by Debra Fiakas CFA
Proper electric and thermal management of advanced battery packs is imperative. During operation, voltage and temperature differences in the battery cells can lead to electrical imbalances and decrease system performance. A good battery management system can ensure strong power delivery and extend battery life. Dozens of battery management systems have cropped up to fill this need for the lithium ion batteries used in new electric vehicles and alternative energy applications. The highly populated field has not intimidated the newest competitor, Flux Power Holdings, Inc. (FLUX: OTC/BB).
Flux is a 2008 spin-off of sorts of LHV Power Corporation (formerly HiTek Power Corporation). The two companies still have common management as Flux’s chief executive officer is the president of LHV Power. A series of distribution, development and manufacturing agreements also link the two companies.
The Wheego LiFe. Wheego Electric Cars was Flux Power Holdings’ first customer in 2010. Photo credit: Wheego
The Flux product line consists of a battery management system (BMS), battery modules and chargers. The first prototype was shipped in 2010 and the next year Flux landed its first customer, electric vehicle producer Wheego Electric Cars. Four new customers in the electric vehicle market have come along over the last year: Greentech Automotive, Epic Boats, Artisan Vehicle and Boulder EV.
Battery modules represented 74% of total sales in the fiscal year ending June 2012 and sales of BMS represented 17% of total sales. The technology behind Flux’s BMS was acquired in late 2009 from Joseph Gottlieb, notably of the pinball Gottlieb family. He served as Flux’s chief technology officer for a time. Seven patent applications are pending covering among other achievements, a method and apparatus for management of individual cells in a battery system and the composition of the BMS as a cell, a microcontroller, a bleed-off resistor and an analog circuit with a powered gate.
No patents have been awarded yet, so any technological edge relied upon by Flux hinges on trade secret protection. Many technology companies benefit from being able to sequester critical process knowledge within the group that cannot be duplicated even if an employee or two decides to go out on their own. With only four years of experience behind it, Flux probably does not yet have that ‘technological fortification.’
Flux has yet to turn a profit. Total sales in fiscal year 2012 were $5.9 million, of which $1.5 million was sidelined on the balance sheet as deferred revenue. Investors should also note that $1.1 million of 2012 sales were to Epic Boats, which is 35% owned by Chris Anthony of member of Flux’s leadership. Flux reported a negative 37% net margin in the year and used $2.2 million in cash to support operations.
It is no secret that cash is in short supply at Flux. The company had $812,000 on its balance sheet at the end of June 2012, just after completing a $1.1 million private placement of 1.7 million shares of common stock and warrants. Since the fiscal year closed Flux has raised another $950,000 and issued 2.3 million new shares. A disclosure in the company’s annual report indicates Flux management plans to continue trying to raise capital.
Besides limited resources, Flux management has to worry about competition from a host of lithium ion battery producers. Flux’s battery is not particularly differentiated from any other lithium ion offerings. The company markets it as a lower-cost alternative to lead-acid batteries.
In the battery management space, Flux competes with Ricardo Plc and Atieva, Inc. , along with at least a dozen other developers. Even electric vehicle producer Tesla Motors, Inc. (TSLA: Nasdaq) has a BMS. Also of note is International Rectifier (IRF: NYSE), which markets an algorithm-based system for heavy duty battery applications under the brand name Evaira EMS.
Investors might note that Flux Power has spent $972,000 on research and development over the last two fiscal years. Of course, the company acquired a good portion of its technology in 2009 from Gottlieb Inventions through the issuance of an unspecified number of options to acquire common stock. Flux Power reported in its fiscal year 2012 annual report that Gottlieb owned at least 782,997 options with an exercise price of $0.04 per share.
Flux Power became public through a reverse merger earlier this year. Insiders own 83% of the company’s 46.3 million shares outstanding, giving them complete control over the company’s strategic direction. The control issue is made particularly salient given that there are a number of related party arrangements with customers and suppliers that are also control by members of management. Two suppliers, Current Ways and LHV Power, are owned and/or managed by Flux’s CEO James Gevarges and Chairman of the Board Chris Anthony is a significant owner of Epic Boats, a customer. At least insiders have signed lock-up agreements, which sequester their shares for eighteen months from the date of the reverse merger. This gives minority shareholders some protection from a flood of shares coming on the market.
As a closely held company, it is not surprising that Flux Power shares rarely trade. That leaves a wide spread between bid and ask prices and few shares available to build positions. This is never a good situation for minority investors. Flux Power has moved into the advanced battery market at top speed. Investors will have to move at a much slower pace to accumulate FLUX positions.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.