Flux Power Holdings, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2014; filed February 13, 2015. Flux develops and sells rechargeable energy-storage systems built around its battery management technology. It is focused primarily on lift equipment and secondarily on micro-grid energy storage. Amounts below are U.S. dollars.
Financial results
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $210,000 | $28,000 | $296,000 | $62,000 |
| Gross profit | $17,000 | $9,000 | $24,000 | $22,000 |
| Gross margin | 8% | 32% | 8% | 35% |
| Operating expenses | $616,000 | $879,000 | $1,244,000 | $1,667,000 |
| Operating loss | $(599,000) | $(870,000) | $(1,220,000) | $(1,645,000) |
| Net loss | $(618,000) | $(915,000) | $(815,000) | $(1,662,000) |
| Loss per share, basic and diluted | $(0.01) | $(0.02) | $(0.01) | $(0.03) |
- Revenue increased 650% in the quarter and 377% in the six-month period, primarily from lift-equipment sales. Cost of sales rose faster than revenue, and gross margin declined substantially; management cited higher unit costs for lift packs and a greater mix of those products.
- Operating expenses fell year over year, chiefly because prior-year periods included much larger amortization of prepaid advisory fees. Selling and administrative costs increased to $474,000 for the quarter and $949,000 for six months, mainly from sales and marketing, demonstration lift packs, and director equity incentives. Research and development expense was $141,000 and $262,000, respectively.
- The six-month 2014 net loss included $438,000 of noncash income from the change in fair value of warrant liabilities. The prior-year comparable gain was $83,000. This benefit reduced reported net loss but did not represent operating cash generation.
Cash flow, liquidity, and capital
- At December 31, 2014, cash was $19,000, total current assets were $352,000, and current liabilities were $1.128 million. The company reported negative working capital of approximately $776,000 and an accumulated deficit of $9.091 million.
- Six-month cash used in operating activities was $966,000, versus $684,000 in the prior-year period. Investing activities provided $3,000. Financing activities provided $866,000, including $501,000 net proceeds from stock and warrant sales and $365,000 from related-party notes.
- Total liabilities were $1.184 million, including $518,000 of accounts payable, $166,000 of accrued expenses, $136,000 in customer deposits from a related party, a $175,000 related-party note payable, and a line of credit reported at $56,000 net of discount. The company also disclosed $190,000 principal outstanding on the Frenkel convertible line of credit, net of $134,000 unamortized debt discount.
- Shares outstanding rose to 99.3 million from 93.3 million at June 30, 2014. At December 31, 2014, the company also had 27.8 million warrant shares and 6.1 million options outstanding, among other potential sources of dilution.
Outlook, risks, and unusual items
- Going concern: Management said existing resources were insufficient to fund planned operations and estimated approximately $1.5 million of additional capital was needed through June 30, 2015. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Funding plans included private placements, borrowing, and other financing structures; management cautioned that funds might not be available on acceptable terms or in time.
- The August 2014 private placement was intended to raise $990,000. It had raised $535,500 gross by December 31, 2014; the filing reports the same total as of February 1, 2015. Financing through equity or debt could dilute shareholders or impose restrictive terms. Failure to raise capital could force cuts to sales, marketing, product development, and capital spending.
- After quarter-end, the company received $54,000 under a KBM Worldwide convertible note, bearing 8% interest and convertible at a 39% discount to a market-price formula; the filing says no related assets or liabilities were recorded at December 31 because funding occurred in January. On January 9, it borrowed another $25,000 under the Frenkel line, and on January 28 it borrowed $150,000 from related-party lender Esenjay.
- Management described lift equipment and micro-grid storage as target markets but warned it could not guarantee customer adoption of its products as replacements for lead-acid technology. The company also depends on a small supplier group; two suppliers represented approximately 46% of six-month inventory purchases. Three customers accounted for approximately 50% of six-month revenue.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its latest Form 10-K, and no material changes in internal control over financial reporting. No formal numerical revenue or earnings guidance was provided.
Key facts for investors to verify
- Whether Flux obtained the additional capital management estimated was needed, and the resulting terms, dilution, and repayment obligations.
- Whether revenue growth in lift-equipment sales can continue while restoring gross margins from the reported 8% level.
- The cash runway and operating cash burn, given $19,000 of period-end cash and substantial negative working capital.
- The full potential dilution and seniority/security terms associated with warrants, options, related-party facilities, and the discounted convertible note.
- The extent of continuing customer and supplier concentration and the company’s progress in securing broader demand and supply sources.