This information should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and Part II, Item 7, Management
’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 30, 2017.
We design, develop and sell rechargeable advanced lithium-ion batteries for industrial uses, including our first-ever UL 2271 Listed lithium-ion “LiFT Pack” forklift batteries. We have developed an innovative high-power battery cell management system (“BMS”) and have structured our business around this core technology. Our proprietary BMS provides four critical functions to our battery systems:
Using our proprietary battery management technology, we offer completely integrated energy storage solutions or custom modular standalone systems to our customers. In addition, we have developed a suite of complementary technologies and products that enhance the abilities of our BMS to meet the needs of the growing advanced energy storage market.
In January 2016, we obtained certification from Underwriters Laboratory (“UL”), a global safety science organization, on our LiFT Packs for forklift use. This UL 2271 Listing demonstrates the quality, safety and reliability of our LiFT Pack line for customers, distributors, dealers and
industrial equipment manufacturers. We believe we have emerged from this effort with a product of substantially enhanced design, durability, performance and value. Additionally, during September 2017, we completed our initial ISO 9001 audit and received our ISO 9001 certificate in November 2017. Obtaining the ISO 9001 certification further demonstrates our strong customer focus, the motivation and involvement of top management and our commitment to consistently providing high quality products and services to our customers.
During the latter part of fiscal 2017 we also began marketing directly to end-users
of lift equipment, primarily in the food and beverage industry. By going directly to the customers with the many benefits of utilizing lithium-ion batteries in their walkie pallet jack forklifts, we anticipate seeing a more rapid transition from traditional lead acid batteries to our lithium-ion batteries. Such benefits include less maintenance, faster charge times, longer lasting and greater power. Such marketing efforts resulted in Flux being named one of
Food Logistics Magazine’s
2017 Champions: Rock Stars of the Food & Beverage Supply Chain. This recognition underscores the increasing acceptance of Flux LiFT Packs powering multi-shift operations at a growing base of food industry distribution centers across America.
Our strategy is to offer a full product lineup for forklifts within the coming year. We are leveraging our prior experience of developing and shipping over 15 megawatts of battery packs into a variety of applications including electrical vehicles, robotic mining vehicles, and various industry specific applications. By working with the
forklift manufacturers, we have secured “technical approval” for compatibility with their equipment and in January 2018 we received Energy Storage System compatibility approval from Toyota Material Handling USA with respect to their 8HBW23 walkie pallet jack and from Raymond Corporation with respect to their 8210 walkie pallet jack. Each of these models have been tested to be electrically compatible with our LiFT Packs. These approvals represent another step towards our achieving industry acceptance and expanding awareness for a lithium-ion battery pack in lift equipment.
We are also developing a sales network utilizing existing battery distributors and equipment dealers
and targeting large purchasers of lift equipment in the food and beverage industry that are looking for improved performance and production using lithium-ion batteries. Our product development has included pilot programs and trials with national accounts, end users, and industrial equipment manufacturers. We have used the feedback from these pilot programs to substantially improve our battery packs.
Our focus thus far has been with our entry-level LiFT Pack line to power Class 3 walkie pallet jack forklifts. During fiscal 2016, the pace of sales was limited by our focus on converting Flux
’s production from small-run production and prototyping into larger scale production of our UL-listed products. We purposely dialed down production during the last six months of fiscal 2016 in order to incorporate the improvements resulting from the UL review process, as well as, implement important engineering features that stem from a model changeover. During the first half of fiscal 2017, we developed specialized assembly and testing stations designed to speed production time frames by streamlining many facets of testing and assembly. Throughout the remainder of fiscal 2017 we recognized the results of these design and production enhancements through reductions in warranty expense and improved gross margins and expect these improvements to continue in the future.
We are currently in development of much larger lithium-ion battery solutions for Class 1 and Class 2 material handling equipment. The Class 1 and Class 2 equipment, comprised of sit-on forklifts, narrow aisle, and
end riders are a natural progression for Flux as we leverage our scalable technology and design. These larger systems will satisfy customers seeking one lithium battery vendor to address all their material handling equipment needs. During December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation. Development of Class 2 packs, including end rider packs, is expected to follow that of Class 1 by approximately two months. With a focus on improvements to our LiFT Packs and overall production processes behind us, and the continued development of our product line, we are now positioned to accelerate our sales efforts in fiscal 2018.
