Flux Power Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016; comparative period is fiscal 2015. The filing was signed September 26, 2016. Flux designs and sells lithium-ion battery systems and battery-management technology, primarily targeting forklift lift equipment and, secondarily, airline ground-support equipment.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $558,000 | $715,000 | Down $157,000, or 22% |
| Cost of sales | $1,098,000 | $774,000 | Up 42% |
| Gross loss (margin) | $(540,000) (-97%) | $(59,000) (-8%) | Gross loss widened |
| Operating expenses | $3,570,000 | $2,780,000 | Up 28% |
| Operating loss | $(4,110,000) | $(2,839,000) | Loss widened |
| Net loss | $(4,571,000) | $(2,415,000) | Up $2,156,000, or 89% |
| Net loss per share | $(0.03) | $(0.02) | — |
| Net cash used in operating activities | $(3,920,000) | $(2,363,000) | Cash use increased |
R&D expense rose 98% to $1,296,000, mainly reflecting UL certification, product testing, staffing and ground-support battery development. Selling and administrative expense was $2,240,000, up 6%. Interest expense increased to $472,000 from $114,000, including approximately $266,000 of amortized deferred financing costs. The income from changes in warrant derivative fair value fell to $11,000 from $548,000.
At June 30, 2016, cash was $127,000, working capital was negative $720,000, total assets were $559,000 and total liabilities were $2,417,000. Accumulated deficit was $15,262,000. The balance sheet reported $1,200,000 outstanding on the related-party line of credit and $215,000 principal on the unrelated lender’s line, presented net of debt discount as $196,000. Operating cash outflow was largely funded with $3,999,000 of financing cash inflows; investing cash use was $5,000.
During FY 2016, the company issued shares to convert or settle approximately $3,397,000 of related-party debt and raised cash through equity sales. Common shares outstanding increased from approximately 99.5 million at June 30, 2015 to 209.4 million at June 30, 2016. The company pays no dividends and does not anticipate doing so in the foreseeable future.
Material changes and business developments
- Revenue declined as Flux deliberately slowed production during a model changeover to incorporate UL-review and product-design improvements.
- Warranty expense and field repairs contributed to higher cost of sales and the gross loss. Accrued product warranty liability rose to approximately $120,000 from $45,000.
- Flux obtained UL 2271 certification for its LiFT Pack forklift batteries in January 2016 and began shipping certified packs in May 2016. The filing describes the packs as the first and only UL-listed lithium-ion batteries then available for this use.
- Three customers together accounted for approximately $285,000, or 51%, of FY 2016 revenue, compared with approximately $341,000, or 47%, in FY 2015. Three suppliers together represented 66% of purchases in both years; the filing also identifies a single Chinese cell manufacturer as the current source for battery cells, with no qualified alternative source.
Outlook, risks and unusual items
Management expected production and assembly enhancements to improve gross margins beginning in the second quarter of FY 2017; this is management’s expectation, not a quantified earnings forecast. A 72-volt airline ground-support battery pilot was deemed successful in August 2016. Flux planned additional airline trials and described potential pack pricing of approximately $20,000–$25,000. Management also identified lift equipment as its main growth focus and portable power, military, mining and stationary applications as adjacent opportunities.
Management estimated that approximately $2,500,000 of financing proceeds would be needed to fund planned operations through June 30, 2017, and stated existing cash resources were insufficient for the next twelve months. The auditor’s report included a going-concern paragraph expressing substantial doubt about Flux’s ability to continue as a going concern. Management planned to seek equity financing and credit-line draws, but funding was not assured.
Flux’s April 2016 private placement was expanded to a maximum $4,000,000. By August 31, 2016, it had raised $3,900,000: $2,125,000 in cash and $1,775,000 through settlement of liabilities. The related-party credit facility had a $920,000 outstanding balance and $2,580,000 available as of September 26, 2016, but further advances were at lender Esenjay’s discretion. The facility carried 6% interest, was convertible at $0.06 per share subject to authorized-share limits, and matured January 31, 2018. The unrelated $500,000 line had $215,000 borrowed and $285,000 available; its stated September 19, 2016 maturity was being renegotiated.
- Key risks include continuing losses and cash burn, dependence on external financing, possible shareholder dilution, limited authorized shares relative to potential issuance, and substantial control by Esenjay and its beneficial owner.
- Other material risks include customer and supplier concentration, reliance on a single battery-cell source, product acceptance and production scale-up, warranty and lithium-battery fire or safety claims, and competition and technological change.
- A work-injury claim was settled for $10,000 in August 2016; the amount had been accrued at June 30 and was paid in September 2016.
- Management reported effective disclosure controls and effective internal control over financial reporting as of June 30, 2016; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether the post-year-end financing proceeds and discretionary related-party credit availability are sufficient to fund operations, and whether additional capital is required.
- Whether Flux can convert UL certification and successful pilots into recurring sales, higher production volumes and the anticipated gross-margin improvement.
- Whether field-product issues are resolved and warranty costs decline from the FY 2016 level.
- Current debt balances, the status of the unrelated credit-line maturity, collateral and conversion terms, and the remaining authorized-share capacity after options, warrants and convertible debt.
- Customer and supplier concentration, particularly the availability of qualified alternative battery-cell suppliers and the pace of customer diversification.
- The extent of dilution and related-party influence, including Esenjay’s ownership, financing role and participation in equity offerings.