Flux Power Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018, compared with fiscal 2017. Although the request identifies “2017 Q4,” this filing is an annual report for fiscal 2018; it does not provide a clear standalone fourth-quarter financial-results summary.
Business context
Flux designs, develops and sells lithium-ion energy-storage systems for industrial applications, primarily forklifts and airport ground-support equipment. Its products use a proprietary battery-management system. The company expanded forklift offerings to higher-capacity Class 1, 2 and 3 packs and reported sales and further orders in airport ground-support equipment. It had 53 full-time employees at June 30, 2018.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.118 million | $902,000 |
| Gross loss | $795,000; gross margin approximately -19% | $720,000; gross margin approximately -80% |
| Operating loss | $6.213 million | $4.176 million |
| Net loss | $6.965 million; $0.27 per share | $4.435 million; $0.18 per share |
| Cash used in operations | $6.500 million | $5.698 million |
| Cash at year-end | $2.706 million | $121,000 |
| Total assets | $5.369 million | $1.921 million |
| Total liabilities | $12.804 million | $6.670 million |
FY2018 financing provided $9.170 million, including $5.195 million of related-party credit-facility borrowings and $3.975 million net proceeds from common-stock sales. Current assets were $5.256 million versus current liabilities of $12.702 million, indicating negative working capital of approximately $7.446 million. Stockholders’ deficit was $7.435 million. The filing reports $10.380 million outstanding under related-party lines of credit and a $500,000 related-party convertible note at year-end; accrued interest was $931,000.
Material changes and management commentary
- Revenue increased $3.216 million, or 357%, driven mainly by orders from a major national account beginning in November 2017, with additional initial airport-equipment sales.
- Despite improved gross margin versus FY2017, the company continued to report a gross loss. Management attributed this to low production volumes, early higher-cost designs and limited sourcing, particularly for new ground-support packs; it said margins were improving as volume increased.
- Selling and administrative costs rose 44% to $3.462 million, and research and development costs rose 86% to $1.956 million. Management linked higher R&D spending largely to development of higher-capacity forklift packs.
- Interest expense rose to $752,000 from $273,000, primarily reflecting credit-facility costs. The company’s net loss increased 57% year over year.
- Two customers each represented more than 10% of revenue; the filing gives approximately $3.181 million, or 77% of total revenue, for the major-customer concentration disclosure. Three suppliers represented $2.285 million, or 50% of purchases.
Outlook, risks and unusual items
- Going concern: The auditor’s report states that recurring operating losses, liabilities exceeding assets and the need for immediate additional financing raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible failure to continue.
- Funding need: Management estimated approximately $7.8 million in financing proceeds would be needed for the 12 months after September 26, 2018, and said existing cash was insufficient. Management planned to pursue equity placements, credit-line extensions and convertible debt; funding was not assured and could dilute shareholders.
- Related-party debt: The $10 million Unrestricted Line of Credit bears 8% interest, matures January 31, 2019 and is convertible at $0.60 per share. A separate $5 million inventory facility bears 15% interest and matures March 31, 2019. Further advances under both facilities are at lender Esenjay’s discretion. Esenjay is controlled by director and major shareholder Michael Johnson.
- Business and operating risks: Key risks include customer and supplier concentration, dependence on a limited source of battery cells in China, competition, product acceptance and safety, execution of new-product launches, and the possibility of costly recalls or regulatory requirements.
- Capital and governance: The company completed a 1-for-10 reverse stock split in August 2017. Management and affiliates held approximately 75% of common stock beneficial ownership as of September 2018; the stock traded on the OTCQB and was described as thinly traded. The company reported no plans to pay dividends.
- Other items: Product warranty liability increased to approximately $158,000 from $85,000. The company reported no material pending legal proceedings. A July 2018 grant of 335,264 options to CEO Ronald Dutt was disclosed as a subsequent event.
Important facts for investors to verify
- Whether the company obtained the estimated $7.8 million of additional financing and how its liquidity and going-concern position subsequently changed.
- Current balances, maturity terms, conversion provisions and availability of the Esenjay facilities, including any default rights or collateral claims.
- Whether revenue growth translated into positive gross margins and lower operating cash burn, given the FY2018 gross loss and $6.5 million operating cash outflow.
- Customer concentration and repeat-order sustainability, as well as qualification of alternative battery-cell suppliers.
- Potential dilution from convertible debt, options, warrants and future equity financing, including the effects of the controlling shareholder’s ownership.