Results of Operations and Financial Condition
The following table represents our unaudited condensed consolidated statement of operations for the three months ended December 31, 2017 (“Q2 2018”) and December 31, 2016 (“
Q2 2017”).
|
|
Three Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
% of Revenues
|
|
|
$
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,201,000
|
|
|
|
100
|
%
|
|
$
|
181,000
|
|
|
|
100
|
%
|
Cost of sales
|
|
|
1,589,000
|
|
|
|
132
|
%
|
|
|
311,000
|
|
|
|
172
|
%
|
Gross loss
|
|
|
(388,000
|
)
|
|
|
-32
|
%
|
|
|
(130,000
|
)
|
|
|
-72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
807,000
|
|
|
|
67
|
%
|
|
|
653,000
|
|
|
|
361
|
%
|
Research and development
|
|
|
479,000
|
|
|
|
40
|
%
|
|
|
219,000
|
|
|
|
121
|
%
|
Total operating expenses
|
|
|
1,286,000
|
|
|
|
107
|
%
|
|
|
872,000
|
|
|
|
482
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,674,000
|
)
|
|
|
-139
|
%
|
|
|
(1,002,000
|
)
|
|
|
-554
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
0
|
%
|
|
|
3,000
|
|
|
|
2
|
%
|
Interest expense, net
|
|
|
(166,000
|
)
|
|
|
-14
|
%
|
|
|
(36,000
|
)
|
|
|
-20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,840,000
|
)
|
|
|
-153
|
%
|
|
$
|
(1,035,000
|
)
|
|
|
-572
|
%
|
Revenues
Revenues for Q2
2018, increased by $1,020,000 or 564%, compared to Q2 2017. During Q2 2018 we sold approximately 420 LiFT Packs, compared to approximately 50 LiFT Packs in Q2 2017. This substantial increase in shipments was directly attributable to
our strong relationships with two leading forklift manufacturers and the related end users which resulted in approximately 80% of Q2 2018 revenues. Sales to these customers were minimal during Q2 2017 Additionally, at December 31, 2017 we had sales orders for an additional 330 LiFT Packs forecasted to generate $900,000 in revenues, of which 217 shipped during January 2018. We are in continued discussions with these forklift manufacturers for similar orders anticipated to ship throughout the remainder of fiscal 2018.
Cost of Sales
Cost of sales for Q2
2018, increased $1,278,000, or 411%, compared to Q2 2017. The increase in cost of sales is directly related to our substantial increase in LiFT Pack sales as discussed above. The primary reason for cost of sales not increasing as much as our revenues during the quarter is due to efficiencies garnered in the production of our LiFT Packs.
It has always been imperative to us that we maintain a knowledgeable and well-trained workforce to produce our packs. Accordingly, production wage expense included in cost of sales has remained substantial over the last several quarters, despite our low sales volume. During Q2 2018, we were able to increase production significantly while increasing our production wages only minimally.
The impact of the greater efficiency of our workforce during Q2 2018 resulted in an improved gross loss percent from -72% during Q2 2017 of to -32% in Q2 2018. Despite this improvement, we have continued to recognize a gross loss during Q2 2018 as we remain subject to low volume purchases, early higher cost designs and limited sourcing related to our inventory purchases, as well as, the continued warranty expense of repairing products in the field and returned products. As the development and improvement of the LiFT Pack continues, we anticipate recognizing quantity discounts on inventory purchases, reductions in warranty expense and continued efficiencies from our workforce, all contributing to improvements in our gross margin.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, public company costs, consulting costs, professional fees and other expenses.
