Flux Power Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017, compared with fiscal 2016. Although the request references 2016 Q4, this filing reports full-year fiscal 2017 results. Dollar amounts below are U.S. dollars; per-share and share data reflect the company’s subsequent 1-for-10 reverse stock split.
Business context
Flux designs, develops and sells lithium-ion energy storage systems and battery management systems, primarily for forklifts and other industrial applications. Its commercial focus was lift equipment, with airport ground support equipment as an adjacent market. The company reported UL 2271 listing for its LiFT Pack forklift batteries and described a successful airline ground-support pilot. Revenue was primarily from U.S. customers.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $902,000 | $558,000 | +$344,000; +62% |
| Gross loss | $(720,000) | $(561,000) | Loss widened $159,000 |
| Gross margin | -80% | -101% | Improved 21 percentage points |
| Operating expenses | $3,456,000 | $3,549,000 | Down $93,000 |
| Operating loss | $(4,176,000) | $(4,110,000) | Loss widened $66,000 |
| Net loss | $(4,435,000) | $(4,571,000) | Loss narrowed $136,000; 3% |
| Net loss per share | $(0.18) | $(0.31) | Comparative share counts changed materially |
| Cash used in operating activities | $(5,698,000) | $(3,920,000) | Use increased $1,778,000 |
| Cash provided by financing activities | $5,745,000 | $3,999,000 | Primarily related-party borrowing |
Gross margins remained negative despite improvement as a percentage of revenue. Management attributed losses to low production volumes, early higher-cost product designs, limited sourcing and warranty costs. Warranty expense declined by $145,000 year over year, but remained a significant cost; the accrued product warranty liability was approximately $85,000 at June 30, 2017.
At June 30, 2017, cash was $121,000, current assets were $1.836 million, current liabilities were $865,000, total assets were $1.921 million and total liabilities were $6.670 million. Inventory increased to $1.566 million from $202,000, including $870,000 of finished goods. Accumulated deficit was $19.697 million and stockholders’ deficit was $4.749 million.
Related-party line-of-credit debt was $5.185 million at year-end, bearing 8% interest, convertible at $0.60 per share and maturing January 31, 2019. Additional draws require lender approval. A separate $500,000 shareholder convertible note bore 12% interest and was due October 27, 2018. By September 21, 2017, line-of-credit borrowings had risen to $6.520 million, with $3.480 million nominally available, subject to lender discretion. The company also reported $239,000 of accrued interest at year-end.
Material changes and operating developments
- Revenue growth followed a production slowdown during fiscal 2016 for a UL-related product redesign and manufacturing changes. Fiscal 2017 cost of sales rose 45%, less than revenue growth, while operating expenses fell 3%.
- Research and development expense declined 19% to $1.052 million, principally because UL testing and certification costs were concentrated in fiscal 2016.
- Operating cash use increased, substantially reflecting a $1.364 million increase in inventory and payments of accounts payable and accrued interest.
- Weighted-average basic and diluted shares increased to 24.5 million from 14.9 million. The company issued shares in private placements, converted related-party debt to equity and exchanged warrants for shares.
- After year-end, the company effected a 1-for-10 reverse stock split, effective August 18, 2017. The filing presents share and per-share data retroactively adjusted.
Outlook, risks and unusual items
Management said it planned to accelerate sales efforts in fiscal 2018, expand its U.S. sales force, and develop packs for additional forklift classes. It also anticipated further ground-support equipment opportunities. These are plans and expectations, not quantified revenue or earnings guidance; the filing provides no clear numerical sales or margin forecast.
The company estimated that approximately $5 million of financing proceeds would be required to fund operations for the 12 months after the filing date, and said existing cash was insufficient. The independent auditor included a going-concern explanatory paragraph, citing accumulated losses and the need for immediate additional financing. Failure to obtain funding could require cuts to sales, product development and capital spending and could threaten continued operations. Financing could also dilute shareholders.
- Concentration: Three customers together accounted for 58% of fiscal 2017 revenue. Three suppliers together represented 57% of purchases. The filing identifies a single current lithium-cell manufacturer and says no qualified alternative source was in place.
- Product and market risks: Warranty claims, battery safety incidents, customer adoption, OEM/dealer acceptance, production capacity and competition could adversely affect results. The company had no long-term customer agreements.
- Related-party financing and control: Esenjay, controlled by director Michael Johnson, was the principal lender and controlling shareholder. Advances are at Esenjay’s discretion; the line is secured by company assets. The filing reports approximately 75.6% beneficial ownership for Johnson, including shares underlying convertible debt and other securities.
- Dilution and trading: The company warned of potential dilution from equity or convertible financing and described its OTCQB stock as thinly traded and subject to penny-stock restrictions. It did not expect to pay dividends.
- Other items: A work-injury claim was settled for $10,000, paid in September 2016. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Key facts investors should verify
- Whether the company obtained the estimated $5 million of funding and whether lender-approved credit availability translated into actual cash advances.
- Subsequent cash balances, operating cash burn, inventory conversion and the timing and terms of further financing.
- Whether revenue growth translated into positive gross margins and lower warranty costs, including the status of the $85,000 warranty accrual.
- Customer and supplier concentration, qualified alternate lithium-cell sources, and evidence of repeat orders or commercial scale in forklift and airport markets.
- Potential dilution and control implications of related-party debt, convertible securities, warrants, options and the reverse stock split. The filing’s beneficial-ownership figures include securities convertible or exercisable within 60 days.
- The customer-concentration wording is not fully clear: it states three customers represented 58% of revenue and gives approximately $524,000, but does not clearly reconcile that amount with the reported $902,000 total revenue.