Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2015. The company develops and sells rechargeable energy-storage systems built around its battery-management technology, primarily for lift equipment and secondarily for micro-grid applications. Amounts below are U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Prior-year quarter | Six months ended Dec. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $106,000 | $210,000 | $277,000 | $296,000 |
| Gross profit (loss) | $(96,000) | $17,000 | $(163,000) | $24,000 |
| Operating expenses | $1,074,000 | $616,000 | $1,965,000 | $1,244,000 |
| Operating loss | $(1,170,000) | $(599,000) | $(2,128,000) | $(1,220,000) |
| Net loss | $(1,216,000) | $(618,000) | $(2,224,000) | $(815,000) |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.02) | $(0.01) |
Gross margin was approximately negative 91% for the quarter and negative 59% for the six-month period, versus approximately 8% in each comparable 2014 period. The six-month 2014 net loss included $438,000 of noncash income from a change in warrant-derivative fair value; no such change was recorded in 2015.
Cash, liquidity and financing
- At December 31, 2015, cash was $63,000, working capital was negative approximately $2.049 million, accumulated deficit was $12.915 million, and stockholders’ deficit was $1.972 million. Total current liabilities were $2.856 million; all reported liabilities were current.
- Six-month operating cash use was $1.965 million, compared with $966,000 a year earlier. Financing provided $1.975 million; there was no investing cash flow in the current period. Ending cash was $63,000.
- Balance-sheet line-of-credit carrying amounts included $1.575 million owed to related party Esenjay and $153,000 for the unrelated-party line, net of discount. The unrelated-party line had $215,000 principal outstanding. The filing also reports $310,000 of deferred financing costs related to the Esenjay line amendment.
- In September 2015, the company issued 51,171,025 shares to Esenjay in exchange for cancellation of $2 million of principal debt. The December amendment extended the related-party line to July 30, 2016, raised its maximum to $2.5 million, and reduced its conversion price to $0.06 per share. Further advances require lender approval.
- After quarter-end, the company borrowed $275,000 from Esenjay in January 2016. As of the filing date, the company reported $1.85 million principal outstanding and $650,000 remaining available under that line.
Material changes and operating developments
- Quarterly revenue fell 50% year over year; six-month revenue declined 6%. Management attributed the decreases to product-development and UL-certification work and resources devoted to warranty returns and repairs.
- Cost of sales rose 5% in the quarter and 62% for the six-month period despite lower revenue. Management cited returns and repair or replacement costs for LiFT Pack products, along with launch costs and customer accommodations. Warranty liability was approximately $78,000.
- Research and development expense rose to $469,000 for the quarter and $801,000 for six months, primarily reflecting UL testing and certification, personnel, materials, labor, and product durability changes. Selling and administrative expense also increased.
- Management said it had identified and re-engineered product issues, but expected elevated returns for approximately the following six months as packs already in the field came back for repair.
- In January 2016, Flux obtained UL 2271 certification for its LiFT Pack forklift batteries and passed the initial production inspection. It expected to begin shipping certified packs later in fiscal Q3 2016.
Outlook, risks and contingencies
Management estimated that approximately $2 million of additional capital was needed to fund planned operations through December 31, 2016. The filing states that existing resources were insufficient and that conditions raised substantial doubt about the company’s ability to continue as a going concern. Management planned to seek debt and equity financing and other investment structures, but noted there was no assurance that funding would be available on time or on acceptable terms. Failure to secure funding could require cuts to sales, marketing, product development, or capital expenditures; financing could also dilute shareholders or impose restrictive terms.
- Revenue and operating cash flow had not been sufficient to sustain operations; the related-party line matures July 2016 and Esenjay has no obligation to advance additional funds.
- Customer concentration was significant: two customers represented approximately 66% of quarterly revenue and 64% for the six months. Three suppliers represented approximately 72% and 64% of inventory purchases in those respective periods.
- The company disclosed a work-related-injury legal proceeding. It recorded no loss because management did not consider a material loss probable or reasonably estimable, while noting an unfavorable outcome could materially affect results.
- No formal financial guidance was provided. Management’s stated UL-shipment timing and funding expectations are forward-looking and subject to risks described in the filing.
Most important facts for investors to verify
- Whether the company obtained the approximately $2 million of additional funding it estimated was needed, and the terms, timing, and dilution associated with any financing.
- Whether Esenjay advanced funds as expected and whether the related-party credit facility was extended, converted, or repaid at maturity.
- Whether UL-certified LiFT Packs shipped on the expected timetable, and whether product returns, warranty costs, and gross margins improved.
- Whether customer and supplier concentration changed, and whether revenue recovered following the certification and product re-engineering effort.
- The outcome and potential financial effect of the work-related-injury proceeding, and whether the warranty accrual remains adequate.