Greetings and welcome to the Flux Power Holdings Third Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call over to Sean Stewart, Financial Planning and Analyst Manager. Sean, you may proceed.

Your host today, Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer, will present results of operations for our third quarter of fiscal year 2023 ended March 31, 2023. A press release detailing these results crossed the wires this afternoon at 4:01 p.m. Eastern Time and is available on 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 may 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 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 will turn the call over to Flux Power Chief Executive Officer, Ron Dutt.

Thank you, Sean and good afternoon everyone. I am pleased to welcome you to today’s third quarter fiscal 2023 financial results conference call. Firstly, please note that on Slide 3, if you are following the deck, there is a short reminder of what we do, calling out, Electrifying Commerce. We are powering material handling, airport, ground support equipment, solar energy storage, port authority equipment and other applications with new and clean technology, and our products and services are focused on very large fleets, including those located nationwide. Now on to our Q3 results. Our third quarter reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In Q3 ‘23, revenues were $15.1 million, up 14% from $13.2 million in the prior year, marking our 19th consecutive quarter of year-over-year revenue growth. We also continued to improve gross profit in the third quarter, up 146% to $4.7 million, and a gross expansion – gross margin expansion of 16 percentage points to 31% compared to the prior – to the year ago period. Our revenue growth and gross margin expansion provide continued operating leverage given our modest increase in operating expense of only 5% for that period. Adjusted EBITDA loss was $700,000 and $3.1 million for the 3 and 9 months ended March 31, 2023, an improvement from adjusted EBITDA loss of $3.4 million and $11.9 million for the 3 and 9 months ended March 31, 2022, respectively. Adjusted EBITDA loss has declined 24% on a sequential basis from the 3 months ended December 31. For the third quarter, our customer order backlog decreased from $30.4 million to $25 million as of March 31, 2023, reflecting continued lithium adoption, although partially impacted by timing delays of production of some forklift models. In the third quarter fiscal ‘23,…

Hey, thanks, Ron. Now, turning to review the financial results in the quarter ended March 31, 2023. As Ron mentioned revenue for the fiscal third quarter of 2023 increased by 14% to $15.1 million compared to $13.2 million in the fiscal third quarter of 2022. This was driven by increased sales volumes and models with higher selling prices. Gross profit for the fiscal third quarter of 2023 increased to $4.7 million compared to a gross profit of $1.9 million in the fiscal third quarter of 2022. Gross margin was 31% in the fiscal third quarter of 2023 as compared to 15% in the fiscal third quarter of 2022. This reflected a higher percentage of units sold at new, increased prices and lower cost of sales as a result of our gross margin improvement initiatives. Selling and administrative expenses increased to $4.7 million in the fiscal third quarter of 2023 from $3.9 million in the fiscal third quarter of 2022. This reflected increases in marketing expenses, commissions, insurance premiums, depreciation and outbound shipping costs. Research and development expenses decreased to $1.2 million in the fiscal third quarter 2023. This is compared to $1.7 million in the fiscal third quarter of 2022, primarily due to lower staff-related expenses and lower expenses related to the timing of development of new products. Adjusted EBITDA loss decreased to $700,000 in the fiscal third quarter of 2023 from $3.4 million in the fiscal third quarter of 2022. For the 9 months ended March 31, 2023, adjusted EBITDA loss decreased 74% to $3.1 million compared to $11.9 million in the 9 months ended March 31, 2022. Our continued initiatives, business growth and operating leverage all contributed to drive this trajectory. Net loss for the quarter – for the fiscal third quarter of 2023 decreased to $1.4 million…

