Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014, the first quarter of fiscal 2015. Flux Power develops and sells rechargeable advanced energy storage systems built around its battery management technology. It is focusing primarily on lift equipment and secondarily on micro-grid energy storage.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2014 | Quarter ended Sep. 30, 2013 / comparison |
|---|---|---|
| Revenue | $86,000 | $34,000; up 153% |
| Gross profit and margin | $7,000; 8% | $13,000; 38% |
| Operating loss | $621,000 | $774,000 |
| Net loss | $197,000 | $746,000 |
| Operating cash used | $306,000 | $334,000 |
| Investing cash used | $6,000 | $0 |
| Financing cash provided | $254,000 | $363,000 |
Cash fell from $116,000 at June 30 to $58,000 at September 30. Total assets were $337,000, total liabilities $979,000, and stockholders’ deficit $642,000. Working capital was negative approximately $698,000; accumulated deficit was $8.473 million. The balance sheet reported $25,000 of related-party note payable and a line of credit, net of discount, of $20,000. The filing also reports $100,000 principal outstanding under a separate secured convertible credit facility at September 30, presented net of an $80,000 debt discount.
The quarter’s $438,000 gain from remeasurement of warrant derivative liabilities was noncash and reduced the reported liability from $571,000 to $133,000. Net loss per share was reported as $0.00, versus $0.02 in 2013; weighted-average shares were 93.9 million versus 47.5 million.
Changes and notable items
- Revenue growth was attributed primarily to lift-equipment sales, but gross margin declined to 8% from 38%, mainly due to product mix and lower-margin sales. Cost of revenue rose 276% to $79,000.
- Selling and administrative expense increased 88% to $507,000, primarily from sales and marketing activity, demonstration lift packs, and board equity incentives. Research and development expense rose 13% to $121,000, mainly due to product and OEM testing.
- Net loss improved substantially year over year, partly because the 2013 quarter included $411,000 of prepaid advisory-fee amortization, which was fully amortized by June 30, 2014. The 2014 result also benefited from the noncash warrant fair-value gain.
- In June 2014, the company converted $2.586 million of debt principal and $304,000 of accrued interest into common stock and warrants, eliminating the prior long-term debt. It borrowed $25,000 from related-party lender Esenjay in August.
- In August 2014, the company began a private placement targeting $990,000. It had raised $142,500 by September 30 and $322,500 by November 14. A separate secured, convertible line of credit with a $500,000 maximum was signed October 2; borrowings were $100,000 at September 30 and approximately $190,000 by November 14. The facility bears 8% interest, is secured by company assets, and includes conversion and warrant provisions.
Liquidity, outlook, and risks
Management stated that existing resources were insufficient to fund planned operations through June 30, 2015 and estimated approximately $1.6 million of additional capital would be needed. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management planned to pursue equity placements and other financing, but funding was not assured; inability to raise capital could force cuts to sales, marketing, product development, and capital spending. No revenue or earnings guidance was provided.
Other risks include the company’s limited cash and negative working capital, potential dilution or restrictive financing terms, dependence on customer demand and successful adoption of its products, concentration among customers and suppliers, and reliance on a small group of component suppliers. Three customers represented 72% of quarterly revenue; four suppliers represented 69% of inventory purchases. The company reported no material pending legal proceedings and no material revisions to the risk factors in its fiscal 2014 Form 10-K.
Important facts for investors to verify
- Progress and terms of financing: the $990,000 placement, subsequent draws on the secured credit line, and the remaining funding needed to support operations.
- Cash runway and going-concern disclosures, including whether operations can be funded without further financing.
- Whether revenue growth can be sustained while restoring gross margins from the quarter’s 8% level.
- Customer and supplier concentration, and the effect of any changes in demand or component availability.
- Potential dilution from outstanding shares, warrants, options, and convertible debt; common shares outstanding were 96,947,446 as of November 14, 2014.