we have the EVO packs to go with them. We've a lot of experience because all of our airport ground support equipment is 80 volts. That now is really starting to develop and is very encouraging. It certainly plays to our sweet spot of offering the energy and power that our battery management system and our mechanical designs support.

Interesting. Yes, higher margin too, right. Okay, but congratulations again.

Yes, it's like cars. Chip, the bigger cars, the SUVs, the luxury cars have higher margins. It's the same here. So we're very keen on it. People are saying lithium technology and costs are all becoming more favorable. These big companies see it, and they don't want to be disadvantaged against lead-acid options, and we can provide the energy solution for that. I think that's an exciting area of growth that we've been seeing this past year, particularly.

Okay. Thank you for taking my questions. Just to begin with, Ron, the two new customers, which industry are these guys from? Is it material handling or something else?

One is the fifth largest can manufacturer in the world for beverages, so various types of cans and bottles. And one is in the retail sector.

Consumer product.

So it really fits into our customer categories in terms of different sectors. We're finding multiple potential customers that we're working with in all those categories.

Understood. Thank you for that. I know you're talking about product adjacency and new opportunities coming up. But we're also seeing sort of the R&D spending has gone down. I'm just trying to make sense of how much more mileage you can get from the existing portfolio and with your ambitions to move into other offerings and applications, how we should think about R&D spend going forward?

Yes, R&D is an interesting area. We have, I think most importantly, we've been doing this for 8 years, and we've learned a lot. We're into another generation of packs that bring better features for the customers at lower costs. However, even within the industries we're in, there continue to be a number of opportunities to expand offerings, maybe fill in some gaps. I mean, there are something like four different types of forklifts that we must fill in some of those gaps. The timing of our R&D, we don’t see R&D expenses declining over time. We can have a little again; it is the word lumpiness, but a lot of it is driven by how much are we testing and how much do we have in terms of expensive product development costs in a quarter versus another quarter. As we plan to grow, our strategy is to be a leader. To be a leader, we need to build scale, and we want to continue to do that. We have to be able to provide to address all customer needs from cost of service, serviceability, ease of doing business, telemetry, and more. As we grow, we will do so at the pace that we can be successful. The demand is there, and we've had more requests to go into new markets and applications. Our challenge, given the experience, is to choose those that will make sense and leverage the resources and scale we are building.

Yes, great question. As we mentioned in the script, we brought in-house vibration table, freezer, and some of the equipment we had previously shipped our packs to Southwest Research mainly down in San Antonio for testing, which was very expensive. We brought that in-house. Some of the R&D expenses we had in the past will go away long-term by doing that in-house. We're also speeding it up and expediting it for UL and UN certifications. The equipment we've brought in is financed, and within 6 months, we will have paid for it. It's a very quick pay-off on some of the equipment.

Understood. Well, that’s helpful. Thank you guys. Just one last one. And I apologize if you've already addressed it. Backlog was lower at the end of this quarter. How should we think about order activity, and maybe backlog building up again going forward?

I think the backlog is one of those things; we see surges. I mean, we notice more and more orders coming in. Whenever you take a mark to market, it does move around. We have been very focused on our full fiscal year and have some benefit from having quite a pretty large backlog. We have much higher confidence of what we have and what's expected, what we have to deliver. We work very closely with those very large customers in terms of their forecasting, knowing we may not get the order immediately. It does not show the whole story of all the anticipated orders to come. They often receive their forklifts first and then put battery orders to us. So we do have those letters of intent out there. We are working with key people at both those customers and in some cases with deal account sales people to identify the needs for many months out. So it's not because there are no orders—the backlog does not tell the whole story of anticipated orders to come. It ties back to our relationship with those customers; they've chosen us not to bid every time they need an order but to work with us ongoing.

Yes, thank you, Ron. I'll take my other questions offline. Appreciate it. Thank you so much.

Okay. Thanks, Amit. Talk to you later.

Hey, good afternoon and congrats on the solid quarter. I guess, apologies if you touched on this, I don't think you did. But with respect to the inventory build, what specifically are you concerned with off-setting that you're building additional inventory? And what sort of components or quality control are you nervous about needing to stockpile?

The latest stuff we're seeing is contactors. We've got some parts that we've used for a lot of electronic products that are still tight, particularly for the boards. We're still chasing down components to complete the board, and those are the ones that we're most concerned about right now. If the cells are doing fine, we're receiving cells in a timely manner while taking advantage of lower prices coming in.

Yes, it’s a lot of the stuff you're 52 weeks out, and you get nervous and say, we'll just buy what we can get, and get it in the door. Hope that helps.

Yes. Yes, that's great. And then I guess on the SG&A line, kind of a high watermark, I think we're running around $4 million through most of fiscal '22. I think it was about $4.5 million in 1Q here. Anything unusual in the quarter? Or is that sort of the runway we should be thinking about for this fiscal year?

I think that is the runway to be thinking about! The stuff that's happened recently is based on significant increases in insurance premiums for D&O and property, which is really hitting everybody. We're very comfortable with the personnel in hand; we're not adding bodies, and we're going to continue as is. I think that's a very good place to be. The only difference there was some internal allocations between a few bodies as we reorganized one department, so some expense got moved to G&A from mainly R&D. There was a bit—just a little bit of that, but that should be a good runway going forward.

Great. Thank you.

Thank you. I would like to thank each of you on the call for joining our financial results conference call today and 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 IR firm, who would be more than happy to assist. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.