Business context and reporting period
Flux Power Holdings, Inc. designs and sells lithium-ion energy storage systems and battery management technology, with a primary focus on lift equipment and secondary opportunities in portable and stationary power. This is the company’s Form 10-K for the fiscal year ended June 30, 2015—not a filing for calendar 2014 Q4. Comparisons below are with fiscal 2014.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $715,000 | $358,000 |
| Gross profit (loss) | $(59,000) | $35,000 |
| Gross margin | (8.3%) | 9.8% |
| Operating expenses | $2,780,000 | $3,756,000 |
| Operating loss | $(2,839,000) | $(3,721,000) |
| Net loss | $(2,415,000) | $(4,299,000) |
| Net loss per share | $(0.02) | $(0.06) |
| Net cash used in operating activities | $(2,363,000) | $(2,151,000) |
At June 30, 2015, cash was $53,000, total assets were $450,000, total liabilities were $2,644,000, and stockholders’ deficit was $2,194,000. Working capital was negative $2,175,000; accumulated deficit was $10,691,000. The balance sheet showed $1.6 million of related-party line-of-credit debt and $110,000 of long-term line-of-credit liability net of discount. The company reported $2.316 million of financing cash inflows, including $501,000 net proceeds from stock and warrants and $1.815 million from stockholder notes and credit lines.
Changes versus the prior period
- Revenue approximately doubled, largely due to the LiFT Pack launch, but cost of revenue rose more than revenue and gross profit turned into a loss.
- Operating expenses declined chiefly because FY2014 included $1.561 million of amortized prepaid advisory fees; FY2015 recorded $17,000.
- Reported net loss improved by $1.884 million. The comparison is affected by the lower FY2015 advisory-fee amortization and a $548,000 gain from the change in fair value of warrant liabilities, versus a $330,000 expense in FY2014.
- Operating cash use increased by $212,000. Customer concentration remained material: three customers represented 47% of FY2015 revenue, compared with two customers representing 36% in FY2014.
Outlook, risks and unusual items
Management estimated that approximately $2 million of additional financing would be needed to fund operations through June 30, 2016, and said existing resources were insufficient. The independent auditor’s report expressed substantial doubt about the company’s ability to continue as a going concern. Funding plans included private placements and borrowings, but availability was not assured; equity financing could significantly dilute shareholders. Related-party credit facilities matured December 31, 2015, and advances were subject to lender approval.
Management expected cost of revenue to decline to approximately 75% of revenue when higher sales volumes were achieved in 2016 and later years; this was an expectation, not a guarantee. The company was pursuing UL certification for LiFT Packs. Key risks include limited operating history, negative gross margin, dependence on a small number of customers and suppliers, lithium-cell supply and product-safety risks, and competition. A work-related injury proceeding was pending; management did not then expect a material adverse outcome but noted uncertainty.
After year-end, the company disclosed that it borrowed an aggregate $975,000 from Esenjay in July–September 2015 and agreed in September to issue 51,171,025 shares at $0.04 per share to convert $2 million of Esenjay debt plus accrued interest. The filing also states subsequent draws of $575,000 after the conversion date. The proposed KleenSpeed acquisition was abandoned in July 2015.
Important facts for investors to verify
- Whether the company secured the financing needed for operations and how subsequent borrowings, the September debt conversion, and remaining related-party balances reconcile.
- Whether LiFT Pack sales can grow enough to restore positive gross margins and meet management’s cost expectations.
- The extent of potential dilution from the debt conversion, outstanding warrants and options, and further capital raising.
- Customer and supplier concentration, cell-sourcing alternatives, UL certification progress, and warranty or product-liability exposure.
- The effect of the warrant fair-value gain and prior-year advisory-fee amortization on comparisons of reported losses and underlying performance.