Such expense for Q2 2018 increased $154,000 or 24%, compared to Q2 2017. This increase is primarily due to the issuance of 1.97 million stock options in October 2017 to our employees resulting in stock-based compensation expense of approximately $84,000 in Q2 2018 in comparison to Q2 2017. This substantial increase was the result of the immediate vesting of 25% of the options upon issuance. The remaining increase was due to expansion of our sales department and the addition of two regional sales managers to the team during October 2017.
Research and Development Expense
Research and development expenses for Q2
2018 increased $260,000 or 119%, compared to Q2 2017. Such expenses consist primarily of materials, supplies, salaries and personnel related expenses, stock-based compensation expense, consulting costs, and other expenses associated with the continued development of our LiFT Pack,
as well as, research into new product opportunities. During Q2 2018, we have continued to focus our efforts in developing lithium-ion battery packs for Class 1 and Class 2 forklifts. The scalable technology and design of our LiFT Packs makes for a natural progression to these larger packs. As a result, during December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation. Development of end rider packs and Class 2 “narrow aisle” packs are expected to follow that of Class 1 by approximately two months. The impact of these efforts is expected to continue to be seen throughout the remainder of fiscal 2018. We anticipate research and development expenses continuing to be a sizeable portion of our expenses as we continue to develop new and improved products to our product line.
Change in Fair Value of Warrant Derivative Liability
We follow FASB ASC Topic No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The change in fair value of derivative liabilities for Q2 2018 decreased $3,000 or 100% compared to Q2 2017. During August 2016, we proposed to our warrant holders that the re-set provision included in the warrant (that creating the derivative liability) be eliminated. Upon receiving consents to eliminate the re-set provision from a majority of the warrant holders, the re-set provision and the related derivative liability were eliminated as of January 23, 2017, thus resulting in no change in fair value of derivative liabilities during Q2 2018.
Interest Expense
Interest expense for Q2 2018 increased $130,000 or 361% and consists of interest expense related to our outstanding lines of credit and convertible promissory note (see Note 4 in the accompanying condensed consolidated financial statements).
Net Loss
Net loss for Q2
2018 increased $805,000 or 78%, as compared to net loss in Q2 2017. The increase is primarily attributable to increased stock-based compensation costs, our growing sales department, the development of Class 1 and Class 2 forklift battery packs and interest expense. As we continue to increase sales of our walkie LiFT Packs, we anticipate being able to take advantage of greater quantity discounts thus improving our gross margin. Additionally, with the introduction of Class 1 and Class 2 packs to the market we expect to also strengthen our financial position.
The following table represents our unaudited condensed consolidated statement of operations for the six months ended December 31, 2017 and December 31, 2016.
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
% of Revenues
|
|
|
$
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net r
evenues
|
|
$
|
1,354,000
|
|
|
|
100
|
%
|
|
$
|
474,000
|
|
|
|
100
|
%
|
Cost of sales
|
|
|
1,898,000
|
|
|
|
140
|
%
|
|
|
771,000
|
|
|
|
163
|
%
|
Gross loss
|
|
|
(544,000
|
)
|
|
|
-40
|
%
|
|
|
(297,000
|
)
|
|
|
-63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
1,483,000
|
|
|
|
110
|
%
|
|
|
1,300,000
|
|
|
|
274
|
%
|
Research and development
|
|
|
957,000
|
|
|
|
71
|
%
|
|
|
509,000
|
|
|
|
107
|
%
|
Total operating expenses
|
|
|
2,440,000
|
|
|
|
180
|
%
|
|
|
1,809,000
|
|
|
|
382
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,984,000
|
)
|
|
|
-220
|
%
|
|
|
(2,106,000
|
)
|
|
|
-444
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
0
|
%
|
|
|
13,000
|
|
|
|
3
|
%
|
Interest expense, net
|
|
|
(302,000
|
)
|
|
|
-22
|
%
|
|
|
(121,000
|
)
|
|
|
-26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,286,000
|
)
|
|
|
-243
|
%
|
|
|
(2,214,000
|
)
|
|
|
-467
|
%
|
Revenues
Revenues for the
six months ended December 31, 2017, increased by $880,000 or 186%, compared to the six months ended December 31, 2016. This substantial increase in shipments was directly attributable the development of a
strong relationships with two leading forklift manufacturers and the related end users which generated approximately 72% of revenues during the six months ended December 31, 2017. Sales to these customers were minimal during the six months ended December 31, 2016. We are in continued discussions with these forklift manufacturers for similar orders anticipated to ship throughout the remainder of fiscal 2018.
