Good afternoon, and welcome to Flux Power's Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, February 12, 2026. I would now like to turn the call over to Joel Achramowicz of Shelton Group Investor Relations. Joel, please go ahead.

Good afternoon, and welcome to Flux Power's Fiscal Second Quarter 2026 Earnings Conference Call. I'm Joel Achramowicz, Managing Director of Shelton Group, Flux Power's Investor Relations firm. Joining me today are Krishna Vanka, Flux Power's CEO; and Kevin Royal, Chief Financial Officer. Before I turn the call over to Krishna, I'd like to remind our listeners that during the course of this conference call, the company will provide financial guidance, projections, comments and other forward-looking statements regarding future market developments, the future financial performance of the company, new products or other matters. These statements are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically our 10-K and our most recent 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Also, the company's press release and management statements during this conference call will include discussions of certain adjusted or non-GAAP financial measures. These financial measures and related reconciliations are provided in the company's press release and related current report on Form 8-K, which can be found in the Investor Relations section of Flux Power's website at www.fluxpower.com. For those of you unable to listen to the entire call at this time, a recording will be available via webcast on the company's website. And now it's my great pleasure to turn the call over to Flux Power's CEO, Krishna Vanka. Krishna, please go ahead.

Thank you, and welcome, everyone, to our second quarter conference call. As we announced on our press release earlier today, we achieved profitability for the first time in the company's history. I am very pleased that we have been able to achieve this milestone within a year since I joined Flux. The discipline we built internally to optimize our expenses, along with the sequential increase in revenue made this happen. I do want to thank all our employees, partners and customers for contributing to this achievement. Also during the quarter, our product development team made significant progress on innovations and road map. I will walk you through these recent developments as I deliver updates to the 5 strategic initiatives that we have established to guide our execution and performance here at Flux. As a reminder, these initiatives include profitable growth, operational efficiencies, solution selling, building the right products and integrating value-added software to generate recurring revenue streams. Let me provide you with an update on our recent efforts as they relate to these key initiatives. To begin, as I mentioned, we have achieved net profitability. I can now say we achieved the first goal of this key initiative. Our focus will be to continue this trend, while growing the business. The results also demonstrate benefits from the multi-quarter restructuring decisions we made to improve our operational efficiencies. These efforts included rightsizing our headcount, as well as all other cost optimizations we took to streamline the organization. I can say that we looked carefully at all levels of the company to find and optimize spending where possible. This rightsizing process has led to a solid financial structure, offering high operating leverage. Today, we have a much lower cost structure, higher margins and a lower breakeven point than we had a year…

Good afternoon, everyone. Revenue for the second fiscal quarter of 2026 was $14.1 million, up from $13.2 million in the prior quarter and down from $16.8 million in the same quarter last year. Gross margin in the second quarter was 34.7% compared to 28.6% in the prior quarter and 32.5% in the prior year period. The 610 basis point sequential increase in gross margin is largely due to improved product mix, our recent cost-saving initiatives and lower warranty costs. Operating expenses in the second quarter of 2026 were $4.1 million compared to $5.9 million in the prior quarter and $6.9 million in the second quarter of 2025. The approximately 31% sequential decrease in operating expenses primarily reflects the benefits from our cost reduction initiatives. Also during the quarter, we recorded an approximately $0.5 million reversal of previously accrued employee bonus awards. Net income for the second quarter was $0.6 million or $0.03 per share compared to a net loss of $2.6 million or $0.15 per share in the prior quarter and a net loss of $1.9 million or $0.11 per share in the second quarter of 2025. Excluding legal costs associated with the multiyear restatement of previously issued financial statements and stock-based compensation, second quarter non-GAAP net income was $1 million or $0.04 per fully diluted share compared to a net loss of $2 million or $0.12 per share in the prior quarter and a net loss of $1.9 million or $0.11 per share in the prior year period. Adjusted EBITDA for the second quarter was positive $1.5 million compared to an adjusted EBITDA loss of $1.4 million in the prior quarter and positive adjusted EBITDA of $130,000 in the same quarter a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $0.9 million compared to $1.3 million on June 30, 2025. The significant capital we raised recently has been used to reduce outstanding balances on our line of credit and to a lesser extent, to reduce our accounts payable balances. Our current borrowing capacity under the Gibraltar line of credit is $16 million, subject to available collateral as defined by the credit agreement and satisfaction of certain financial covenants. I will now turn the call back to Krishna for his final remarks, and then we will open it up for questions. Krishna?

