Flux Power Holdings, Inc.

and also to build scale with our business. We have leveraged increased sales volumes to resource steel and board components to low-cost regions and to higher volumes suppliers. We have also implemented inventory kitting process improvements that have provided sustainable productivity enhancements. We are progressing on new product designs based on a new modular platform for our battery packs to address customer needs. Some of the improvements include higher capacities for more demanding shifts, easier servicing, and other features to solve a variety of existing performance challenges of the diverse customer operations we serve. At the same time, Our new designs provide a reduction in the number of parts, achieving commonality across models. We're now building and shipping the first few models of our new platform, having recently received UL certification on models of the new platform. We're now pursuing forklift approvals and UN 38.3 certification which is required for shipping compliance. We also expanded our in-house testing and production validation capabilities, but all the equipment needed to satisfy the UL requirements and UN 38.3 compliance testing, including an onsite vibration table, therefore eliminating the need to outsource any aspect of the testing for either UL or UN certifications, which all expedites the process. Achieving in-house testing under UL oversight reflects successful building of both our technical experience and recognized confidence by UL. Our efforts to scale our business have included implementing lean manufacturing process, enabling us to more quickly monetize backlog and increase output with existing resources. On May 1st, we opened a new facility in Atlanta to supplement our customer support services and help support our 18,000 PACs we have in the field. Investment in the Atlanta office broadens our geographic footprint to bring comprehensive and responsive services to customers in the eastern half of the United States, while also, and importantly, resulting in lower service logistics costs associated with personnel travel and shipping the batteries to and from our California facility. The Atlanta facility augments our current partnership with Archon Equipment, located in Cleveland, Ohio, which operates a service facility which includes use and repair of our packs. As supply chain disruption is declining, our profitability improvement initiatives have continued to gain momentum. For the first nine months of fiscal 23, cash used by operations declined by $14.1 million, or 73% from fiscal 2022 to a level of $5.2 million. In the third quarter, we also saw sequential and year-over-year improvement in gross margins from cost and price initiatives. This was helped by design cost actions to lower material costs and assembly and reduce inventory requirements. Improved production processes, including progress in implementing lean manufacturing, as I mentioned previously, have resulted in increased efficiency and higher throughput. Availability, as of May 10th this year, under our New, our two credit facilities total $7.8 million, which includes $3.8 million remaining balance under our renewed revolving line of credit with First Citizens Bank. And secondly, $4 million available under our subordinated line of credit. Our efforts on increasing revenue and margin improvement specifically for adjusted EBITDA are reflected on slide seven showing the upward trend over the past fiscal year. We are executing our specific supply chain and cost reduction initiatives to continue this momentum. Further, our realized successes are being applied across various customer applications. Our current and potential pipeline of customers continues to expand this past quarter with two new customers having large fleets. Our full product line caters to large fleets who seek a relationship partner to meet current and future needs. These customers represent a diverse base in multiple sectors, all of whom are seeking lower costs during the life of the product and higher performance from lithium-ion battery packs. Our primary revenue has come from orders of our packs on new forklift deliveries. As customer adoption of lithium solutions increases across fleets, We anticipate increasing orders to replace lead acid batteries reaching into life prior to forklift into life, given the generally longer life of lithium versus lead acid. We have taken actions to restore our gross margin trajectory. As highlighted on slide 9, our gross margin improved sequentially to 31% in the past third quarter, from 24% in the second quarter of fiscal 2023, and from 22% in the first quarter of 2023. Our improvement initiatives include a number of actions that have begun to impact our gross margin. Price increases to offset pandemic-related commodity increases continue. to impact the results. Other drivers for margin include increased pack volumes, more competitive shipping costs, lower unit costs, more reliable and secondary suppliers of key components, improved manufacturing capacity and production processes, and transition of product lines to a new modular platform, all of which are part of our plan to accelerate margins both now and moving forward. During the third quarter, our backlog was reduced to 25 million, partially reflecting extended delivery times for some models of forklifts and GSD equipment. Normalization of global supply chains, as I mentioned previously, and ongoing adoption of lean manufacturing principles are driving throughput and capacity improvements as we continue to monetize a healthy customer backlog. Our strategic initiatives are also improving sourcing actions to mitigate part shortages, accelerating our backlog conversion to shipments, and increasing inventory turns to help mitigate inventory expansion. These initiatives are key drivers of gross margins along with operating leverage discussed previously. Although our supply chain disruptions have improved, we have increased our inventory raw materials, finished goods, and component parts to $21 million. as of March 31st, 2023, in order to mitigate supply chain disruptions and accommodate delays of forklift deliveries as previously mentioned. With that, I will now turn it over to Chuck Shiley, our Chief Financial Officer, to review the financial results for the quarter ended March 31st, 2023. Chuck? Thanks, Ron.

