Market Overview

Is This The Cost Effective Lithium Battery Solution Wall Street and Industry Have Been Waiting For?


Publicly traded U.S. based Lithium cell battery companies have had a rough year.  Ener1 and Valence both entered bankruptcy in 2012 and A123 Systems Inc. (NASDAQ: AONE) accepted a $465 million rescue investment from China's largest auto parts maker, Wanxiang Group Corp. to avoid the fate of Ener1 and Valence, but that deal was not consummated.  On October 16, 2012 A123 filed for Chapter 11 bankruptcy and Johnson Controls Inc. (NYSE: JCI) will acquire the automotive assets in a deal valued at $125 million. Two primary issues doomed these companies: 1) Lack of demand for electric vehicles due to the high price, and 2) the high cost of batteries that is a large contributor to the high price of electric vehicles.

The addressable market for lithium energy solutions in 2010 was $21.4 billion according to Lux Research and Oracle Capital estimates.  This estimate was from four addressable markets: Grid Management ($5.4B), Electric Vehicles ($7.7B), E-Bikes/Scooters ($6.4B) and Other ($1.9B).  The research groups project the markets to grow rapidly on an annual basis and estimate the addressable market to more than double to $44.4 billion in 2015.  Flux Power Holdings, Inc. (OTCBB: FLUX) is positioned to be a leader in providing innovative, high-performance, low-cost lithium energy solutions in these rapidly growing industries. 

Flux Slides 1

FLUX is now the only publicly traded, U.S. owned Lithium Power Solutions Company.  Flux is significantly different than A123, Ener1 and Valence. Flux is an innovator in developing Intelligent Battery Management Systems, including charging, energy monitoring and display solutions for large format lithium cells; Flux does not focus on developing battery chemistries.  Flux provides lithium storage energy solutions to several markets including lead acid battery replacement, electric vehicles, backup power and solar array power systems.  Flux Power uses lower cost, lower functionality lithium batteries from multiple suppliers in their plug and play designed Battery Management Systems (BMS), which substantially lowers the cost versus other suppliers, by over 50% in most cases.  Flux BMS then manages the batteries to perform equally or better than the higher cost competitors.  Flux's BMS increases the life cycles of the battery over 500% compared to an unmanaged battery, and controls and records all aspects of the batteries functions.

To get some bearing on the battery cost situation for electric vehicles (EV's) McKinsey and Company wrote a report, published in the July 2012 McKinsey Quarterly, on their battery cost model and where the market could go with continued improvement in technology.  The authors wrote, "To inform the debate, we developed a detailed, bottom-up "should cost" model that estimates how automotive lithium-ion battery prices could evolve through 2025. Our analysis indicates that the price of a complete automotive lithium-ion battery pack could fall from $500 to $600 per kilowatt hour (kWh) today to about $200 per kWh by 2020 and to about $160 per kWh by 2025.1 In the United States, with gasoline prices at or above $3.50 a gallon, automakers that acquire batteries at prices below $250 per kWh could offer electrified vehicles competitively, on a total-cost-of-ownership basis, with vehicles powered by advanced internal-combustion engines." 

Flux Slide 2

The McKinsey model shows that EV prices may not be competitive for 7 to 12 years, base on battery cost alone.  One thing they may have overlooked is that EV's need an extensive system to manage the batteries to allow them to perform within the ranges expected of them and to charge the vehicle properly.  These Battery Management Systems can add considerable expense on top of the battery costs.  Not only do the systems add expense, but so does the engineering of the battery systems, for connecting all the batteries, to charging and discharging all the cells in the battery system, and making the batteries interact properly with the EV. 

An example of the power of Flux's plug and play system is their customer Wheego Electric Cars.  Wheego challenged suppliers to provide them with a 30 kilowatt-hour battery system for $12,000.  Flux's engineers designed a system for ease of use in the Wheego vehicles at a cost to Wheego of $11,500.  The two competitors for the project came in with their best prices of $24,500 from Valence and $25,500 from A123.  This example alone may explain the demise of both Valence and A123.  Furthermore, Flux's system cost about $380/kilowatt-hour, much lower than the $500-600/kilowatt hour cost estimate of McKinsey's model and closer to the $250 competitive EV price range. 

Aside from the EV market, Flux Power is also focused on the large opportunity in replacing lead acid batteries with the Flux lithium energy solution.  Many service vehicles, such as forklifts and sidewalk cleaners are electric vehicles powered by lead acid batteries.  The replacement market is a multi-billion dollar annual market.  Flux has proven that their solutions cost at or the below the cost of lead acid batteries when spread across the 5 plus year lifecycle of the Flux lithium system.  Lead acid power system usually needs to be replaced annually, as well as have scheduled maintenance, both of which adds cost.  Flux's solutions are very low maintenance, last for five or more years and charge faster than lead acid systems, all of which are significant advantages for their lead acid replacement customers.  

Another advantage of the Flux BMS is the recording of the charge cycles of each individual cell in the battery pack.  This allow the customers to get 'State of Charge" and 'State of Health' reports on the battery pack so customers know exactly how the batteries are performing.  When an EV battery pack nears the end of its useful life for the EV, these reports facilitate the battery cells to be recycled into energy storage systems, as the full history of the cells are known.  It is estimated that recycling these batteries may allow customers to recoup up to 35% of the battery pack cost.  This is another savings for the customer with the Flux Power systems, further reducing the overall cost of the Flux solution through the lifetime of use. 

Flux Power Holdings has shipped over 14 kilowatt-hours of systems since 2010. Flux is working with Hyster USA to convert Hyster's new and legacy electric forklifts using lead acid to lithium solutions.  A Flux Battery Management System is also designed into GreenTech Automotive's Neighborhood Electric Vehicles, which should be hitting the roads in 2013.  Greentech may expand their lineup in the future with a vehicle that could compete with the Chevy Volt, which is built by General Motors (NYSE: GM).  With 40 customers and another 60 potential customers, the company is on track to see strong growth in 2013 and beyond. 

Flux's experienced management team has taken a common sense approach to the lithium solutions market.  They utilized easily accessible lower cost lithium batteries, smart design and software to develop a low cost, easy to use, robust solution that is competitive in performance with much more expensive systems.   As more companies become aware of Flux's solutions, we expect potential customers in all of Flux's focus markets to migrate to their cost effective system technologies.  The next few years could be very successful for Flux Power Holdings. 

Flux Power made over $5 million in revenues for fiscal 2012, which ended in June, while posting an EBITDA loss of $1.19 million.  Flux has the capability of strong growth over the next few years, and should see a strong second half to the current fiscal 2013 year.  The Company has just over 41 million shares outstanding and a market cap of $62 million at $1.50/share.  For investors looking for Cleantech investments that can grow and be profitable in the current environment, look no further than Flux.  The product is complete, cost effective and in a multi-billion dollar, rapidly growing market.  As we see Flux's customers begin to roll out their products with the Flux BMS over the next nine month, we will see strong growth in Flux's top line and possibly cash flow and earnings positive results.  Over a long-term investment period, Flux Power Holdings is poised to be one of the Cleantech sector's biggest winners.

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