Flux Power Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2014, compared with fiscal 2013. Although the request references “2013 Q4,” this filing is an annual report for FY2014, not a quarterly filing. Amounts are U.S. dollars.
Business context
Flux Power designs, develops and sells lithium-based energy storage systems built around its battery management system (BMS). During FY2014 it shifted its primary focus toward lift equipment sales through dealers and distributors, with micro-grid and portable-power applications as secondary opportunities. It launched lift-equipment products in January 2014 and reported military trials and other customer evaluations. The company had 43 customers as of June 30, 2014, but operating history and commercial scale remained limited.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $358,000 | $772,000 |
| Gross profit | $35,000; 10% margin | $16,000; 2% margin |
| Operating expenses | $3,756,000 | $5,280,000 |
| Operating loss | $3,721,000 | $5,264,000 |
| Net income (loss) | $(4,299,000) | $351,000 |
| Cash used in operations | $2,151,000 | $3,371,000 |
| Cash at year end | $116,000 | $20,000 |
- Revenue declined $414,000, or 54%. Management attributed much of the decrease to FY2013 recognition of $480,000 of previously deferred Wheego revenue after a right of return was waived; related cost of revenue was $429,000.
- Gross profit rose $19,000, with margin improving from 2% to 10%, partly because the obsolete-inventory write-down fell from $77,000 to $29,000. Selling and administrative expense declined 38% to $1,659,000, and R&D expense declined 46% to $536,000.
- FY2013 reported net income included a $5,731,000 noncash gain from remeasurement of warrant derivative liabilities. Excluding that gain, the company reported a FY2013 net loss of approximately $5,380,000. FY2014 included a $330,000 warrant-valuation expense; these fair-value changes did not affect cash.
- At June 30, 2014, total assets were $462,000, current liabilities $1,246,000, working capital was negative $887,000, and accumulated deficit was $8,276,000. The balance sheet showed no stockholder-note debt at year end, following debt-to-equity conversions.
- During FY2014, $3,136,000 of stockholder debt principal and $304,000 of accrued interest were converted to equity. The company reported $3,250,000 available under Esenjay credit facilities, but draws were discretionary and Esenjay had no obligation to advance funds.
- Financing activities provided $2,248,000 in cash in FY2014, including net proceeds from stock and warrant sales. The company estimated it needed approximately $2 million of additional financing to fund planned operations through June 30, 2015.
Material changes, outlook and risks
- Strategy: Flux moved away from lengthy, exclusive OEM development arrangements toward a broader lift-equipment dealer/distributor network, while pursuing micro-grid, military and other applications. The filing gives no firm revenue or profitability guidance.
- Funding and going concern: The auditor’s report and management disclosures state that substantial doubt exists about the company’s ability to continue as a going concern. The company said existing cash was insufficient for the next twelve months and that continued operations depended on raising capital and/or generating adequate revenue. An August 2014 equity placement had raised $142,500 of a planned $990,000 by October 7, 2014.
- Subsequent financing: In October 2014, the company entered into a secured convertible line of credit of up to $500,000, bearing 8% interest, with conversion at the lender’s option at $0.12 per share. Approximately $100,000 had been drawn by October 7, 2014. The company also reported a $25,000 draw under the Esenjay facilities after year end.
- Dilution and control: FY2014 equity offerings and debt conversions increased common shares outstanding from approximately 47.4 million to 93.3 million. Management and directors and their affiliates beneficially owned approximately 70.6% as of October 7, 2014. Further financing could dilute existing holders; the filing also notes limited authorized common-share capacity after reservations for options, warrants and convertible securities.
- Principal operating risks: Customer concentration and lack of long-term customer contracts; dependence on a limited number of battery-cell suppliers, including suppliers in China; product safety, warranty, liability and recall exposure; competition and technology risk; and dependence on continued funding. Two customers represented 36% of FY2014 revenue. The company reported no material pending legal proceedings.
- Related parties and governance: Esenjay, controlled by a director and major shareholder, was the company’s principal lender and received shares and warrants in debt conversions. SRA, the placement agent, was led by the executive chairman. The company disclosed that it had no independent directors, and its full board performed audit-committee functions.
- Unusual reporting item: The risk-factor section describes a “gross loss” of $4,299,000, but the audited statements report that amount as net loss and show gross profit of $35,000. This appears inconsistent and should be checked against the filed statements.
Important facts for investors to verify
- Reconcile the risk-factor reference to a $4.299 million “gross loss” with the audited income statement’s $35,000 gross profit and $4.299 million net loss.
- Confirm current cash, cash burn, actual financing raised and drawn, and whether committed funding is sufficient; the principal Esenjay facilities were discretionary.
- Review the terms, security, conversion features and potential dilution from the October 2014 $500,000 credit line, warrants, outstanding options and other securities.
- Assess whether lift-equipment trials and distribution relationships have converted into recurring commercial orders, given low revenue and customer concentration.
- Review the going-concern disclosures, related-party financing and placement arrangements, and the company’s remaining authorized share capacity.