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Q '15 Q&A with CEO Ron Dutt
1. Does Flux Power have any convertible debt outstanding?
A: As of March 31, 2015, Flux had borrowed a total of $215,000 under a $500,000, 8% convertible line of credit that was established October 2, 2014. The line of credit is convertible into Flux common stock at $0.12 per share. Flux has also filed with the SEC for the possible sale of up to $2M in notes convertible into Flux stock at $0.14 per share to provide working capital to support accelerated sales growth within its expanding base of customers and customer prospects that have substantial materials handling operations.
2. Why is there no promotion to attract new investors?
A: Flux does have ongoing programs to attract new investors as you know, however they have not yet been reflected in our share price, I think because our financial performance has yet to show in numbers the qualitative success we are having. Flux is focusing its finite personnel and financial resources principally on its sales, marketing and corporate communications efforts. These efforts reach a variety of constituents including customers, distributors, OEMs, trade media AND investors. To leverage the Company’s progress, we also utilize an external investor relations firm to provide ongoing counsel, communications support, and investor outreach and engagement – all of which is intended to develop new investor interest and support existing shareholder interest in the Company.
Flux is very active in social media, a discipline that provides efficient and low cost visibility to support the building of our brand, our sales and marketing visibility and our investor relations profile.
In addition, Flux has an active trade show schedule, including our recent participation at PROMAT 2015 in Chicago and DC Power Group Annual Meeting 2015 in San Diego where we developed solid additional exposure across our stakeholder objectives including investors.
Specifically on the IR front, Flux was featured company within our IR agency’s booth this week (May 12-14) at the Las Vegas Money Show. Several thousand prospective investors were exposed to the Flux name and brand over the three days, including approximately 75 investors who heard the Flux overview presentation and over two hundred investors who received Flux materials. Like all outreach efforts, it takes time and effective follow up to see the results, but we are pleased by the increased exposure.
Flux will also be presenting on June 2nd in Los Angeles at the LD Micro Invitational Investor Conference. LD Micro has emerged as one of the premier West-coast events for small and microcap companies. This year’s invitation-only event features over 170 presenting companies and an estimated 700 professional investors. We expect to develop new investor AND prospective customer interest at this forum.
3. What is the current number of shares outstanding and are they going to continue to dilute?
A: As of May 5, 2015, Flux had 99,464,112 shares outstanding. Given our operating losses and financial position during these early stages of our product rollout and market development, investors should assume some level of additional dilution as part of our working capital funding. However, we do have cost management procedures in place and are very focused on delivering a return on investment from our deployment of capital in the business. Sourcing capital on the most favorable and risk-adjusted terms possible is important to us.
Additionally, given the solid demand we have achieved for our LiFT Pack product line and the growing base of large customers that have made initial purchases and are now considering broader-scale deployments, I am both optimistic and confident that in the next few quarters, investors should start to recognize the value of the franchise we have built in the industrial equipment market.
4. What technology or patents defend Flux’s Market Position?
A: Flux has developed a range of engineering and technical knowledge and patents over the past six years that form the core of our value proposition and competitive advantage. We have developed battery management system technology that is the ‘brains' of an effective storage solution, and we have addressed all the issues that go into the design and effective functioning of a battery pack used in very challenging industrial environments like materials handling.
Each storage application has its unique demands - and this is true of forklifts, given their use cycles, environmental issues - indoor, outdoor, movement, temperature changes - run time needs, etc. We have spent the past 18 months learning about our customers needs and learning from the testing and piloting process. We have also invested in the testing of our LiFT Pack products by the three leading forklift OEMs to secure technical approval of our LiFT Pack product line for walkie pallet jacks. These approvals are of critical importance to customers as they signify that the use of our batteries is condoned by the OEMS and therefore will not impact their warranty protections. Further with each lift truck model and manufacturer, there is a range of case sizes & specifications as well as power and other feature requirements - it’s not just a one size fits all market, and we have built products to meet each specification of our target market. And because we have initialized interest and demand from some substantial customers, we are now taking the next step in market development which is to secure UL certification for our LiFT Packs so that certain of our customers who require that validation in their procurement process will be able to move forward. As we built our packs based on UL specifications, we are confident in our ability to meet their specifications and expect to secure the approval in the next few months.
