Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2016 (fiscal 2016 third quarter; not 2015 Q3 as indicated in the request metadata). Unaudited results are presented against the comparable 2015 periods. Flux develops and sells rechargeable advanced energy storage systems, with a focus on lift equipment and its battery management technology.
Financial performance and condition
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Revenue | $117,000 | $199,000 | $394,000 | $495,000 |
| Gross profit (loss) | $(210,000) | $(21,000) | $(373,000) | $3,000 |
| Operating loss | $(1,058,000) | $(658,000) | $(3,186,000) | $(1,878,000) |
| Net loss | $(1,232,000) | $(632,000) | $(3,456,000) | $(1,447,000) |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.02) |
- Revenue fell 41% in the quarter and 20% over nine months. Cost of sales rose 49% and 56%, respectively, producing negative gross margins in both 2016 periods.
- Operating expenses were $848,000 for the quarter and $2.813 million for nine months. Nine-month research and development expense increased 163% to $1.048 million, primarily for UL certification, product development, testing, and personnel.
- Cash used in operating activities was $2.848 million for nine months, compared with $1.683 million in 2015. Investing cash flow was zero; financing provided $2.875 million, mainly through credit facilities. Cash increased by $27,000 to $80,000.
- At March 31, 2016, current assets were $517,000 and current liabilities were $3.768 million, a working-capital deficit of approximately $3.251 million. Total assets were $588,000; total liabilities were $3.768 million; stockholders’ deficit was $3.180 million. Accumulated deficit was $14.147 million.
- Current liabilities included $2.475 million owed under the related-party line of credit and $175,000, net of discount, under the unrelated-party line. The latter had $215,000 principal outstanding. The related-party facility bore 6% interest and matured July 30, 2016; the unrelated-party convertible facility bore 8% interest and matured September 19, 2016.
- Interest expense rose to $190,000 for the quarter and $286,000 for nine months, including amortization of deferred financing costs and debt discount. The warrant derivative liability was $7,000 at March 31, down from $23,000 at June 30, 2015.
Material changes, outlook, and risks
- Management attributed lower revenue to a production slowdown during the transition to redesigned UL-listed LiFT Packs. Higher cost of sales reflected increased warranty expense on field repairs and returned products; the company accrued $144,000 for warranties. Management said it had addressed most identified product issues but expected some continuing issues with packs not incorporating fixes.
- The company received UL 2271 certification for its Light EV battery packs in January 2016 and anticipated beginning shipments of certified LiFT Packs in May 2016. In April, it began testing a prototype battery pack with a domestic airline for ground-support equipment.
- Management estimated approximately $2 million of additional capital was needed to fund planned operations through March 31, 2017. It stated existing cash was insufficient, and explicitly warned that these conditions raised substantial doubt about the company’s ability to continue as a going concern. Continued operation depends on obtaining financing; management’s expectation of funding is not assured.
- After quarter-end, the company authorized a private placement of up to $3.1 million. On May 5, it completed an initial $1.85 million closing: $500,000 cash from an unaffiliated investor and $1.35 million of related-party debt settled for shares. The 46.25 million shares issued increased reported shares outstanding to 197,185,137 as of May 13. Esenjay, the controlling shareholder and lender, held approximately 67% at that date. The transaction also reset the exercise price on 2,907,347 warrants to $0.15.
- Customer and supplier concentrations were significant: four customers represented 92% of quarterly revenue and 75% of nine-month revenue; three suppliers represented 62% of quarterly inventory purchases. A work-related injury proceeding was pending; no loss was accrued because management did not consider a material loss probable or estimable, but an unfavorable outcome could be material.
- Management reported disclosure controls and procedures were effective and no material changes to internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the company obtained sufficient additional financing on acceptable terms, and whether the related-party credit facility was extended beyond its July 2016 maturity.
- Whether UL-listed pack shipments began as expected, generated revenue, and improved production levels and gross margins.
- Whether warranty claims and field-product issues declined, and whether the $144,000 warranty accrual adequately covers expected costs.
- The final size and terms of the private placement, resulting dilution, warrant adjustments, and the controlling shareholder’s ownership and influence.
- Customer and supplier concentration, cash burn, and the company’s ability to meet near-term obligations and sustain operations.