Now turning to review the financial results in the quarter ended March 31st, 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 of 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 nine months ended March 31st, 2023, adjusted EBITDA loss decreased 74% to 3.1 million compared to 11.9 million in the nine months ended March 31st, 2022. Our continued initiatives, business growth and operating leverage all contribute to drive this trajectory. Net loss for the quarter So the fiscal third quarter of 2023 decreased to $1.4 million for a net loss of $3.7 million in the fiscal third quarter of 2022. This principally reflected the increased gross profit. Net cash used in operating activities decreased to $3.3 million in Q3 of 2023. This is compared to $3.9 million in Q3 of 2022. and to $5.2 million for the nine months ended March 31st, 2023, compared to $19.3 million for the nine months ended March 31st, 2022. The net cash decreases were primarily due to a decrease in net loss and increase in accounts payable. We recently announced a renewal of the available credit on our existing facility with Silicon Valley Bank, which is now a division of First Citizens Bank. That renewal of $14 million to support the working capital requirements related to our customer demand. First Citizens Bank is a top-tier financial institution, and we are pleased to now be partnering with them on our revolving credit line. This renewal, along with our existing cash, will continue to meet our anticipated capital resources to fund planned operations. On a longer-term basis, we also continue to explore alternative capital opportunities to enable us to meet the demands of our aggressive growth. Now I'd like to pass it back to Ron to offer some closing remarks.

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 a combination of existing customer orders and acquisition of new customers, we 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 fixed 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 seven, 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. Operator?

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we pull for our first question. Our first question comes from Chip Moore with EF Hutton. Please proceed.

Evening. Thanks for taking the question. Ron and Chuck, I wanted to ask on margins. Congrats on getting to 30. That's a great milestone. 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 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?

Yeah, Chuck, you want to handle that one?

Yeah, 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're creating the grouper product, which is a different product that's going to have different margins. We're not fully vetted on those yet. So, you know, in the short term, I think that we're going to stay in that range as we continue to move forward for a little while here. We're 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, yeah, sort of sustainable here right now, right, some puts and takes, but longer term, clearly you've got 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?

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

Yeah, no, that's great, Ron. And if I could ask another, I guess, specifically, you know, 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, you know, backlog, I think you talked about the forklift lead times, you know, being an issue there. And I, you know, I've 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're seeing in terms of underlying demand. Thanks.

Yeah, no, Chip, sure. The pipeline, yeah, we live and breathe on that because our customers want us to build scale. They're 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. Fortunately, that's been our strategy for eight years. So we're 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 you mentioning their name, but I thought I'd mention this, Procter & Gamble. We've just got the first big order for that. And they're an example of some of our other suppliers that you see on our PowerPoint, in our deck, on our website. This is a long-term relationship we have with them. 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 guaranteed contract. That's not part of the profile of the sector we're in. It's how good were you each month and Frankly, I'm used to that, having been in a lot of other industries. However, I really like the idea that our customers even want a long-term relationship. We're working on another of other customers in the pipeline. That one took over 10 months, but others can take six weeks. We have a variety of others. I'm not going to mention them. I just wanted to to throw out an example to give you some sense of that. Turning to the lead times, yeah, you know, we haven't mentioned a couple times here. We were just at PROMAT at the largest trade show, the annual trade show in Chicago in March, and everybody was talking about the delayed lead times on forklift delivery. And that has impacted us. Now, it's not on every line, every truck line. It's some of them, some of the bigger ones. And we don't get any assurance of exactly when that's going to be, but we believe it's a residual hangover from the pandemic and the supply chain disruptions. But we're working through that. We're adding new business, trying to fill in any gaps. And I think that's That's good. It's impacted us a bit this quarter, could impact us a bit next quarter. We're not giving guidance, but I'm just explaining that this factor is affecting us and others. I know one supplier that's nearly driving out of business, but it does have an impact. But the good news is we're not losing any business. The forklifts are coming. and it just pertains well to the future, particularly as we get past a few months ahead and that supply situation begins to normalize.

Got it. That's great to hear. Appreciate all the color, and I'll hop back into you. Thanks very much.

Thank you. Once again, ladies and gentlemen, to ask a question at this time, please press star 1 on your telephone keypad. One moment while we hold for more questions.

Once again, that's star one at this time.

We have a question from Matthew Galenko with Maxim Group. Please proceed.

Hey, guys. Thanks for taking my question, and I apologize if this was already answered, but I think I heard you mention that you've passed through some price increases. You also mentioned that that steel prices have been somewhat or will be somewhat of a limiter to your gross margin upside, you know, just based on recent trends. So can you maybe talk about as we move forward a little bit and if, you know, 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?

Yeah, Chuck, do you want to field that one?

Yeah, Matt, we've got the, you know, 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're 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, which, you know, it's a significant part. But, you know, there's plenty of other stuff we're 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, you know, we've got activities going every week that's starting to pull costs So we'll continue to do it. I just think you're not going to see a six-point jump. It's going to be more, you know, a steady growth from here on out.

Yeah, you know, another element, Matt, is if you look up on Google the price of cobalt 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 issues, 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 benefits your processes and ability to deliver products timely?

Yeah, it's a good question. It's a twofold answer. There's 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's a lot involved. There's just more than you'd believe. You know, 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 this third-party 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, you know, the past six years, we've UL'd all our PACs, our first generation. Now we just went through this new platform. So we've 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. You know, shake tests, vibe tests, high temp tests, low temp tests, durability and so forth. So we bought that equipment, and that's an enabler to accelerating the timeline it takes to develop products internally, um to um and any of the elements of that then secondly uh ul testing is not cheap you know we spent hundreds of thousands of dollars on that and being able to do that test internally where they just they have to monitor certain tests as part of their their requirement compliance so they can do it either on site on zoom or we can tape it and give it to them. So we really, and we're 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.

Yeah, thanks, Matt.

Once again, to ask a question at this time, please press star 1 on your telephone keypad. 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 MC 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.