Finally, there is the issue of building awareness and trust in a market. Large companies have rigorous processes for vetting vendors and new equipment and there’s no shortcut to building that trust. Material handling is the basis of their business, and any disruption would create significant reverberations though their business. As a result, they cannot afford to take a chance on any new battery technology or vendor that shows up with a product. Additionally, we have focused on building both products and relationships - as at the end of the day, customers will choose to do business with those company’s they can trust to deliver on their word and to address any issues that might arise. We have purposely moved slowly in our market development so that we could assure we were responsive to our customer needs, and that has required we remain focused on a smaller base of customers, distributors, dealers & OEMs. We will expand that focus as we build on our current successes.
While all of these issues could be achievable by another company, the combination of industry knowledge, investment and time required to meet the requirements to do business with any one customer, OEM or distributor or dealer remain a very important hurdle for competition. We are starting to see some competitors in the market, but we feel we have a sufficient lead in timing and value-add with our products that we are not concerned about this, and frankly other participants would expand our sales, marketing and market awareness efforts for lithium technologies, likely increasing the near term addressable market.
5. If Flux has Such a Great Product, Why are Sales so Low?
A: Flux is in the early stages of product introduction. The past year has been focused on introducing the Company and the LiFT Pack line to the material handling industry. A new company with a new solution - it takes time to build trust, to carve out attention and then to develop interest, pilots and ultimately sales. Big companies move slowly to avert risk.
Large enterprise clients take a long time to vet the credibility of their vendors technology. The cycle between initial interest, piloting and final adoption can take several months or as much as a year. Fortunately, this sales cycle starts to shorten as the solutions become known and trusted and the vetting process can be streamlined or ultimately eliminated. But there is no short cut to building customer relationships and trust.
Having put in this effort with OEMs and many large customers, Flux is now approaching the inflection point where they can begin to expect far larger deployments. UL approval is an important step in enabling larger scale sales. Even so, the trend of unit sales and revenue is starting to show engagement and Flux is confident that its growing base of customer interest will translate into accelerating sales growth.
6. How can they demonstrate their customer prospects?
A: Flux issued a release in March 2015 that highlighted 16 large customer prospects with extensive material handling demands. Representative customers included those in the food & beverage production & distribution businesses where supply chain efficiency can make a big impact on profitability. Of these 16 companies - with annual revenues ranging from $1B to over $50B - 10 have completed piloting of Flux LiFT Packs and made initial demonstration orders and the other six are in the process of evaluating. As these companies become more comfortable with Flux - from evaluation and initial product purchases, the expectation is that they will begin to convert their fleets to Lithium-ion packs as new batteries are required.
Flux estimates that on average these clients could account for annual purchases of 100 - 300 LiFT Packs - or roughly $300,000 - to $1 million in annual revenue.
To help accelerate adoption, Flux is in the process of receiving the “UL Mark” certification from Underwriters Laboratories. This certification will demonstrate compliance with industry standards and safety, making large companies comfortable in making larger scale purchases.
Flux LiFT packs have been tested and approved by lift equipment OEMs representing approximately 75% of the Class III market. There is also a growing base of LiFT Pack interest from dealers, battery distributors and other customers across the material handling industry.
7. Do they have access to capital?
A: Capital has been the one weak spot in Flux’s story as the market has yet to respond to our growing base of interest and demand. As a result, Flux has had to work on less than optimal funding but we have been able to advance the business significantly despite this limitation. Flux has been funding its working capital needs via credit lines and equity sales and currently is seeking capital via a convertible note structure. We have the financial support of a major shareholder who continues to provide capital to support Flux’s progress while we work to secure additional funding and to begin to build an equity valuation that would allow us to source capital on more attractive terms.