Flux Power Holdings, Inc.

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 Shiawee, CFO, will present results of operations for our fiscal year 2022 second quarter ended December 31st, 2021. A press release detailing these results crossed the wires this afternoon at 4.01 p.m. Eastern Time, and it's available in the investor relations section of our company's website, fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates, or other information that might be considered forward looking. While these forward looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. Your caution 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 form our 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 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 our 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 22, in 23.8% over the year-ago quarter. To highlight a few of our successes, we received multiple orders for our large Class I X-Series battery packs from a global consumer appliance manufacturer, and a new order for GSE, or Airport Ground Support Equipment, battery packs from an additional large domestic airlines. We also received multiple orders for our C-Series battery pack, signed for our solar-powered EV charging station partner, Beam Global, who recently reported record deliveries, pipelines, and backlog. For the second quarter, customer order backlog increased to a record $31.4 million as of December 31st, 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 strengthened our corporate governance with the appointment of Chi-Min Bo-Lin, 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, Team N. As we put our fiscal Q2 results in perspective for the full year of 2021, the December ending quarter reflected the impact of the global supply chain disruption everybody's familiar with. increased shipping delays of key parts throughout the year, triggered delays in production, and increasing purchase orders from growing customer demand, as I've alluded to. This resulted in pre-purchasing of inventory given the production delays. While we did not lose customers or orders, the increase in inventory spending was, fortunately, supported by our capital rates of $14 million in September. Related to those delays, we experienced increases in the prices of steel, electronic components, and shipping, which impacted Q2 gross margins. While we implemented a price increase in Q2 2021 on new orders, we continued to ship orders from our backlog that were ordered prior to the increase at the higher component costs. This supply chain impact occurred as we were supporting product design changes for new cells that will bring lower costs and better features in 2022. I will outline actions to restore our gross margin improvement path as is highlighted on slide five for those of you on the webcast. In addition to the price increase, we also initiated a design cost reduction project to improve gross margins across our product line. We took actions to improve our supply chain efficiency and supplier management. such as vendor metrics, better tracking of accountability, and alternate suppliers to replace vendors that we have outgrown. In fiscal year 2022, we have made changes to our ERP purchasing methodology to avoid excess inventory, particularly in the race-defined parts that are available. also to rebalance supply chains to leverage low-cost sourcing, and also to improve payment terms with our suppliers. Given the recent growth of our product lines, an impactful action has been taken to better align our suppliers to meet our production demands while taking into consideration the current supply chain disruptions. Additionally, we are pursuing sourcing strategies in Mexico and selection of other vendors to align better our growing needs and increase timing demands. We've been aggressively resolving supply chain issues with our vendors. Our pricing actions with customers have a delayed effect due to the build-up and open sales orders already received. However, our price increases with customers are intended to help offset cost increases already incurred from suppliers. And our design cost reductions from our 10-year accumulated pioneering experiences with lithium ion technology is meant to provide the remaining element of achieving our gross margin targets. Our strategy for the past several years has been to capture leadership in the lithium ion sector for industrial and commercial equipment. We are pleased with being chosen by Fortune 500 companies as their supplier of choice. This refers to customers, as shown in our website presentation, such as Delta Airlines, PepsiCo, Caterpillar, and a number of other household names. Our vision is to be a leader in providing best-in-class product and service to material handling, energy storage, and related sectors. We have confidence in these goals and the credibility in sustaining relationships I have mentioned with those household names. At the same time, we're committed to reach profitability as soon as possible. While our strategy continues to aggressively maintain our leadership position and invest in our growth, we are equally as aggressive at improving our gross profit margins and preserving our cash and pursuing cash flow break even. I'm pleased with the specific initiatives and actions were taken to meet that goal. Our vision is to then move forward to expand bringing our proprietary energy storage products to serve the rapidly growing applications of lithium ion technology, as most of you know, and to lead the innovation of energy storage solutions, including engaging partnerships to leverage our resources. During the second quarter, We experienced the full impact of the supply chain disruption, but without time to build and collect from the order backlog. We are pleased to report that we have a line of sight to accelerate our trajectory to cash flow breakeven. We do acknowledge the