Business Context and Reporting Period
Flux Power Holdings, Inc. develops and sells rechargeable advanced energy storage systems built around its battery management technology. This Form 10-Q covers the three months ended September 30, 2012—the first quarter of fiscal 2013, not calendar 2012 Q1. The company completed its reverse acquisition in June 2012; the financial statements reflect Flux Power, Inc. as the accounting acquirer.
Financial Performance and Condition
| Metric | Quarter ended September 30, 2012 | Prior-year quarter |
|---|---|---|
| Revenue | $76,000 | $582,000 |
| Gross profit (margin) | $31,000 (41%) | $82,000 (14%) |
| Operating expenses | $1.411 million | $410,000 |
| Operating loss | $1.380 million | $328,000 |
| Net loss | $9,000 | $350,000 |
| Cash used in operating activities | $1.231 million | $41,000 |
| Capital expenditures | $27,000 | $30,000 |
| Cash at period end | $457,000 | $319,000 |
Revenue fell approximately 87% year over year. Gross margin improved despite lower gross profit. The reported $9,000 net loss includes a $1.388 million noncash gain from the decrease in fair value of warrant liabilities; excluding that gain, the operating loss was $1.380 million, before interest expense.
At September 30, 2012, total assets were $4.278 million, current assets $2.972 million, and current liabilities $6.089 million, yielding negative working capital of approximately $3.117 million. Total liabilities were $6.339 million, including $850,000 of stockholder notes payable bearing 8% interest ($600,000 current and $250,000 long term). The company also reported a $4.411 million warrant derivative liability, measured using Level 3 inputs. Stockholders’ deficit was $2.061 million; accumulated deficit was $4.337 million.
Financing activities provided $903,000, primarily from equity sales. The company issued 2,293,657 shares and 458,732 warrants during the quarter. It reported $1.9 million of borrowing availability under existing credit facilities and had not drawn on the $1.5 million stockholder line of credit at quarter end.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $506,000 as orders from electric-vehicle startup Wheego slowed amid production delays. Flux shifted its focus toward replacing legacy lead-acid systems, but reported no significant purchases for those applications during the quarter.
- Selling and administrative expense increased $383,000 to $714,000, primarily due to financing-related fees, marketing, public-company compliance, and professional fees. Research and development expense rose $211,000 to $290,000, mainly due to higher personnel costs and materials use.
- Amortization of prepaid advisory fees was $407,000, versus none in the prior-year quarter. The remaining prepaid balance was approximately $2.783 million.
- Operating cash use increased to $1.231 million from $41,000. The net loss comparison is substantially affected by the current-period warrant fair-value gain.
Outlook, Risks, and Unusual Items
Management believed available cash, customer collections, private-placement proceeds, and stockholder credit facilities would fund anticipated needs for at least twelve months from September 30, 2012. It also stated that further financing may be needed and that funding may not be available on acceptable terms. If funds are unavailable, the company may need to reduce sales, marketing, product-development, or capital spending, potentially harming operations and its ability to continue as a going concern.
The company had raised approximately $2.122 million toward a planned $4 million private placement, short of its target. Subsequent to quarter end, it raised approximately $93,000 in an additional private-placement closing on October 30, 2012. Management cited risks including customer adoption of its products, dependence on financing, competition and changing technology, ability to source labor and materials, and customer concentration. Three customers represented 51% of quarterly revenue; one was a company founded and controlled by the chairman and president. The filing also reports related-party transactions, including the Baytree advisory agreement and payments to LHV Power for manufacturing services.
Deferred revenue of $478,000 related to one customer and units not yet sold through to end users; associated product cost of $429,000 remained in inventory. The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and procedures. No specific revenue or earnings guidance was provided.
Important Facts for Investors to Verify
- Whether sales recover and the shift from startup electric-vehicle customers to legacy-battery replacement markets produces sustained orders.
- Actual cash burn, liquidity runway, and access to the reported credit facilities and remaining private-placement financing.
- The noncash warrant remeasurement’s effect on reported earnings and the valuation assumptions underlying the $4.411 million derivative liability.
- Customer concentration, related-party sales and agreements, and the timing of recognition of the $478,000 deferred revenue.
- Potential dilution from outstanding options and warrants, including warrants with repricing provisions and the additional shares issued after quarter end.