Flux Power Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended December 31, 2012 (the second quarter of fiscal 2013); six-month results are also compared with the prior-year period. Flux develops and sells rechargeable energy storage systems built around its battery management technology, serving applications including lift equipment, microgrids and electric vehicles. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $516,000 | $1,833,000 | $592,000 | $2,415,000 |
| Gross profit / margin | $58,000 / 11% | $339,000 / 18% | $89,000 / 15% | $421,000 / 17% |
| Operating loss | $(1,288,000) | $(273,000) | $(2,668,000) | $(601,000) |
| Net income (loss) | $876,000 | $(293,000) | $867,000 | $(643,000) |
- Reported net income included a noncash gain from the change in fair value of warrant derivative liabilities: $2.184 million for the quarter and $3.572 million for the six months. The company remained loss-making at the operating level.
- Six-month operating cash flow was $(2.169) million, versus $149,000 provided in the prior-year period. Investing cash use was $37,000; financing provided $1.435 million, including $981,000 net equity proceeds and $450,000 of borrowings. Cash fell from $812,000 at June 30 to $41,000 at December 31.
- At December 31, total assets were $3.145 million, total liabilities $4.330 million, and stockholders’ deficit $1.185 million. Working capital was negative $1.782 million. Stockholder notes payable totaled $1.3 million; the company reported $1.45 million of borrowing availability under existing facilities.
Material changes versus prior comparable periods
- Revenue declined 72% for the quarter and 75% for the six months. Management attributed the decline to customer buying patterns, delayed electric-vehicle production and the lack of significant orders for lead-acid replacement systems during the quarter.
- Wheego accounted for $478,000, or 93%, of quarterly revenue and $480,000, or 81%, of six-month revenue. Most was previously deferred revenue recognized after the return right was waived; management said the customer’s sell-through was completed in the quarter.
- Gross margins fell to 11% for the quarter and 15% for the six months. Selling and administrative expense rose 27% quarterly and 60% for the six months; research and development expense rose 242% and 255%, respectively. Prepaid advisory-fee amortization was $423,000 for the quarter and $830,000 for the six months, versus none in the comparison periods.
- The warrant liability declined to $2.302 million from $4.943 million at June 30, 2012, contributing to reported income through the fair-value gain. The warrants are valued using Level 3, unobservable inputs.
Outlook, risks and contingencies
- Management expected available resources to cover at least the twelve months after December 31, 2012, based on cash, customer collections, further private placements and stockholder credit facilities. It also anticipated needing additional financing in 2013; financing was not assured and could dilute shareholders or be unavailable on acceptable terms.
- The company shifted its focus toward microgrid energy storage and lift equipment, seeking fewer products and customers with shorter development and negotiation cycles. It cautioned that adoption of its systems in place of lead-acid technology was not assured. Management cited NACCO’s decision to pursue a larger supplier for one product area.
- Key risks include low cash, negative working capital, operating cash burn, customer concentration, declining sales and dependence on additional capital. The filing also identifies risks involving competition, technology, sourcing and execution of growth plans.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subsequent customer orders and collections improve revenue, cash generation and customer concentration after the one-time Wheego revenue recognition.
- Actual subsequent borrowing, remaining credit-facility availability, debt terms and the company’s ability to raise additional capital.
- The cash-flow and earnings effects of the warrant fair-value gain and advisory agreement amortization, including the assumptions used for Level 3 valuations.
- Progress and costs in the lift-equipment and microgrid markets, and evidence that the shift in strategy can produce repeatable sales at improved margins.