unprecedented level of supply chain uncertainty and the potential for continuation. Accordingly, we have chosen to report our FY 2022 Q2 10Q going concern language. Finally, we increased our purchasing and related inventory to $9.6 million at December 31, 2021, to mitigate supply chain disruptions from increasingly hard-to-acquire microchips and electronic components while utilizing, as I said earlier, our capital raise of 14 million in September. These actions were taken to protect customer orders and customer relationships, which for us are long-term. With our recent production throughput improvements, including launching lean manufacturing, a second shift to launch this month, and a major quality initiative to reduce costs, we expect to achieve quicker turns on this customer backlog. A strategic decision was made to secure inventory to align our backlog to deliver our customer requirements. While this as well outside our inventory turnover goals, we felt it was necessary to secure this inventory given the current supply chain inconsistencies to achieve our future financial goals while meeting our customer expectations. Looking beyond the remaining 2022 fiscal year and building on our success in the material handling industry, we intend to broaden our reach to include stationary energy storage and related sectors. We are focused on delivery of our stationary energy storage product to Beam Global for their solar-powered EV charging stations. With our operational investments, we are positioned well to continue to support this sector as EV adoption continues to accelerate. On the technology front, We have commenced deployment of our Sky BMS Telematics product for remote fleet management and monitoring that delivers battery-packed data to optimize performance and customer fleet tracking. I'm happy to report the customer interest has been very positive. Now, Turning to review our financial results in the quarter ending December, revenue grew 19% to $7.7 million in the quarter as compared to $6.5 million a year ago quarter. Revenue grew 27% to $14 million for the six-month ended period December 31st, 2021, as compared to $11. million in the six months ended December 2020. The increased revenue was primarily driven by sales of battery packs with higher selling prices of products sold, including greater sales to existing customers as well as initial sales to new customers. In the second quarter of 2022 alone, we booked 19.8 million in new orders. While there can be some seasonality with orders, clearly strong customer demand continues. Gross profit margin decreased to $1 million in the quarter, or 13.6 in this fiscal second quarter of 2022. As compared to gross profit margin of $1.5 million, or 23% in the same year-ago quarter. Gross profit margin increased to $2.5 million, or 18%, for the six months ended December 2021 as compared to the gross profit margin of $2.4 million, or 22%, for the six months ended a year ago. Gross profit in 2021 was affected by higher costs for steel, electronic components, electronic parts, and common off-the-shelf parts during the quarter and partially offset by higher revenues associated with increased product sales. Taking a look at our gross margin trajectory as illustrated on the slide for those watching, Our gross margin improvement was impacted by the pandemic during the last two quarters. While the supply chain disruption hit us hard, we have taken aggressive actions with our suppliers. Our pricing strategies, product redesigns, and manufacturing initiatives to regain our previous trajectory. Selling and administrative expenses increased too. $4 million in the fiscal second quarter of 2022 from $3.1 million in the same fiscal period of 2021, reflecting increases in outbound shipping costs, personnel-related expenses, insurance premiums, and sales and marketing expenses. R&D expenses increased to $2.1 million in the second quarter, compared to $1.6 million and a quarter a year ago, primarily due to new product development activities and their related OEM and UL certifications. Cash usage, as described earlier, supported our actions to protect our customer orders, given 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 second quarter with $7.9 million in cash and additionally have our credit line with Silicon Valley Bank with the line recently increased from $4.0 million to $6.0 million as an alternative resource to manage working capital needs. With $19.6 million in product inventory, we will do everything in our power to build, produce, and deliver product timely. In summary, we are well positioned to create long-term value for our shareholders. Looking ahead into 2022, we are intensely focused on our strategic initiatives to increase profitability, mitigate ongoing global supply chain disruption, and deliver upon our record customer order backlog. We are seeing strong interest from both investment funds, customers, and vendors, or products and businesses that are aligned with ESG, or environmental social governance, values and impact. Well, FlexPower is at the forefront of sustainable products, saving customers tons of carbon dioxide from our efficiency. and empowering our drive to create more sustainable material handling and GSE solutions as we continue expanding into emerging application and adjacent verticals. I look forward to providing our shareholders with further updates in the near term as we continue to leverage our first mover position in lithium ion technology solutions. With our growing list of new and diverse, large customers, which provide validation of our strategy. We also hope to see some of you at the upcoming 34th Annual Roth Conference in March, and also our investor analyst facility tour planned this year at our headquarters in Vista, California. I thank you all for attending. And now I'd like to hand the call over to the operator to begin our Q&A session. Operator?