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 across 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 flexpower.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 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 $6.5 million, making 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 20% -- 24% over prior quarter Q1 2022 and 23.8% over a year -- of the year ago quarter. Highlight 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 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. And then in January we also strengthen 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…

[Operator Instructions] 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 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?

Yeah. No. No, Thanks, Craig. Thanks for jumping on. The backlog -- we’re going to work most of that backlog, it should be delivered by summer, by the end of June. So its front loaded in the calendar year. So we have to hustle on our production. We’ve got key customers that -- they’re getting their forklifts and other equipment delivered, and looking for the batteries, fortunately, there’s a long lag with forklifts as well. But to your question on that backlog, we have Delta Airlines as a big piece of that, more than 10%, Electrolux has a piece, that’s more than twice that, PepsiCo, of course, as you know is our biggest account has quite a bit more than that, leading customer, Caterpillar has a good chunk and we’ve got quite a few other companies. But those are some of the marquee names being global. I mentioned earlier, just doubled their pacing. We build and ship them packs every week on a regular basis. So they’re upping their opportunities and so we’re seeing a doubling there. So we are optimistic on that front. Does that help, Craig?

That definitely does. That definitely does. So it’s wide based Tier 1 customers and many of those I think are things you’ve been pursuing for a long period of time, so it’s nice to see them all bearing fruit now. I wanted to ask a little bit about the progression into the March and June quarters as you close out your fiscal year. I know this environment is tricky as far as overall visibility, but with your investments in the raw materials to make the deliveries and a little bit more customer confidence out there. It sounds like -- how do you feel about the shape of the growth curve as we look into the third and fourth fiscal quarters?

We can’t build packs fast enough to keep up with the demand and so we see a robust quarters. And however, as you’ve seen this past quarter, if we can’t get the electronic components, that this isolator chips, everybody’s fighting for them. Jakvac [ph] contactors, other components, are the ones everybody’s chasing all over the world. So it certainly dampen what we could do revenue wise in the quarter, as I’ve kind of beat that drum pretty loudly here. But I don’t think anybody projects that the supply chain disruption is over. We do see signs, though, very positive signs of our suppliers and ourselves working hard to mitigate a lot of those impacts. We see we see some indication of steel prices coming down a few. Yeah, there are 100 chips at the port that cause delays that we see some of that, but we are working on that backlog for the next two quarters and shipping just as much as we possibly can. The one thing we don’t want to do is purchase significantly more material and inventory, then the -- then will be allowed under supply chain potential constraints. So that’s the balancing Act. We’re continuing to receive orders weekly and on out beyond this year as well. So the growth is there. We’re implementing lean manufacturing, a number of other measures as, we are -- look, we’re an emerging growth company. We’re building all the time, our processes, caliber of people to do this, it is very exciting. Does that help, Craig?

Yes. Absolutely. So last question if I may. Your SG&A growth seem to be outpacing your revenue growth and we can call this maybe a little bit material. Can you 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 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? It’s both of them had fairly substantial growth…

Yeah.

… compared to your 19% topline?

Yeah.

Yeah.

Yeah. It’s a good question. It’s one that’s been frustrating. There’s a variety of things, I’d say, you have a several buckets. One, insurance premiums have just gone through the roof, as a lot of people know. Our public company expenses are to ensure that that we’re in touch with the market and things we need to do, it certainly has contributed something. As we -- there’s a slide, I think, in our website that shows, our packs are all over the country. While all over the country means we need to support them. Now, we use equipment dealers and battery distributors to support that, but it does take more effort on our part. What we’re doing to mitigate some of these things with SG&A is to get expand our certified people on the ground in those areas. So we’re not shipping packs back and forth, increasing costs from that as well. And so we -- as we look forward, we’ve always kind of forecast those operating expenses not to increase and get a lot of leverage from the revenue growth. But as you say, this past quarter, that’s not very evident. But what’s going on the ground. Another one, for example, and R&D has been up, because we migrated from our power cells to E cells [ph] and that, however, took at least a $1 million and a lot of that was in the quarter. That’s non-recurring. The other one that was big was 100% increase in shipping costs. All our outbound shipping costs are in OpEx and that that’s been a huge hit. We hope that starts to recover. I can’t imagine that that would continuing as well. So some of those things are temporary or hoping that they will be mitigated the supply chain disruption lessened.

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 experienced in supply chain problems, 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 -- in terms of 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 lean items. And there are some parts of the electronic parts, by the way, there’s some that there have been such as toilet paper run and global chase. We have our engineers have gone out and bought some of those and put them into consigned inventory so that when our Board assemblers need them, , they’ll have and then we won’t run out. So that’s part of our mitigation strategy that we probably wouldn’t have had and there’s, I don’t know, a couple million of that…

Yeah.

…as well.

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

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

The price rise -- when COVID came along in March 2020, we didn’t see a very big effect for a while and I think there was just a delay of even our suppliers raising prices along with the other dynamics that were building and as they built it, we really started to see it more in June. Chuck, would you say.

Yeah. Yeah.

In June and then it really started to accelerate in October, November, December. And so, I think, that period, hopefully, is the hardest debt. But we’ll see. Who knows. But those prices were definitely going up through that period. And so…

Okay. Yeah.

