Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (the company’s fiscal second quarter of fiscal 2019); filed February 13, 2019. Flux designs and sells lithium-ion battery systems for industrial equipment, including forklifts and ground support equipment.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $2.711 million | $1.201 million | $4.547 million | $1.354 million |
| Gross income (loss) | $255,000 | ($388,000) | $272,000 | ($544,000) |
| Gross margin | 9% | (32%) | 6% | (40%) |
| Operating loss | ($2.231 million) | ($1.674 million) | ($4.358 million) | ($2.984 million) |
| Interest expense | $693,000 | $166,000 | $967,000 | $302,000 |
| Net loss | ($2.924 million) | ($1.840 million) | ($5.325 million) | ($3.286 million) |
| Basic and diluted loss per share | ($0.07) | ($0.07) | ($0.15) | ($0.13) |
- Quarterly revenue increased 126% year over year; six-month revenue increased 236%. Management attributed growth to sales across a wider product range. The quarter included approximately 327 packs across product classes, compared with approximately 420 walkie packs in the prior-year quarter.
- Gross margin improved from negative to positive: 9% for the quarter and 6% for the six-month period. Management cited lower inventory costs, improved assembly efficiency, and reduced warranty expense.
- Operating expenses increased with hiring, sales support, product development, stock compensation, and professional fees. Net losses widened, with higher interest expense also reflecting approximately $466,000 of induced-conversion expense and $25,000 in shareholder-credit origination fees.
Cash, debt, and liquidity
- At December 31, 2018, cash was $1.044 million, current assets $5.983 million, current liabilities $4.438 million, and total liabilities $4.531 million. The balance sheet showed positive stockholders’ equity of $1.635 million, compared with a $7.435 million deficit at June 30, 2018.
- Cash used in operating activities was $5.256 million for the six months, versus $3.262 million a year earlier. Investing cash use was $101,000. Financing provided $3.695 million, principally from common-stock sales; cash declined by $1.661 million from June 30.
- The related-party inventory line had $2.405 million outstanding at period-end, bore 15% interest, and was due March 31, 2019. The company’s prior $7.975 million Esenjay line balance and $1.041 million accrued interest converted into common shares in October 2018; a separate $500,000 shareholder note and accrued interest also converted. Two short-term shareholder credit facilities were repaid in December.
- A December private placement generated $3.695 million at $1.10 per share. By January 2019, total placement proceeds were $4.392 million, and approximately $2.6 million was used to repay short-term facilities and accrued interest. Shares outstanding were 50,329,436 at December 31 and 50,962,900 at February 13, 2019.
Outlook, risks, and notable items
- Going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern for the twelve months following filing. Management estimated approximately $10.3 million in financing proceeds would be required to fund current and planned operations during that period, and said further funding may be needed afterward. No assurance was given that financing would be available on acceptable terms or on time.
- Management intends to seek additional equity and debt financing. Failure to obtain funding could require cuts to sales, marketing, product development, and capital spending; financing could dilute shareholders or impose restrictive covenants.
- Management expects gross-margin improvement as volumes grow, assembly productivity improves, and costs decline. It expects research and development to remain significant; development and UL listing work continued for additional forklift battery products. The filing provides no specific revenue or earnings guidance.
- Revenue and supply chains are concentrated: five customers accounted for approximately 95% of quarterly revenue; three suppliers represented approximately 59% of quarterly inventory purchases. A major shareholder and director-affiliated entity was a significant related-party lender; one beneficially owned approximately 62% of shares at December 31.
- There were no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Flux raised the additional financing needed to meet its stated $10.3 million funding requirement, and the terms, timing, and dilution from any financing.
- Cash burn, receivables and inventory growth, and the company’s ability to convert rising sales into operating cash flow and sustainable positive margins.
- Repayment or refinancing of the related-party inventory line due March 31, 2019, and any subsequent related-party transactions.
- Customer and supplier concentration, product adoption across new battery classes, and progress on UL listings and expected cost improvements.
- The extent of share dilution from placements, debt conversions, stock compensation, options, and warrants.