Thank you, Chuck. While we’re on track executing our gross margin improvement and cost control initiatives, we are exploring increases to our working capital availability. 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. Product quality, leading technology and service are key factors as to why we continue to win and maintain business relationships and we ensure our goal to continue our growth trajectory. And our current production facility also should support annual revenue up to $150 million given our current facility footprint, second shift build-out and lean manufacturing implementation. Looking beyond reaching profitability and building on our success in the material handling industry, we are also focused on broadening our reach into related verticals such as warehouse robotics. With our operational strategy, including six assembly lines, we are well positioned to continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate, initiatives to ensure leadership in technology that expands product and service value to our customers. In summary, we are well positioned to execute our strategy of Electrifying Commerce as we offer customers stored energy solutions to increase productivity at lower cost during our product’s life. We are encouraged by strong purchase orders, improving backlog and continued expansion of margins through improved 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 to achieve profitability. And further, we anticipate expanding into new markets having strong demand for our value proposition of high performance and lower cost of ownership. I look forward to providing our shareholders with further updates in the near future as we continue to leverage our leadership position in lithium-ion technology solutions with 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.

Thank you. [Operator Instructions] Our first question comes from Chip Moore with EF Hutton. Please proceed.

Evening. Thanks for taking the questions. Ron and Chuck, I wanted to ask on margins. Congrats on getting to 30%. That’s a great milestone. I guess, is there anything with regard to mix in the quarter to sort of help you there? And then help us think about moving forward, you’ve got another – a number of initiatives underway that are sort of just ramping and then, of course, volume leverage. Is there a way to think about where margins might be able to get sort of near term and long-term?

Yes. Chuck, do you want to handle that one?

Yes. Chip, I think there is a little bit of a slight amount of mix there that drove it a little higher than what we actually even forecasted a little bit, but not much. There’s a little bit of that. Right now, if you kind of look at the margins, we’ve done a lot in terms of what we’ve done internally. As you know, we are creating the group of product, which is a different product that’s going to have different margins. We are not fully vetted on those yet. So, in the short-term, I think that we are going to stay in that range as we continue to move forward for a little. We are also seeing a little bit of pressure on steel prices again, which is if you watch the commodities markets that can affect us on the steel side, and that’s a big part of our product as well.

Okay. So, it sounds like – yes, sort of sustainable here right now, right, some puts and takes. But longer term, clearly, you have guided – yes, upside from here. That’s very helpful. And a follow-up there on margins, I guess specifically to the new Atlanta facility that just opened. That should give you some benefits as well. Can you maybe expand on what that brings in terms of profitability potential?

Yes. Chuck, let me jump in here. That does with producing – ultimately reduce warranty costs. And another way to think about it, Chuck, in addition – Chip, in addition to what Chuck said, as think about it as we have an ongoing margin improvement strategy. And we – as you have seen, we have done a lot of work on our initiatives via our weekly board room items we have mentioned. But we want to continue value engineering. We are roughly 30% now, and we have realized that we need to move higher and we will. And one of the enablers of that is going to be our operating leverage that we have with our fixed operating costs, which are largely fixed, and with the growth in revenue that we have as well. So, hope that – I hope that helps, Chip.

Yes. No, that’s great, Ron. And if I could ask another, I guess specifically on the pipeline, it sounds like it’s still very strong. You talked about adding some new, potentially large accounts. Maybe talk about the size and scope potential there? And then in terms of timing, obviously, backlog, I think you talked about the forklift lead times being an issue there. And I have heard that welding in particular has been a real constraint for some of the OEMs. But maybe just help us think about that sort of very near-term versus what you are seeing in terms of underlying demand? Thanks.

Yes. No, Chip, sure. The pipeline, yes, we live and breathe on that because our customers want us to build scale. They are big, the bigger we are, the better we can address and support deliveries and service all over the country. Canada, Mexico and some of these want to take us internationally at some point in the future, not in the near-term. But the point is they want us to build scale. That’s – fortunately, that’s been our strategy for 8 years, so we are on that track. I will mention that just yesterday, we got a big order for our next new big customer, which is not part of the two. I mentioned some of these companies really don’t like to mentioning their name, but I thought I would mention, it’s Procter & Gamble. We have just got a – the first big order for that. And they are an example of some of our other suppliers that you see on our PowerPoint in our deck and on our website. This is a long-term relationship we have with them. They – it’s very disruptive for them to change suppliers. Typically, they have lots of different locations, how things are operated, how things connect with the forklift, how things connect with their chargers, so it can be a very sticky business. Now, that doesn’t mean that we have a long-term guarantee contract. That’s not part of the profile of the sector we are in. It’s how good were you each month. And frankly, I am used to that, having been in a lot of other industries. And however, I really like the idea of that, our customers even want a long-term relationship. So, we are working on another – other customers in the pipeline. That one took over 10…