So we have a very significant price increases to our customer in October. But, again, there’s a lag with that, as I mentioned.

Yeah.

Right. Great. So then just combining an answer you gave for Craig about the $13.1, sorry, $31.4 million of backlog, a significant portion of that to be delivered before June. And juxtapose that with the $19 million minus $3 million or $4 million of finished goods inventory, which will be your raw material inventory. So 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?

Well, if you look at a number you say, well, why don’t you have enough inventory? And the simple answer is in the complexity of the purchasing and the long lead items versus non-long lead. So and they can’t end up committed contracts we have on buying inventory. We’re trying to push out some of those PO commitments we have in our suppliers. So we’re working -- we’ve been working hard on that doing some of it, but there’s -- there -- it’s not possible in all cases. So there’s going to be some purchasing that’s for future use.

Right.

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

Right. And from a money standpoint, there’s small parts, these are connectors or some…

Yeah.

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

Right.

… looking with strength getting stuff out the door.

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?

Yeah.

Can you explain that? Yeah. Can you explain that?

Yeah. Yeah. No. We’re adding a second shift now, this month that as we speak, and the second ship will not be a full second shift yet, but it will be a doubling of our large dollar high volume packs, which include our X -- Class 1 X-Series, the large pack, the $21,000 -- $20,000 plus battery pack and similar packs that go on the airport trucks, as well. So that, in fact, has been one of the places of the most urgent need to accelerate our production. So I’m real pleased with that. Our VP of Operations doing a great job with that, along with implementing lean manufacturing which would recover many, many months ahead.

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. And we initially started delivering that last August to some customers and then it was really more of a pilot phase with PepsiCo. And 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 I’ve ever seen. So they wanted 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. And we -- 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. And so 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 and 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 that the packs may go through corner cases, 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.

[Operator Instructions] 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 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.

Yeah.

Yeah.

…that I don’t have. But gross margins, as you know, are hot topic. We put out pricing in October. We see opportunity to -- for another round now and there is a little bit of judgment put in with that. But I think it’s there. Everybody’s getting price increases, everybody’s got material costs. And so we think we have to -- that that will be a big element in recovering our. But it’s going to take some time. As we mentioned, we got a lot of backlog orders there that we’re committed before that. But that’s a big one where our engineers are designing out some cost in the steel and the number of welds and number of turns and sourcing to Mexico, our VP of Operations has a lot of experience with some high quality vendors in Mexico. We can reduce these costs on those and still have a very good supply partner. And then inQ4 and some of these things are going to take a little time. I mean, I’m talking about them now, we’re working on them, but there’s a bit of implementation and launch time, as you would guess, but it’s real, very, very real. In Q4, Chuck, can probably talk about this. Our projection is based on -- all of our planned shipments are really based on current backlog we have. And there’s a much bigger increase in the large packs which have higher prices and typically higher gross margin. So we hope to see a real impact of that and that really gets back to the high demand lines, I mentioned earlier, our Class 1 offerings and our airport GSE offerings. Chuck, can you add some color to that?

Yeah. And I think that’s 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 separate about as well, if you want a little more detail.

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

And follow-up and….

Yeah. And…

Okay.

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 in the chip problems. And I’m not talking about you, Chip. But not very funny, but…

Different, like, yeah.

We’re actually 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 emerging company, we’re pioneering these things, we’re looking at everything, we know that this is a getting gross margin 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 bill that we’ve talked about and I think executing on backlog here sort of front loaded this fiscal year, it’s -- 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 back up 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, 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?

No. I think it’s just the pure uncertainty. So, as you look at this, we’ve been caught out with stuff that, vendor says, I got it next week and all sudden, they’re like, oh, I don’t have it, because the vendor before they promise them. So it’s just -- it’s not a cash issue. It’s more of an uncertainty of is the supply chain getting better or not? We’ll manage through it. We have no problem. We have access to the money. But it is one of those things where we have to just look at and assess that isn’t a risk. Yeah, there’s risk. We don’t know what’s happening in the supply chain.

I’d say there’s another element here as well, though, when we look at the impacting courses. We do see there’s probably a lesser need to overstock our inventory in that defensive posture we were taking. There was more uncertainty as what was really going on, there is still uncertainty. But I think that matters, I think it matters a lot. So we’re going to do the best we can to manage that inventory down, we got aggressive targets goals to bring it down each month, our purchasing activities, moving committed purchasing out, as I mentioned earlier. So all that we hope drives cash to be satisfactory for us and…

Yeah.

… improve and drive. Our drive is like driving to the end zone of cash flow breakeven. So all of these supply chain initiatives, gross margin, operating expense, we’ve got initiatives in those areas as well to be as efficient, lean, even down to it’s very important to get the right person in the right job, address any reworking efficiencies we have. So we have a major quality initiative that we’re initiating, we just hired a new very, very competent experienced Director of Quality. So I think all these things play to building momentum in the direction that we’re trying to head here, because our future is so good and our vision and our plan is to be this vendor of choice. So as part of that, my experience was -- has been mostly with large companies. If you want to -- if that is your goal, you need to be as efficient. You need to do all these things we’re doing. So we are on that March.

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, MZ Group, 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.