Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013 (fiscal first quarter), compared with the three months ended September 30, 2012. Balance-sheet comparisons are with June 30, 2013. Flux develops and sells rechargeable advanced energy storage systems based on its battery management technology, focusing principally on lift equipment and micro-grid applications.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $34,000 | $76,000 |
| Gross profit / margin | $13,000 / 38% | $31,000 / 41% |
| Operating expenses | $829,000 | $1,411,000 |
| Operating loss | $(816,000) | $(1,380,000) |
| Net loss | $(746,000) | $(9,000) |
| Basic and diluted loss per share | $(0.02) | $(0.01) |
| Cash used in operations | $(334,000) | $(1,231,000) |
Cash at September 30 was $49,000, versus $20,000 at June 30. Working capital was approximately $514,000, but included about $1.2 million of prepaid advisory fees. Total assets were $1.523 million; total liabilities were $3.720 million; and stockholders’ deficit was $2.197 million. Notes and line-of-credit borrowings totaled $2.831 million, owed to major stockholder Esenjay Investments and secured by company assets. The company reported $363,000 of financing cash inflow in the quarter and no investing cash flow.
Changes and notable items
- Revenue fell $42,000, or 55%, which management attributed primarily to major customers not meeting production expectations. Gross margin declined from 41% to 38%, with fixed costs not declining in line with sales.
- Operating expenses declined 41%, mainly due to lower selling and administrative costs after staffing and overhead reductions and the absence of prior-year reverse-merger legal and accounting costs. Research and development expense also declined; prepaid advisory-fee amortization remained high at $411,000.
- Net loss widened substantially despite the improvement in operating loss. The prior-year quarter included $1.388 million of income from a change in warrant derivative fair value, compared with $81,000 in the current quarter. The current quarter also included a $42,000 gain on settlement of an accrued liability.
- At September 30, the company had 47.56 million common shares outstanding and 5.54 million outstanding options. Potential dilution is relevant; the filing reports 808,662 potentially dilutive shares excluded from diluted EPS for the current quarter because their inclusion would be anti-dilutive.
Liquidity, outlook, and risks
The auditor’s October 15, 2013 report cited substantial doubt about the company’s ability to continue as a going concern. Flux stated that existing cash resources were insufficient for anticipated needs over the next 12 months and estimated approximately $2.5 million of financing would be needed to fund planned operations through September 30, 2014, with additional financing required by the second quarter of fiscal 2014. Management planned to seek equity financing and other investment structures; availability and terms were not assured. Failure to obtain funding or grow sales could require further cuts or suspension of operations and could threaten the company’s ability to continue as a going concern.
After quarter-end, on October 16, Esenjay amended the revolving note, bridge note, and line of credit: maturities were extended to December 31, 2015, interest rates were reduced from 8% to 6%, and the line-of-credit facility was increased to $2.0 million. The amendments also provided conversion options at specified prices. Flux subsequently drew an additional $230,000 under the line of credit. These changes extend debt maturities but do not resolve the stated need for additional financing.
A June 2013 non-binding letter of intent to acquire KleenSpeed Technologies remained subject to a definitive agreement and other closing conditions, including a private placement raising at least $800,000 and up to $2.5 million. The company also cited execution risks in transitioning customers from lead-acid technology, customer and supplier concentration, reliance on a small group of component suppliers, and risks around funding, competition, technology, and growth. No material pending legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company secured the financing needed for operations and the status, terms, and remaining availability of Esenjay facilities and conversion rights.
- Whether customer demand and production expectations recovered, given the 55% revenue decline and significant customer concentration.
- The cash impact and terms of any KleenSpeed transaction or related financing; the filing describes only a non-binding LOI.
- The extent of potential equity dilution from outstanding options, warrants, and debt conversion provisions.
- The composition and realizability of reported working capital, particularly the substantial prepaid advisory-fee asset, and the company’s progress toward positive operating cash flow.