Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016 (the company’s fiscal first quarter of 2017); comparative period is the three months ended September 30, 2015. Flux develops and sells rechargeable lithium-ion battery systems, primarily for lift equipment, using its battery management technology.
Financial performance
| Metric | Quarter ended Sep. 30, 2016 | Quarter ended Sep. 30, 2015 |
|---|---|---|
| Revenue | $293,000 | $171,000 |
| Gross loss (margin) | $(167,000) (-57%) | $(67,000) (-39%) |
| Operating expenses | $937,000 | $891,000 |
| Operating loss | $(1,104,000) | $(958,000) |
| Net loss | $(1,179,000) | $(1,008,000) |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) |
| Cash used in operating activities | $(1,226,000) | $(956,000) |
- Revenue increased 71%, which management attributed to an 84% increase in LiFT Packs sold. Discounts to introduce the redesigned products limited revenue growth relative to unit growth.
- Cost of sales rose 93%, exceeding revenue growth; warranty costs for repairs and returned products contributed. Gross margin deteriorated to negative 57% from negative 39%.
- Selling and administrative expense increased 17% to $647,000, while research and development expense declined 14% to $290,000, primarily because UL certification work was substantially completed.
- Net loss increased 17%. Higher personnel and legal costs and $44,000 of financing-cost amortization contributed; improved sales partly offset those increases.
Liquidity, debt, and capital
- At September 30, cash was $88,000, current assets $503,000, current liabilities $1.042 million, and working capital deficit $539,000. Total liabilities were $2.098 million and total assets $557,000; stockholders’ deficit was $1.541 million.
- Operating cash burn was $1.226 million; investing used $8,000. Financing provided $1.195 million, including $1.075 million from stock sales and $120,000 of borrowings. Cash declined $39,000 during the quarter.
- The company reported $215,000 outstanding under a secured, convertible lender line, presented net of discount, and $920,000 outstanding under its related-party line of credit. The related-party facility had $2.58 million available at quarter-end, but further draws required the lender’s approval.
- The unrelated lender note matured September 19, 2016 and was in default after the company could not repay it. The filing states the default rate is 18%, with a 2% penalty fee, and the lender may exercise rights against secured assets. The company was renegotiating; it reported no notice of default as of the filing date. It paid $50,000 toward principal on October 7.
- The April–August 2016 private placement raised $3.9 million in total, including $2.125 million in cash and $1.775 million through debt and liability settlements. The quarter included 26.875 million shares sold for cash and 10 million shares issued to settle $400,000 of related-party debt. Shares outstanding were 249,931,478 at September 30.
- After quarter-end, the company borrowed another $275,000 from its controlling shareholder, bringing that related-party balance to $1.195 million as of November 10, 2016; $2.305 million remained available at that date, subject to the lender’s discretion.
Outlook, risks, and notable items
- Management stated that existing liquidity was insufficient to fund planned operations for the next 12 months and estimated approximately $2.5 million of financing was needed through June 30, 2017. It cited substantial doubt about the company’s ability to continue as a going concern.
- Management expected production and design improvements to support better gross margins beginning in fiscal Q2 2017, but provided no quantified margin or revenue guidance. It also warned that funding may not be available on acceptable terms; absent funding, the company might curtail sales, marketing, product development, and capital spending.
- The company reported that a three-month pilot of its 72-volt aviation ground-support battery pack ended in August and was deemed an “unqualified success.” It planned additional test units; management described an approximate $20,000–$25,000 price point per pack as potential growth opportunity, not a forecast.
- Warranty issues remained a risk: the company accrued $120,000 for product warranty liability and said some packs in the field predated corrective fixes. Two customers represented approximately 50% of quarterly revenue; three suppliers represented approximately 54% of inventory purchases.
- A work-injury lawsuit was settled for $10,000 in September. The filing reports no off-balance-sheet arrangements and says disclosure controls were effective.
Important facts for investors to verify
- Whether Flux secured the estimated additional financing and can meet operating needs, including the terms and availability of related-party credit draws.
- How the overdue secured note was resolved, including any default interest, penalties, or enforcement action.
- Whether unit sales growth translates into improved pricing, gross margins, and lower warranty costs as management expected.
- Customer and supplier concentration, product reliability, and the commercial progress of the aviation ground-support pilot.
- Potential dilution: the filing identified 51,140,074 potentially dilutive shares excluded from diluted loss per share, and the related-party facility is convertible subject to authorized-share limits.