Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013. The unaudited statements consolidate Flux Power Holdings and its wholly owned subsidiary, Flux Power, Inc. The company develops and sells rechargeable advanced energy-storage systems built around its battery management technology, with a focus on motive power and related markets.
Key financial results
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 | Prior-year comparable |
|---|---|---|---|
| Revenue | $28,000 | $62,000 | $516,000 and $592,000 |
| Gross profit; gross margin | $9,000; 32% | $22,000; 35% | $58,000; 11% and $89,000; 15% |
| Operating expenses | $879,000 | $1,709,000 | $1,346,000 and $2,757,000 |
| Operating loss | ($870,000) | ($1,687,000) | ($1,288,000) and ($2,668,000) |
| Net income (loss) | ($915,000) | ($1,662,000) | $876,000 and $867,000 |
| Net cash used in operations | Not provided for quarter | ($684,000) | ($2,169,000) for six months |
The prior-year periods reported net income largely because of noncash gains from changes in the fair value of warrant liabilities: $2.184 million for the prior-year quarter and $3.572 million for the prior-year six-month period. The corresponding six-month gain in 2013 was $83,000. Interest expense was $100,000 for the 2013 six-month period.
Financial position and liquidity
- At December 31, 2013, cash was $4,000; current assets were $966,000 and current liabilities were $971,000, resulting in approximately $5,000 of negative working capital. Current assets included $756,000 of prepaid advisory fees.
- Total assets were $1.065 million, total liabilities were $4.107 million, and stockholders’ deficit was $3.042 million. Accumulated deficit was $5.639 million.
- Stockholder notes and line of credit totaled $3.136 million, classified as long-term at period end. The secured lender, Esenjay Investments, LLC, is a major shareholder affiliated with a company director. October 2013 amendments extended debt maturities to December 31, 2015, reduced the interest rate to 6%, and increased the credit-line limit to $2 million. The balance drawn on the line was $1.886 million, leaving $114,000 available at December 31.
- Six-month financing cash inflow was $668,000, principally from additional draws under the Esenjay line of credit. There were no investing cash flows in the period.
Changes, outlook, and risks
- Revenue fell 95% year over year in the quarter and 90% in the six-month period. Management attributed the decline primarily to major customers failing to meet production expectations. Selling and administrative expense and research and development expense also declined, reflecting reduced staffing and overhead and lower personnel costs.
- Management said existing resources were insufficient for anticipated needs over the next 12 months, estimated approximately $2.5 million of financing would be required to fund planned operations through December 31, 2014, and stated additional financing was needed by fiscal Q3 2014. The auditor’s October 2013 report raised substantial doubt about the company’s ability to continue as a going concern. Management’s financing plans are not assured.
- Subsequent to quarter end, Esenjay subscribed for $600,000 of units, comprising $200,000 cash and $400,000 of debt forgiveness. Five other investors subscribed for $168,000 in cash in February 2014. These transactions involved common shares and warrants and therefore create dilution. They do not, by themselves, demonstrate that the full financing requirement has been met.
- Product and market developments included work on a tow-vehicle battery prototype and an unmanned-robot battery project; in February 2014, the company received approval to sell its 24-volt LiFT Pack for certain Toyota and Raymond lift trucks. The filing provides no quantified revenue forecast or formal earnings guidance.
- Customer concentration was high: three customers represented approximately 94% of quarterly revenue and 73% of six-month revenue. A small group of suppliers represented approximately 82% of quarterly inventory purchases and 67% of six-month purchases. The company also disclosed a $135,000 deposit from related party Epic Boats for anticipated batteries not yet delivered.
- Other notable items: warrant derivative liabilities were $60,000 at period end, down from $143,000; the $83,000 fair-value change was recorded as income. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the company secured sufficient additional financing to fund operations and whether the going-concern risk improved.
- Whether customer production expectations, sales volume, and revenue recover, given the sharp decline and high customer concentration.
- The actual cash proceeds, debt reduction, share issuance, warrant terms, and resulting dilution from the post-period financing transactions.
- Whether the Toyota and Raymond product approval and other development projects lead to commercial orders and meaningful revenue.
- The collectability and practical liquidity of assets, particularly prepaid advisory fees, and the company’s continuing dependence on its related-party lender.