Got it. That’s great to hear. Appreciate all the color and I will hop back in the queue. Thanks very much.

[Operator Instructions] We have a question from Matthew Galinko with Maxim Group. Please proceed.

Hey guys. Thank you for taking my question and I apologize if I – if this was already answered. But I think I heard you mention that you passed through some price increases. You also mentioned that steel prices have been somewhat or will be somewhat of a limiter to your gross margin upside just based on recent trends. So, can you maybe talk about as we move forward a little bit and if material prices remain high, do you have the ability to continue pushing price increases to your current customers, or what does that look like going forward?

Yes. Chuck, do you want to field that one?

Yes. Matt, we have got the – we can, of course, push some pricing, and we continue to look at that and we will. And it’s more product-by-product instead of overall at this point, so we are looking at specific products that make sense to do pricing increases. And there are numerous gross margin initiatives we continue to have going on harnesses and boards and all the other components. So, steel is just, as you know, a piece of it. It’s not – it’s a significant part, but it’s – there is plenty of other stuff we are working on that will continue to increase margins. So, it’s not like that is stopping anything at this point. I think it’s more of a – we have got activities going every week that’s starting to pull costs out there. So, we will continue to do it. I just think you are not going to see a 6-point jump. It’s going to be more a steady growth from here on out.

Yes. Another element, Matt, is if you look up on Google, the price of cold-rolled steel, it just really went up like a mountain during the pandemic and it’s really, really largely come down. And it’s interesting, as Chuck pointed out, we have seen some recent upward adjustment to that. But I think that’s the world we live in and all of us are getting used to dealing with that.

Thanks. That’s helpful. And then I guess as a follow-up. With respect to your in-house testing capacity, given some of the supply chain dynamics that you talked about, are you going to be able to see the benefits of that, or can you talk a little bit more about how that all – how that benefits your processes and the ability to deliver product timely?

Yes, it’s a good question. It’s a two-fold answer. There is two points to make here. We started this UL testing back in early 2015 and went through it for the first time with our initial product, and there is a lot involved. There is just more than you believe. On the surface, it’s really testing for durability and safety of the packs. So, we felt that was really important with lithium and being new, and it actually took us forever because we had to go out and get all these third-parties testing. So, you had to reserve space and time and facilities in Texas and elsewhere, and UL had to – come in and out all the time. So, over the past 6 years, we have UL-ed all our packs, our first generation. Now, we just went through this new platform. So, we developed a lot of experience and confidence by UL and what we can do. So, along that journey, we said, hey, let’s buy some of this equipment because you know what, we could use it for just internally developing our products. Shake test, vibe test, high-temp test, low-temp test, durability and so forth. So, we bought that equipment, and that’s an enabler to accelerating the timeline it takes to develop products internally to – and any of the elements of that. Then secondly, UL testing is not cheap. We spend hundreds and thousands of dollars on that. And being able to do that test internally where they just – they have to monitor series of tests as part of their requirement and compliance. So, they can do it either on-site, on Zoom or we can tape it and give it to them. So, we would really – and we are not sending anything to Texas and other places for third-party testing. So, it has a benefit with many aspects to us, both financially cost-wise and time-wise.

Great. Thank you and congrats again on the gross margin trajectory.

Yes. Thanks Matt.

[Operator Instructions] There are no further questions in queue. I would like to turn the call back over to Mr. Dutt for his closing remarks.

Thank you, operator. I would like to thank each of you 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 or if you have further questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.