Flux Power - Sell On Going Concern Warning And Near-Term Capital Raise Requirements

Feb. 11, 2022 10:39 AM ETFlux Power Holdings, Inc. (FLUX)QMCO8 Comments3 Likes
Henrik Alex profile picture
Henrik Alex


  • Flux released Q2/FY2022 results. Elevated working capital requirements caused by persistent supply chain disruptions resulted in record quarterly cash usage.
  • Without raising additional capital, the company is likely to run out of funds by the end of June.
  • Flux Power's liquidity struggles required a going-concern warning in the company's quarterly report on form 10-Q.
  • With supply chain disruptions unlikely to be resolved anytime soon, investors need to prepare for a near-term capital raise at rather unfavorable conditions.
  • Given these issues, investors should consider selling existing positions or outright shorting the shares.

Elektrischer Gabelstapler-Fahrzeugpark und Stecker zum Laden der Batterie im Logistiklager. Alternative Energiequelle für Auto und Maschine im industriellen Geschäftsfeld. Automobiltechnik.

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On Thursday, lithium-ion battery manufacturer Flux Power Holdings (NASDAQ:FLUX) or "Flux Power" reported less-than-stellar Q2/FY2022 results.

While the company's top- and bottom line results largely matched analyst expectations, Flux Power's cash usage reached new all-time highs.

Cost inflation and ongoing supply chain disruptions resulted in negative free cash flow of $11.3 million for the quarter thus causing cash and cash equivalents to decline to just $7.9 million despite an initial $3.5 million drawdown under the company's $6.0 million revolving credit facility with Silicon Valley Bank.

Although customer demand was strong during the second quarter, our profitability was negatively impacted by continued disruption in our supply chain. We experienced higher costs to obtain key components of our energy solutions and delays in the receipt of such parts which led to manufacturing and shipping delays. To address the unprecedented level of supply chain uncertainty, we elected to build inventory levels of key component parts. This combination of factors increased our operating expenses and reduced gross profit.

Cash usage in the second quarter of 2022 was also elevated due to global supply chain disruptions leading to high levels of inventory as well as new strategic initiatives that include new product designs, production facility improvements and better supply chain management. We ended the second quarter with $7.9 million in cash, and $19.6 million in product inventory. Our goal is to monetize our existing backlog of $31.4 million in the months ahead and improve our working capital and cash flow needs.

The massive liquidity drain resulted in the requirement to include a going-concern warning in the company's quarterly report on form 10-Q (emphasis added by author):

Delays in the receipt of key component parts due in part to supply chain disruptions as well as recent changes in the design of the product offering have impacted the Company’s ability to fulfill the backlog of sales orders as planned. These events have placed pressure on the Company’s margins and cash resources and raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months following the filing date of this Quarterly Report on Form 10-Q. As of December 31, 2021, the Company had a cash balance of $7,855,000 and may need to raise additional capital in the near future.

With supply chain issues and associated cost inflation unlikely to go away anytime soon, Flux Power's working capital needs will likely remain elevated for the next couple of quarters.

Even when assuming the company returning to its previous quarterly cash burn rate of approximately $5 million, Flux Power would be out of funds at the end of June.

Given this issue, a near-term capital raise appears to be in the cards.

At the end of Q2, the company had approximately $5.7 million left under its $20 million at-the-market offering program with H.C. Wrainwright but with an average daily trading volume of just 105k shares, the impact on the stock price would likely be devastating.

Moreover, raising just $5.7 million (before commissions) would only provide Flux Power with an additional 90 days of runway, insufficient to remove the going concern language in the quarterly report.

In my opinion, the company would need to raise at least $10 - $15 million to address the going-concern warning. While not impossible, potential investors are likely to demand a very substantial risk premium and perhaps even the issuance of warrant sweeteners.

As a result, I would expect a potential secondary offering to price deeply in the hole thus causing substantial dilution to existing equityholders.

The company might also consider issuing preferred stock or convertible debt to deal with near-term liquidity issues but conditions are likely to be ugly or even toxic.

Bottom Line

The ongoing global supply chain disruptions will likely prevent Flux Power from materially reducing its record-high backlog for at least the next couple of quarters thus resulting in elevated working capital needs and additional cash usage.

Without raising additional capital, the company is likely to run out of funds by the end of June.

To address the going-concern warning, Flux will likely have to raise $10-$15 million of new capital with the stock price near all-time lows.

As investor sentiment towards ESG stocks has cooled down quite meaningfully in recent quarters, conditions for a capital raise are likely to be ugly or even toxic.

To get an impression of market participants' reaction to a company struggling to deliver upon customer demand amid persistent supply chain issues should take a look at data storage product provider Quantum Corporation (QMCO) which saw its shares dropping by almost 40% on Thursday after the company outlined potential debt covenant violations and the need to secure additional liquidity in its quarterly report on form 10-Q.

Based on my expectations for material, near-term dilution at highly unfavorable terms, I firmly expect the shares to drop to new all-time lows over the next couple of weeks.

Given these issues, investors should consider selling existing positions or outright shorting the shares.

This article was written by

Henrik Alex profile picture
I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.Despite not being a native speaker, I always try to deliver high quality research at no charge to followers and the entire Seeking Alpha community.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in FLUX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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