Thank you, Kevin. We have made a great deal of progress this past quarter across all of our strategic initiatives. Our battery product line and energy system software have been enhanced measurably using AI, and the company is now operating much more efficiently. And with the lithium-ion battery market that continues to offer great opportunities, I believe we remain well positioned to capitalize on them in the long term. Flux has made the necessary investments to remain in a leadership position in this industry by serving our customers for years to come. We remain focused on making continued progress across our business, while managing through these current business conditions in order to return to growth. With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question comes from Rob Brown with Lake Street Capital Markets.

Congrats on all the progress. On the -- first on the capital freeze and the customer commentary, is this unique to this customer? Or are you seeing maybe signs of this sort of across this industry segment through vertical? Or is this unique to the customer?

It is one -- Rob, this is Krishna. Thanks for the question. We lost you for a quick second, but you're asking about the customer on the capital freeze. This is one individual customer.

And then in general, how is the demand environment looking in the market? Are you seeing sort of stable demand? Or how would you characterize the overall demand environment has been a little bit mixed, but how would you characterize the broader environment?

Yes. The tariff effects, I would say, are still lingering to a little bit extent. There was some change in the percentages of the tariffs, for example, starting January 1st and so on. So a lot of key customers are still cautiously watching what does it mean for tariffs and whatnot. All that said, we know that customers need to buy these batteries to run their businesses. So they are, in certain ways, moving forward on that they need this equipment to continue their business operations.

Okay. And then the SkyLNK product, I think you said some pretty good customer feedback and you're rolling it out more broadly. Can you give us a sense of sort of as you roll that out, how -- do you go certain verticals? Or do you just offer kind of across the customer base? And what's the opportunity there in terms of driving some new business?

Sure. The SkyLNK telematics, which is really our next-generation product, as I mentioned, it's significantly powerful, comes with the chip for machine learning and even implementing some AI, and it is nicely connected to our battery management system. The customers are now asking us greater questions like, hey, can we know when the battery leaves certain geofence, right? Can we be alerted proactively for our operators to take some action? So the SkyLNK telematics will solve these problems either there is connectivity or not because it's a powerful system and it can make decisions literally along with the battery management system. So we are -- this will be offered across our product line for all of our batteries in a couple of months. The initial feedback has been pretty positive. And this will also honestly open doors for us to be able to offer more telematics-based solutions to our customers in the future. So we are really looking forward to deploying this with every battery we sell.

Our next question comes from Sameer Joshi with H.C. Wainwright.

Congrats on the good performance and positive net income despite the headwinds. So getting into that, the gross margins, 610 basis point improvement, really good. I think you mentioned product mix, cost saving effort initiatives as well as lower warranty costs. So going forward, maybe the product mix may vary, but the cost savings and the warranty costs, are those expected to stay low and sort of have a better gross margin profile going forward?

Yes. We're taking steps -- continued steps to lower our product cost. We continue to experience positive trends as it relates to warranty and repair costs associated with our warranty obligations. So quarter-to-quarter, depending on the mix, we would expect to see -- if the mix were to stay the same, I put it that way, you'll see improvements quarter-to-quarter. But there will be times when you have a decline, times when you have an increase, and that's solely related to mix.

And I guess, spreading of cost overheads over a different revenue profile as well, I guess?

That is correct. Leverage will also have an impact.

