Business context and reporting period
Flux Power Holdings, Inc. designs and sells lithium-ion battery systems and proprietary battery-management technology for forklifts and airport ground-support equipment. This is its Form 10-K for the fiscal year ended June 30, 2019, filed September 12, 2019—not a report for calendar-year 2018 Q4. Financial comparisons are fiscal 2019 versus fiscal 2018; per-share figures reflect the July 2019 1-for-10 reverse split.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $9.317 million | $4.118 million |
| Gross profit (loss) | $549,000; 6% margin | ($795,000); (19%) margin |
| Operating expenses | $11.800 million | $5.418 million |
| Operating loss | ($11.251 million) | ($6.213 million) |
| Net loss | ($12.414 million) | ($6.965 million) |
| Net loss per share | ($2.84) | ($2.74) |
| Cash used in operations | $10.712 million | $6.500 million |
| Cash at year-end | $102,000 | $2.706 million |
- Revenue rose 126%, primarily from expansion within existing customer fleets and initial airport GSE sales. Higher volumes and lower material costs per pack contributed to the return to positive gross profit.
- Selling and administrative expense increased 123% to $7.712 million; research and development increased 109% to $4.088 million, principally for higher-capacity forklift packs and UL testing. Interest expense was $1.247 million, up from $752,000.
- At June 30, 2019, total assets were $7.206 million and total liabilities were $10.375 million. Working capital was negative $3.644 million, improved from negative $7.446 million a year earlier. Accumulated deficit was $39.076 million.
- Related-party credit-facility borrowings totaled $6.405 million at June 30, bearing 15% interest and due December 31, 2019. The facility had $595,000 available at September 12, subject to lender approval. A separate $1 million Cleveland loan remained outstanding at that date, due December 1, 2019.
- Management estimated approximately $12 million in financing proceeds would be needed for the twelve months following the filing. The auditor cited substantial doubt about the company’s ability to continue as a going concern.
Material changes and developments
- Four customers accounted for approximately 87% of FY2019 revenue, compared with two customers representing 77% in FY2018. Three suppliers represented 62% of FY2019 purchases, versus 50% in FY2018.
- In October 2018, related-party debt and accrued interest were converted into equity; the filing reports $8.475 million of debt conversion and $1.610 million of common stock issued for interest in supplemental cash-flow disclosures. The company also raised approximately $4.392 million gross through a private placement in December 2018 and January 2019.
- After year-end, the company entered a receivables factoring agreement with a stated maximum credit of $3 million, subject to eligible receivables and lender discretion. It had received $302,600 from receivables sales by September 11, 2019. The arrangement is secured by broad company assets and includes fees and financing charges.
- The company relocated to a 45,600-square-foot Vista facility in June 2019. The new lease has an initial term of seven years and four months, with stated future minimum lease payments totaling $3.810 million. The filing estimated adoption of the new lease standard would add approximately $2.7 million each to right-of-use assets and lease liabilities.
- A 1-for-10 reverse split took effect July 11, 2019. The company reported 5,104,474 common shares outstanding on September 12, 2019.
Outlook, commentary, and risks
Management is focusing on lift equipment and adjacent GSE markets, expanding sales capacity, developing higher-capacity products, and seeking additional UL listings. It planned to release a next-generation BMS in fiscal 2020. The filing provides no quantified revenue or earnings forecast; management cautioned that funding is required and may not be available on acceptable terms.
- Funding and solvency: Year-end cash and the remaining credit-line availability were limited; the credit line was discretionary and substantially drawn. Failure to raise capital could force cuts to operations, product development, sales and marketing, and capital spending. Financing may dilute shareholders.
- Customer and supplier concentration: Revenue depends heavily on a few customers, with no long-term customer contracts. The filing identifies battery-cell supply dependence and says no qualified alternative source was available, creating a potential supply and cost risk.
- Execution and market risks: Product adoption, OEM approvals, UL certification, production capacity, and timely product development are not assured. Lithium-ion safety perceptions, product warranty or liability claims, and possible tariffs on China-sourced batteries could adversely affect demand or margins.
- Governance and trading: Michael Johnson beneficially owned approximately 61.4% of shares, and officers, directors, and affiliates collectively owned approximately 66.7%. The common stock traded on OTCQB and was described as thinly traded and illiquid.
- Other items: The company recognized $84,000 of other income from release of a related-party customer deposit. Warranty liability rose to $361,000 from $158,000. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the company secured the estimated $12 million of required financing, and the status, maturity, cost, and collateral terms of its credit and factoring arrangements.
- Current cash, working capital, operating cash burn, and progress toward generating cash from operations.
- Whether customer concentration declined, customer orders continued, and the company obtained additional OEM approvals and UL listings.
- Whether battery-cell supply was diversified and whether tariffs, input costs, warranty claims, or product issues affected margins.
- The effect of equity issuance, warrants, options, and the reverse split on fully diluted ownership and shareholder dilution.