Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the company’s first quarter of fiscal 2020 (compared with the three months ended September 30, 2018). The company designs and manufactures lithium-ion battery systems for lift trucks, airport ground-support equipment, and other industrial applications.
Financial performance and condition
- Revenue: $1.919 million, up 5% from $1.835 million, primarily reflecting sales of larger battery packs.
- Gross profit and margin: $117,000 and approximately 6%, versus $18,000 and approximately 1%. Management cited lower inventory costs, improved workforce efficiency, and reduced warranty expense per pack.
- Operating expenses: $3.603 million, up from $2.145 million. Selling and administrative expense rose 49% to $2.206 million; research and development expense rose 111% to $1.397 million.
- Losses: Operating loss was $3.486 million versus $2.127 million. Net loss was $3.814 million versus $2.401 million, a 59% increase. Basic and diluted loss per share was $0.75, compared with $0.77; per-share figures reflect the 1-for-10 reverse split.
- Cash flow: Operating cash use was $1.423 million, compared with $2.158 million. Investing cash use was $104,000, and financing provided $1.588 million, primarily from credit-facility borrowings. Cash increased by $61,000 to $163,000.
- Liquidity and debt: Current assets were $5.832 million and current liabilities $12.973 million. At September 30, the company reported $8.0 million of related-party line-of-credit debt on the balance sheet; the notes describe $7.0 million outstanding under the credit facility, plus a $1.0 million short-term Cleveland loan. The facility and shareholder loan carried 15% interest. Accrued interest was $853,000.
- Other balance-sheet items: Total liabilities were $15.541 million, and stockholders’ deficit was $6.532 million. Adoption of the lease standard resulted in recognition of approximately $2.7 million each in right-of-use assets and lease liabilities.
Material changes and developments
- Revenue increased modestly, while the gross margin improved from approximately 1% to 6%; operating costs grew substantially, worsening operating and net losses.
- The company entered a new seven-year-and-four-month facility lease. Rent expense was approximately $170,000 for the quarter, versus $41,000 a year earlier.
- On October 10, 2019, the credit facility was increased from $7 million to $10 million. As of November 12, $3 million was available for future draws.
- The company adopted lease accounting effective July 1, 2019. It also entered a receivables factoring arrangement in August; $382,000 was due to the factor at quarter-end.
- A 1-for-10 reverse stock split took effect July 11, 2019. The company had 5,104,474 common shares outstanding at September 30 and reported 5,107,595 as of November 12.
Outlook, risks, and contingencies
- Going concern: Management stated that available liquidity was insufficient to fund planned operations for the 12 months following filing. The accumulated deficit was $42.890 million, and the filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Additional capital is needed; management cited equity and debt financing but provided no assurance funding would be available on acceptable terms.
- Operating plans: Management plans to expand sales and develop products for larger Class 1 and Class 2 equipment. It anticipated a December 2019 commercial launch of Class 2 Narrow Aisle and Class 3 End Rider batteries and expected additional UL listings during 2019. No quantified revenue or earnings guidance was provided.
- Demand update: In October, the company received a $0.3 million order for additional airport batteries from an existing airline customer and said further orders were expected; timing and amounts were not assured.
- Risks: Three customers accounted for approximately 78% of quarterly revenue, and two suppliers accounted for 44% of purchases. The company also cited funding needs, competition, dependence on demand and suppliers, product development, and execution of growth plans as risks.
- Contingencies: Management reported no material legal proceedings pending to its knowledge. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company secured adequate funding beyond the amended $10 million facility, and whether its going-concern uncertainty was resolved.
- The composition of reported related-party debt: the balance sheet shows $8.0 million of line-of-credit debt, while the notes describe $7.0 million under the facility and a separate $1.0 million loan.
- Whether expected product launches, UL listings, and additional airline orders occurred, and how they affected sales and gross margins.
- Whether customer and supplier concentration, factoring costs, and high-interest borrowing materially affected working capital and cash needs.
- The effects of the reverse split, outstanding options and warrants, and any subsequent equity or debt financing on per-share value and dilution.