Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2016; filed February 14, 2017. Flux designs and sells rechargeable lithium-ion battery systems, principally for lift equipment, with aviation ground-support equipment as an adjacent market. Its products use a proprietary battery management system.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $181,000, up 71% year over year | $474,000, up 71% |
| Gross loss | $130,000; gross margin approximately negative 72% | $297,000; gross margin approximately negative 63% |
| Operating loss | $1.002 million | $2.106 million |
| Net loss | $1.035 million, versus $1.216 million | $2.214 million, versus $2.224 million |
| Operating cash used | Not presented for the quarter | $2.416 million, versus $1.965 million |
Quarterly revenue growth reflected a 61% increase in LiFT Pack units sold and a modest increase in selling price. Six-month unit sales increased 75%. Operating expenses declined 8% in the quarter and 8% for the six months, primarily as research and development costs fell following completion of much of the UL certification work. Cost of sales remained above revenue; management attributed improving product economics and lower recent warranty costs to product and production improvements. The six-month gross-loss rate nevertheless worsened year over year.
Financial position and liquidity
- At December 31, cash was $72,000; current assets were $729,000 and current liabilities $903,000, a disclosed working-capital deficit of $174,000.
- Total liabilities were $3.356 million, including $2.325 million outstanding on the related-party line of credit. Stockholders’ deficit was $2.566 million; accumulated deficit was $17.476 million.
- Six-month financing cash inflows were $2.385 million, including $1.075 million from common-stock sales and $1.525 million of line-of-credit proceeds, offset by $215,000 in repayments. Cash declined $55,000 over the period.
- Management said existing resources were insufficient for planned operations over the next 12 months and estimated approximately $3.5 million of financing would be needed through December 31, 2017. The filing states that substantial doubt exists about the company’s ability to continue as a going concern.
Outlook, risks, and notable items
- Management said it planned to pursue equity and debt financing and use available draws under the Esenjay facility, subject to the lender’s discretion. It warned that unavailable or unfavorable financing could require cuts to sales, marketing, product development, and capital spending. No revenue or profitability guidance is provided.
- After quarter-end, Flux borrowed $500,000 from Esenjay; at February 14, $2.825 million was outstanding and $675,000 remained available at Esenjay’s discretion. The facility matures January 31, 2018 and bears 6% interest. Esenjay beneficially owned approximately 64% of common shares.
- On February 1, 2017, Flux received a separate $200,000 shareholder advance under an oral agreement; written terms were still being negotiated as of the filing date.
- Revenue and supply chains are concentrated: two customers accounted for approximately 78% of quarterly revenue; three suppliers represented approximately 59% of quarterly inventory purchases. A $100,000 product-warranty accrual remained at December 31, and management said older packs could continue to generate repair issues.
- The company repaid a matured non-related-party credit line in December, including approximately $42,000 of accrued interest and a $5,000 penalty; the lender had not declared a default. A work-injury matter was settled for $10,000. The filing reports no off-balance-sheet arrangements and says disclosure controls were effective.
- Common shares outstanding increased to 249.9 million at December 31 from 209.4 million at June 30; 73.2 million potential common shares were excluded from diluted loss per share as anti-dilutive.
Important facts for investors to verify
- Whether Flux secured the estimated $3.5 million of required financing on acceptable terms, and whether the shareholder advance was documented.
- Actual subsequent-period revenue, gross margins, warranty costs, and operating cash use, particularly as sales scale.
- Availability and terms of remaining related-party credit, including Esenjay’s discretion over additional draws and its control position.
- Customer and supplier concentration, outstanding warranty exposure, and progress converting product pilots and distribution activity into recurring sales.
- Potential dilution from future equity financing, convertible debt, warrants, options, and warrant exchanges.