Cost of Sales
Cost of sales during the six months ended December 31,
2017, increased $1,127,000, or 146%, compared to the six months ended December 31, 2016. The increase in cost of sales is directly related to our increase in LiFT Pack sales. Consistent with the increase discussed regarding Q2 2018 above, cost of sales did not increase as much as our revenues during the period due to efficiencies garnered by our production workforce. We anticipate further reductions in our cost of sales in the future as we begin to take advantage of greater quantity discounts that will come along with our increased sales.
Selling and Administrative Expenses
Selling and administrative expenses for the six months ended December 31,
2017 increased $183,000 or 14%, compared to the six months ended December 31, 2016. As discussed above regarding Q2 2018, the increase is primarily attributable to the issuance and vesting of 1.97 million options, as well as, the growth of our sales department.
Research and Development Expense
Research and development expenses for the six months ended December 31,
2017 increased $448,000 or 88%, compared to the six months ended December 31, 2016 due to our
continued focus in developing lithium-ion battery packs for Class 1 and Class 2 forklifts. As a result, during December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation. Development of end rider packs and Class 2 “narrow aisle” packs are expected to follow that of Class 1 by approximately two months. The impact of these efforts is expected to continue to be seen throughout the remainder of fiscal 2018. We anticipate research and development expenses continuing to be a sizeable portion of our expenses as we continue to develop new and improved products to our product line.
Change in Fair Value of Warrant Derivative Liability
We follow FASB ASC Topic No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The change in fair value of derivative liabilities for the six months ended December 31, 2017 decreased $13,000 or 100% compared to the six months ended December 31, 2016. During August 2016, we proposed to our warrant holders that the re-set provision included in the warrant (that creating the derivative liability) be eliminated. Upon receiving consents to eliminate the re-set provision from a majority of the warrant holders, the re-set provision and the related derivative liability were eliminated as of January 23, 2017, thus resulting in no change in fair value of derivative liabilities during the six months ended December 31, 2017.
Interest Expense
Interest expense during the six months ended December 31,
2017 and 2016 was $302,000 and $121,000, respectively, and consists primarily of interest expense related to our outstanding line of credit and convertible promissory note. Also included in interest expense during the six months ended December 31, 2016 is the amortization of deferred financing costs associated with our Unrestricted Line of Credit. On December 29, 2015, we entered into the Second Amendment of our Unrestricted Line of Credit which included, among other provisions, the reduction in the conversion price of the Unrestricted Line of Credit from $3.00 to $0.60 per share. The estimated change in fair value of the conversion price of approximately $310,000 was recorded as a deferred financing cost at the date of the Second Amendment and was amortized over the then remaining seven-month term of the amended Unrestricted Line of Credit agreement. During the six months ended December 31, 2016, we amortized the remaining $44,000 of deferred financing costs.
Net Loss
Net loss for the six months ended December 31,
2017 increased $1,072,000, as compared to net loss for the six months ended December 31, 2016. The increase is primarily attributable to increased stock-based compensation costs, our growing sales department, the development of Class 1 and Class 2 forklift battery packs and interest expense. As we continue to increase sales of our walkie LiFT Packs, we anticipate being able to take advantage of greater quantity discounts thus improving our gross margin. Additionally, with the introduction of Class 1 and Class 2 packs to the market we expect to also strengthen our financial position.
Liquidity and Capital Resources
Overview
As of December 31,
2017, we had a cash balance of $31,000, working capital of $532,000, and an accumulated deficit of $22,983,000.
We do not have sufficient liquidity and capital resources to fund planned operations for the twelve months following the filing date of this Quarterly Report. The Company is exploring and working on securing additional capital in the form of convertible debt and private placements from both current sources and new sources. See “Future Liquidity Needs” below.
