Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019; filed May 10, 2019. Although the request metadata says “2018 Q3,” the filing covers fiscal 2019 Q3. Amounts are in U.S. dollars.
Business context and results
Flux designs, develops, and sells lithium-ion battery systems for industrial equipment, including forklifts and aviation ground support equipment. It operates as one reportable segment.
| Metric | Three months ended March 31, 2019 | Year-over-year | Nine months ended March 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $1.751 million | Up 5% | $6.297 million | Up 109% |
| Gross profit (loss) | $61,000; 3% margin | Prior-year loss $150,000; margin improved 12 percentage points | $329,000; 5% margin | Prior-year loss $708,000; margin improved 28 percentage points |
| Operating loss | $3.724 million | Prior-year loss $1.542 million | $8.081 million | Prior-year loss $4.527 million |
| Net loss | $3.814 million; $0.08 per share | Prior-year loss $1.753 million; $0.07 per share | $9.139 million; $0.22 per share | Prior-year loss $5.039 million; $0.20 per share |
Cash, liquidity, and debt
- Cash was $900,000 at March 31, 2019, down from $2.706 million at June 30, 2018. Current assets were $5.656 million and current liabilities $6.144 million, implying negative working capital of approximately $488,000.
- For the nine months, operating cash use was $7.055 million, investing cash use was $144,000 in the cash-flow statement, and financing provided $5.393 million. Cash declined by $1.806 million. The MD&A cash-flow summary reports investing use of $209,000, which differs from the financial statement.
- At March 31, $3.405 million was outstanding under a secured, related-party credit facility bearing 15% interest. The facility limit was increased to $7 million and maturity extended to December 31, 2019; the filing reports $3.595 million available for further draws.
- Flux raised approximately $4.392 million gross through a private placement of 3,992,564 shares at $1.10 per share. It also converted related-party debt and accrued interest into equity. Shares outstanding rose to 51.0 million at March 31, from 31.061 million at June 30, 2018.
Material changes and management commentary
- Nine-month revenue growth reflected higher shipments through relationships with two leading forklift manufacturers and sales across the expanded product line. In Q3, Flux sold approximately 418 battery packs versus approximately 530 a year earlier, while revenue increased modestly.
- Management attributed improved gross margins to lower inventory costs, better workforce efficiency, and reduced warranty expense, and expected further improvement as volume and productivity increase. No quantified earnings or revenue guidance was provided.
- Operating expenses rose substantially: Q3 selling and administrative expense increased 172% and research and development expense increased 182%. Management cited staffing, product development, professional fees, and increased stock-based compensation. Q3 stock-based compensation was $1.086 million.
- Flux continued Class 1 and Class 2 product development and began the UL certification process for its Class 1 battery pack and new battery management system in January 2019. Management expected these development efforts to continue through the remainder of fiscal 2019.
Outlook, risks, and unusual items
- Going concern: Management stated that existing cash was insufficient for anticipated needs and that substantial doubt existed about Flux’s ability to continue as a going concern for the twelve months following the filing date. It estimated approximately $13.1 million of financing proceeds would be needed for current and planned operations over that period, with possible further financing needs thereafter. Funding was not assured.
- Failure to obtain financing could force cuts to sales, marketing, product development, and capital spending. Additional equity could dilute shareholders; debt could include restrictive covenants.
- Customer concentration remained material: two customers represented approximately 59% of Q3 revenue and four represented approximately 80% of nine-month revenue. Three suppliers represented approximately 67% of Q3 inventory purchases.
- Related-party lender Esenjay’s beneficial owner was a director and major shareholder, holding approximately 61.3% of outstanding common shares at March 31, 2019. The facility is secured by substantially all company assets.
- On April 25, 2019, Flux signed a seven-year, four-month lease for approximately 45,600 square feet, beginning around August 2019, at $42,400 monthly for the first 12 months, with annual 3% increases. It includes extension options and a right of first refusal on additional space.
- The filing reported no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Flux obtained the estimated $13.1 million of required financing, and the amount, timing, cost, and terms of any subsequent funding.
- Current cash, operating cash burn, working-capital needs, and the status and maturity of the secured related-party credit facility.
- Whether revenue growth, pack volumes, and gross-margin improvements continued after March 31, 2019, and whether customer concentration changed.
- The outcome and timing of UL certification for the Class 1 pack and new battery management system, and the commercial traction of newer product classes.
- The lease’s total expected cost and operational impact, and the discrepancy between investing cash use shown in the cash-flow statement and MD&A summary.