Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017; filed February 13, 2018. The company designs and sells lithium-ion batteries for industrial equipment, including forklift LiFT Packs.
Financial performance and position
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.201 million | $181,000 | $1.354 million | $474,000 |
| Gross loss (margin) | $(388,000) (-32%) | $(130,000) (-72%) | $(544,000) (-40%) | $(297,000) (-63%) |
| Operating expenses | $1.286 million | $872,000 | $2.440 million | $1.809 million |
| Operating loss | $(1.674) million | $(1.002) million | $(2.984) million | $(2.106) million |
| Interest expense | $166,000 | $36,000 | $302,000 | $121,000 |
| Net loss | $(1.840) million | $(1.035) million | $(3.286) million | $(2.214) million |
| Loss per share, basic and diluted | $(0.07) | $(0.04) | $(0.13) | $(0.09) |
- Quarterly revenue rose 564%, and six-month revenue rose 186%. The company sold approximately 420 LiFT Packs in the quarter versus approximately 50 a year earlier.
- Gross margins improved, but the company continued to sell below cost. Management cited low purchase volumes, early higher-cost designs, limited sourcing, and warranty costs; it expects production efficiencies and volume discounts to help margins.
- Selling and administrative expense and research and development expense increased. Drivers included sales-force expansion, stock-option compensation, and development of Class 1 and Class 2 forklift battery packs.
- At December 31, cash was $31,000; working capital was $532,000; total assets were $2.479 million; total liabilities were $10.338 million; and stockholders’ deficit was $7.859 million. Accumulated deficit was $22.983 million.
- Six-month operating cash use was $3.262 million, investing cash use was $43,000, and financing cash provided was $3.215 million, primarily from the related-party credit line. Cash declined from $121,000 to $31,000.
- At December 31, the Esenjay related-party line of credit had $8.4 million outstanding and $1.6 million remaining available, subject to lender approval. It bears 8% interest, is convertible at $0.60 per share, and matures January 31, 2019. A separate $500,000 shareholder convertible note bears 12% interest and matures October 27, 2018.
Outlook, risks, and unusual items
- Going concern and funding: Management stated that existing resources were insufficient for planned operations over the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. It estimated approximately $7 million in financing proceeds would be required for the 12 months following the filing date. There is no assurance funding will be available on acceptable terms or on time; failure could require cuts to sales, product development, and capital spending.
- Subsequent financing: The company borrowed another $555,000 from Esenjay between January 1 and February 13, 2018. At filing, the line had $8.955 million outstanding and $1.045 million available, still subject to Esenjay’s discretion. Esenjay beneficially owned approximately 64% of outstanding common shares.
- Commercial developments: At December 31, the company reported orders for 330 additional LiFT Packs expected to generate $900,000; 217 shipped in January 2018. It was in discussions for further orders. The first Class 1 pack was shipped to a Fortune 100 company for evaluation. Management targeted a full forklift product line by April 2018 and expected Class 2 development to follow Class 1 by about two months. These are plans and expectations, not assured results.
- Concentration and execution risk: Three customers represented approximately 94% of quarterly revenue and 89% of six-month revenue. Three suppliers represented approximately 55% and 48% of inventory purchases, respectively. The company also cited risks involving financing, competition and technology, product demand, sourcing, skilled labor, and key personnel.
- Other items: The company completed a 1-for-10 reverse stock split effective August 18, 2017; historical per-share amounts were adjusted retroactively. It granted 1.97 million stock options in October 2017. No material legal proceedings or off-balance-sheet arrangements were reported. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company secured the estimated financing needed, and the terms, availability, and related-party implications of further Esenjay advances.
- Whether reported orders shipped, were collected, and converted into sustainable revenue and positive gross margins; verify warranty costs and production economics.
- Whether customer and supplier concentration changed, and whether follow-on orders and manufacturer approvals translated into repeat sales.
- Progress, timing, costs, and commercial acceptance of Class 1 and Class 2 products, including the evaluation pack.
- Potential dilution from convertible debt, options, warrants, and any additional equity or debt financing.