Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2015 (the company’s fiscal third quarter), with comparisons to the three and nine months ended March 31, 2014. The filing metadata labels the period “2014 Q3,” but the filing itself reports 2015 Q3.
Business context and results
Flux Power develops and sells rechargeable advanced energy storage systems built around its battery management system. It was focusing primarily on lift equipment sold through dealers and battery distributors, with micro-grid applications as a secondary opportunity.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | 2015: $199,000; 2014: $94,000 | 2015: $495,000; 2014: $157,000 |
| Gross profit (loss) | 2015: $(21,000); 2014: $46,000 | 2015: $3,000; 2014: $69,000 |
| Gross margin | 2015: approximately (11%); 2014: 49% | 2015: approximately 1%; 2014: 44% |
| Operating loss | 2015: $(658,000); 2014: $(996,000) | 2015: $(1,878,000); 2014: $(2,641,000) |
| Net loss | 2015: $(632,000); 2014: $(1,745,000) | 2015: $(1,447,000); 2014: $(3,407,000) |
| Loss per share, basic and diluted | 2015: $(0.01); 2014: $(0.03) | 2015: $(0.01); 2014: $(0.06) |
Cash flow, liquidity, and debt
- For the nine months, operating cash use was $1.683 million, versus $1.291 million in the comparable prior period. Investing cash use was $5,000; financing provided $1.641 million, compared with $1.944 million in 2014.
- Cash was $69,000 at March 31, 2015, down from $116,000 at June 30, 2014. Current assets were $447,000 and current liabilities $1.734 million, a working-capital deficit of approximately $1.287 million. Accumulated deficit was $9.724 million.
- Outstanding related-party notes payable were $925,000 at March 31, bearing 6% interest and due December 31, 2015, subject to extension. A separate convertible line of credit had $215,000 principal outstanding at 8%, due September 2016; its balance-sheet carrying amount was $88,000 after unamortized debt discount.
- After quarter-end, the company borrowed an additional $500,000 from related-party lender Esenjay. The filing says $1.825 million remained available under its Esenjay facilities, but further advances were at the lender’s discretion and not committed.
- The company raised $535,500 gross of a planned $990,000 equity private placement by March 31. It also disclosed a private placement of up to $2 million of convertible notes.
Material changes and management commentary
- Revenue rose 112% for the quarter and 215% for the nine months, primarily from lift-equipment product sales. Cost of sales grew faster than revenue, and gross margin fell sharply. Management attributed the quarter’s gross loss to product-launch costs, customer incentives and accommodations, and a higher-cost product mix. It also noted that the March 2014 quarter’s inventory estimate was based on analysis rather than a physical count and that cost of sales was understated then.
- Net losses narrowed year over year. Lower amortization of prepaid advisory fees and more favorable changes in warrant fair value were significant contributors; the warrant fair-value change produced $498,000 of income over the nine months, versus $567,000 of expense in 2014. These are non-cash valuation effects.
- Selling and administrative expense increased 33% for the nine months, largely from sales and marketing costs, demonstration lift packs, and director equity incentives. Research and development expense rose 8%, primarily due to product and OEM testing.
- Management stated that revenue and operating cash flows were insufficient to sustain operations and that additional financing was needed. It estimated approximately $2 million of capital was required to fund planned operations through March 31, 2016, and separately estimated approximately $0.4 million of financing proceeds were needed through the fiscal year ending June 30, 2015. The filing’s liquidity discussion contains an inconsistent date in one reference to the $2 million estimate; the intended period is not clear from that sentence.
- The company warned that failure to obtain timely funding could require cuts to sales, marketing, product development, and capital spending. The filing states that these conditions raise substantial doubt about its ability to continue as a going concern. Management expressed confidence in obtaining funding but gave no assurance that it would be available on acceptable terms.
Risks, contingencies, and other items
- Customer concentration remained material: three customers represented approximately 55% of quarterly revenue in aggregate; two represented approximately 33% of nine-month revenue. The company also relied on a small group of suppliers.
- Potential financing may dilute shareholders or include restrictive covenants. The Esenjay facilities are related-party arrangements and are not committed for future advances.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its latest Form 10-K, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- Common shares outstanding were 99,464,112 at March 31, 2015. Shareholders had approved increasing authorized common shares to 300 million and a 10-million-share equity plan.
Most important facts for investors to verify
- Whether the company obtained sufficient committed financing to meet its stated cash needs and address the going-concern uncertainty.
- Actual subsequent borrowing and remaining availability under the Esenjay facilities, including lender discretion and maturity or extension terms.
- Whether lift-equipment sales can grow while improving gross margins after launch costs, incentives, and customer accommodations.
- The cash consequences of continued operating losses and the company’s ability to manage working capital, inventory, and supplier/customer concentration.
- The extent of potential dilution from equity placements, convertible debt, warrants, options, and the increased authorized share count.