Flux Power Holdings, Inc. — Form 10-Q summary
Period note: The filing is for the fiscal quarter and nine months ended March 31, 2017 (fiscal Q3 2017), not 2016 Q3 as stated in the request metadata. Amounts below are in U.S. dollars.
Business context and reporting period
Flux develops and sells lithium-ion energy storage systems for industrial uses, including forklift batteries and airport ground-support equipment. Its products use a proprietary battery management system. The company reported as a single segment and focused primarily on lift-equipment customers, while pursuing aviation ground-support opportunities.
Financial results and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2017 / 2016 | $306,000 / $117,000 | $781,000 / $394,000 |
| Gross loss, 2017 / 2016 | $220,000 / $210,000 | $571,000 / $373,000 |
| Gross margin, 2017 / 2016 | (72%) / (179%) | (73%) / (95%) |
| Operating loss, 2017 / 2016 | $1,111,000 / $1,058,000 | $3,217,000 / $3,186,000 |
| Net loss, 2017 / 2016 | $1,162,000 / $1,232,000 | $3,377,000 / $3,456,000 |
| Net loss per share, 2017 / 2016 | $(0.00) / $(0.01) | $(0.01) / $(0.02) |
At March 31, 2017, cash was $70,000, working capital deficit was $3.161 million, total assets were $1.228 million, total liabilities were $4.938 million, and stockholders’ deficit was $3.710 million. Inventory rose to $950,000 from $202,000 at June 30, 2016. The related-party line of credit balance was $3.325 million; the filing also reported a $500,000 shareholder advance.
For the nine months, operating cash use was $3.897 million, investing cash use was $45,000, and financing provided $3.885 million. Cash declined by $57,000 from $127,000 at the beginning of the period. The company said its cash resources were insufficient for the next 12 months and estimated approximately $6 million in financing would be needed to fund current and planned operations through May 15, 2018.
Material changes versus the prior comparable period
- Quarterly revenue increased 162%, and nine-month revenue increased 98%, mainly reflecting 117% and 118% more LiFT Packs sold, respectively. The quarter also included $30,000 from one ground-support battery pack.
- Gross losses remained, but gross margin improved year over year in both periods. Management attributed lower warranty and repair costs to product design and production improvements; warranty expense was $54,000 for the quarter and $141,000 for the nine months, versus $166,000 and $295,000, respectively, in 2016.
- Nine-month operating expenses declined to $2.646 million from $2.813 million, primarily as research and development expense fell after substantial completion of UL certification work. Quarterly operating expenses increased to $891,000 from $848,000.
- Nine-month net loss improved modestly to $3.377 million from $3.456 million, while operating loss increased to $3.217 million from $3.186 million. Interest expense declined to $174,000 from $286,000.
- Common shares outstanding increased to 250,609,087 at March 31, 2017 from 209,375,137 at June 30, 2016. The nine-month weighted-average share count was 243.7 million versus 138.7 million.
Outlook, risks, contingencies and unusual items
- Going concern: The accumulated deficit was $18.639 million, and operating revenues and cash flows had not sustained operations. The filing stated that these conditions raised substantial doubt about the company’s ability to continue as a going concern. Management planned to seek equity, debt and other financing; funding was not assured.
- Related-party financing: On April 11, 2017, after quarter-end, the Esenjay credit facility maximum increased from $3.5 million to $5 million and its interest rate rose from 6% to 8%, effective April 1. By May 15, $4.155 million was outstanding and $845,000 remained available at the lender’s discretion. Esenjay was a major shareholder and board-member-affiliated lender. The facility matures January 31, 2018 and is convertible at $0.06 per share, subject to authorized-share limits.
- Shareholder note: A $500,000 advance received during the quarter was formalized on April 27, 2017 as a note bearing 12% interest, due October 27, 2018, with a conversion option at $0.12 per share subject to a 5% ownership cap.
- Funding and dilution risks: Management warned that unavailable financing could require cuts to sales, marketing, product development and capital spending, potentially harming operations and going-concern prospects. New debt or equity could impose restrictive terms or dilute shareholders.
- Concentration and product risks: Four customers represented approximately 69% of quarterly revenue; three suppliers represented approximately 60% of nine-month inventory purchases. Management said some fielded packs without later design fixes could still require warranty work; the warranty liability accrued was $107,000.
- Other items: The company exchanged warrants for shares and eliminated the related warrant derivative liability, which was zero at March 31, 2017. A work-injury lawsuit was settled for $10,000 in September 2016. The filing reported no off-balance-sheet arrangements and no current legal proceedings.
Most important facts for investors to verify
- Whether Flux secured the estimated $6 million needed through May 15, 2018, and whether related-party credit remained available on acceptable terms.
- Whether higher unit sales and improved warranty performance translated into positive gross margins and stronger operating cash flow.
- The cash conversion and recoverability of the sharply higher inventory balance, and the company’s near-term working-capital needs.
- The effects of further share issuance, convertible debt and the 93.2 million potentially dilutive shares excluded from diluted loss per share.
- Ongoing customer and supplier concentration, remaining warranty exposure, and execution of the aviation ground-support and expanded forklift product plans.