Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2015; unaudited. Comparisons are with the three months ended September 30, 2014 unless otherwise noted. Flux develops and sells rechargeable energy storage systems built around its battery management technology, with a primary focus on lift equipment and a secondary focus on micro-grid applications.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $171,000 | $86,000 |
| Cost of sales | $238,000 | $79,000 |
| Gross profit (loss) | $(67,000) | $7,000 |
| Gross margin | (39.2%) | 8.1% |
| Operating expenses | $891,000 | $628,000 |
| Operating loss | $(958,000) | $(621,000) |
| Net loss | $(1,008,000) | $(197,000) |
| Net loss per share, basic and diluted | $(0.01) | $(0.00) |
| Cash used in operating activities | $(956,000) | $(306,000) |
| Cash provided by financing activities | $975,000 | $254,000 |
Financial position and material changes
- At September 30, 2015, cash was $72,000, total assets $529,000, total liabilities $1.646 million, and stockholders’ deficit $1.117 million. Working capital was negative approximately $1.068 million.
- Current liabilities were $1.514 million, including $575,000 drawn under related-party credit facilities; an additional $132,000 of line-of-credit debt, net of discount, was classified as long term.
- In September, Flux issued 51.171 million shares to related-party lender Esenjay Investments to convert $2.0 million of principal debt. The cash flow statement reports $2.047 million of debt converted to equity, including accrued interest. Shares outstanding at September 30 were about 150.785 million.
- Revenue rose about 99%, primarily from lift-equipment sales, but cost of sales rose about 201%. Management attributed the gross loss mainly to LiFT Pack launch costs, incentives, and customer accommodations. R&D increased 174% to $332,000, largely due to materials and labor for UL certification testing.
- Net loss increased substantially. The prior-year quarter included $438,000 of noncash income from a change in warrant derivative fair value; there was no comparable gain in 2015. Interest expense also increased to $50,000 from $14,000.
- Operating cash use increased to $956,000 from $306,000. Cash nevertheless rose by $19,000, primarily because of financing proceeds. The filing reports no investing cash flow in the current quarter.
Outlook, risks, and other notable items
- Going concern: Management says existing liquidity is insufficient to fund planned operations for the next 12 months and estimates approximately $2 million of additional capital is needed through September 30, 2016. The filing states that these conditions raise substantial doubt about the Company’s ability to continue as a going concern.
- Management planned to seek private debt and equity financing and explore other funding structures. Esenjay facilities had $2.675 million available at quarter-end, but advances were subject to lender approval and Esenjay had no obligation to lend. A separate convertible line had $285,000 available.
- After quarter-end, Flux borrowed an aggregate $600,000 from Esenjay in October and November. The related-party facilities mature December 31, 2015, subject to possible lender extension. The filing also describes an October engagement with Monarch Bay Securities to assist with capital raising, with cash and warrant fees payable upon a successful financing.
- Management reported that UL testing for LiFT Packs was near completion, with one test underway; certification remained subject to successful testing, review, and inspection. The company gave no quantified revenue or earnings guidance.
- Customer concentration remained meaningful: one customer represented approximately 59% of quarterly revenue. Two suppliers accounted for approximately 44% of inventory purchases.
- The Company disclosed a pending work-related injury proceeding; it had recorded no loss and said a material outcome was not considered probable or reasonably estimable, while acknowledging an unfavorable ruling could have a material impact. Management reported disclosure controls were effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Flux obtained the estimated $2 million of needed capital on acceptable terms, and the status and maturity or extension of Esenjay borrowings.
- Whether LiFT Pack UL certification was completed and whether lift-equipment sales can grow with improved gross margins.
- The extent of future dilution and related-party influence following the 51.171 million-share debt conversion; verify share counts, as the cover page reports 150,860,137 shares outstanding as of November 12, while the balance sheet reports 150,785,137 at September 30.
- Whether customer and supplier concentration, the work-injury proceeding, and the going-concern uncertainty changed after the filing date.