And then just following up on a couple of things that Rob is -- from where you sit and where you have your pipeline at, is it more from any one particular, say, material handling or some other sector? And how do the prospects look over the next 6 to 12 months? I mean, this one customer you -- I think you would have to sort of replace or get additional customers to make up that revenues?

Yes. You answered my -- you answered the question towards the end. We are putting every effort possible to fill the gap. That's our first focus. As I mentioned, we hired a new OEM Director, very happy with the progress that he's doing here. We are hiring a couple more salespeople, one in California and one in Texas. These were advertised and these are already on the LinkedIn boards. We are also putting more focus on the material handling. We are looking for a VP sales level position as well. So yes, that's our focus. We are doing every effort. We are seeing some -- definitely an increase in the adoption of lithium, I would say. We are seeing some trends when we speak with OEMs, where they're saying, hey, we are expecting some greater adoption of lithium in the coming years, literally short term, 1 and 2 years. So we are getting ready for that.

Understood. And then just the last one. These new sort of the SkyLNK features, right, are these going to be sold at a premium pricing or rather, I should say, incremental pricing? And how does that, in turn, improve your gross margin profile? Because I guess, these will have really high gross margins.

That is the plan. We just tiered our software into a standard and a professional version, I would say. We are yet to provide all the details and the naming of it. But our expectation is the standard package comes standard with the SkyLNK, and it creates an option for us to sell these premium package, which comes with some AI-based functionality. So we are literally wrapping up all the packaging and we'll bring the software solutions together. And you are spot on. The gross margin on some of this software-based sales will be significantly higher. The key is that we have 30,000-plus batteries in the market. How do we go back to existing customer base and get some extra from the existing customer base versus moving forward, right? So that's the puzzle we would love to solve. We have solved it a few times. We would love to figure out how to solve it with the existing battery base as well.

May I squeeze in one more. On the State of Health patent, can you elaborate on it? And like what is the revenue potential from this? I guess, this is also going to be sort of an incremental feature that users can -- customers can pay you for?

Thank you. Yes. We got the full patent last quarter on the State of Health. I am pretty impressed when I looked at the scope of the patent, what it does. It includes not only how to do it locally on the battery with the BMS and the SkyLNK, but also how to write that algorithm, right, the scope of the algorithm. So the patent is pretty extensive. We already took that patent the algorithm and we implemented it on the software side. This will be included in the premium package I mentioned. The real advantages of that State of Health is customers are getting insights into the next stage of the batteries, right? When do I need to repurchase the batteries? How long life do I have? What is the right time to start thinking about my capacity planning? Can I actually reduce some capacity? So we will start answering these high-level business decisions. And we are putting an AI engine, as we speak into the SkyEMS software, which can derive some forward-looking knowledge based on the State of Health algorithm. So yes, really, it's one thing for companies to get the patents. It's the other thing to actually put them into use and generate revenue. I think we are going to be able to do that as part of the process here.

Our next question comes from Craig Irwin with ROTH Capital Partners.

So the only question I have at this point is the accounting for your $0.5 million reversal of incentive comp in the quarter. Can you maybe clarify for us how much of that was included in cost of sales versus SG&A? And is there anything else you can share to clarify whether or not this could impact the current quarter or if you'll be restoring those incentive bonuses in the near term?

Yes. Sure, Craig. So that amount was the incentive compensation that we had accrued through our first quarter. When we got into the second quarter and we near the end and we evaluated the objectives for the incentive compensation against our forecast and realized that they wouldn't be achieved, especially given the significant customer announcement and disclosure that we've made, GAAP required that we reverse that estimate. And so we did. That was the amount, again, that had been accrued through Q1 and was reversed in Q2 and will not have an impact on the upcoming quarters.

So my question is, was that recognized in cost of revenue or SG&A or in a combined places on the P&L?

So in all 3, but primarily in SG&A and R&D with a slight amount, say, around $50,000 in COGS.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Krishna Vanka for any closing remarks.

Thank you again for joining us on the call today. We look forward to reporting our continued progress throughout the quarter on our next earnings call in mid-May. Operator, you may now disconnect.

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