Cash Flows
Operating Activities
Our operating activities resulted in net cash used in operations of
$3,262,000 during the six months ended December 31, 2017, compared to net cash used in operations of $2,416,000 during the six months ended December 31, 2016. The primary reason for the increase in net cash used in operations was an increase in accounts receivable at December 31, 2017 of $1,049,000.
Net cash used in operating activities during the six months ended December 31, 2017, reflects the net loss of $3,286,000 for the period offset primarily by non-cash items including stock-based compensation and depreciation, as well as, increases in accounts receivable, accounts payable and accrued interest and decreases in inventories.
Net cash used in operating activities during the six months ended December 31,
2016, reflects the net loss of approximately $2,214,000 for the period offset primarily by non-cash items including depreciation, the change in fair value of warrant liability, stock-based compensation, and the amortization of debt discounts and deferred financing costs, as well as, increases in accounts receivable, inventories and accounts payable and decreases in accrued expenses.
Investing Activities
Net cash used in investing activities during the six months ended December 31, 2017 consists
primarily of the purchase of office and warehouse equipment and leasehold improvements, totaling $43,000.
Net cash used in investing activities during the six months ended December 31, 2016 consists of the purchase of office equipment, primarily computer related, for $24,000.
Financing
Activities
Net cash provided by financing activities during the six months ended December 31, 2017 was $3,215,000 and resulted from the borrowing from our line of credit with Esenjay.
Net cash provided by financing activities during the six months ended December 31, 2016 was $2,385,000 and consisted of $1,075,000 of proceeds from the sale of common stock and $1,525,000 of borrowings from our line of credit with Esenjay, offset by the repayment of our Line of Credit of $215,000 with a non-related party.
Future Liquidity Needs
We have evaluated our expected cash requirements over the next twelve months, which include, but are not limited to, investments in additional sales and marketing and product development resources, capital expenditures, and working capital requirements and have determined that our existing cash resources are not sufficient to meet our anticipated needs during the next twelve months, and that additional financing is required to support current operations. Based on our current and planned levels of expenditure
s, we estimate that total financing proceeds of approximately $7,000,000 will be required to fund current and planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q. In addition, we anticipate that further additional financing may be required to fund our business plan subsequent to that date, until such time as revenues and related cash flows become sufficient to support our operating costs.
We intend to continue to seek capital through the sale of equity securities through private placements, in addition to utilizing our existing credit facility with Esenjay Investments, LLC (“Esenjay”). Esenjay is deemed to be a related party as Mr. Michael Johnson, the beneficial owner and director of Esenjay, is a current member of our board of directors and a major shareholder of the Company. The credit facility
for up to a maximum amount of $10,000,000 bears interest at 8 % per annum, matures on January 31, 2019, and is convertible into shares of common stock at $0.60 per share (the “Unrestricted Line of Credit”). As of December 31, 2017, the amount outstanding under the Unrestricted Line of Credit was $8,400,000, with $1,600,000 available for future draws at Esenjay’s discretion. As of February 13, 2018, the amount outstanding under the Unrestricted Line of Credit was $8,955,000 with $1,045,000 available for future draws. Esenjay owns approximately 64% of our issued and outstanding common stock as of February 13, 2018.
Although management believes that the additional required funding will be obtained, there is no guarantee we will be able to obtain the additional required funds in the future or that funds will be available on terms acceptable to us. If such funds are not available, management will be required to curtail its investments in additional sales and marketing and product development resources, and capital expenditures, which will have a material adverse effect on our future cash flows and results of operations, and our ability to continue operating as a going concern.
To the extent that we raise additional funds by issuing equity or debt securities, our shareholders may experience additional significant dilution and such financing may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates, or grant licenses on terms that may not be favorable to us. Such actions may have a material adverse effect on our business.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management
’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended June 30, 2017.
Recently Issued Accounting Pronouncements Not Yet Adopted
Management has considered all recent accounting pronouncements issued since the last audit of the Company
’s consolidated financial statements and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.