FLUX - Flux Power: Elevated Growth Expectations And Risk Of Further Dilution - Avoid

2023-05-12 18:54:47 ET

Summary

• Company reports mixed Q3/FY2023 results with strong margin improvement but revenue came in slightly below expectations and new order intake was weak.
• On the conference call, management blamed supply chain issues which are expected to persist in the short term.
• The company continues to burn cash with no visible path to sustainable free cash flow at this point.
• In recent months, Flux Power has resumed sales of new common shares into the open market which are likely to put ongoing pressure on the company's stock price.
• Given elevated risks of weaker-than-expected growth and additional shareholder dilution, I believe investors should avoid the shares for the time being.

Note:

I have covered Flux Power Holdings Inc. ( FLUX ) previously, so investors should view this as an update to my earlier articles on the company.

On May 11, lithium-ion battery manufacturer Flux Power Holdings or "Flux Power" reported mixed Q3/FY2023 results:

Thanks to continued, strong margin improvement, Adjusted EBITDA progressed further towards break-even:

On the flip side, revenue came in slightly below consensus estimates and new order intake was weak.

On the conference call , management blamed supply chain issues which are expected to persist in the short term:

In the third quarter fiscal ‘23, we received $9.8 million in customer purchase orders from existing and new Fortune 500 customers. New orders were down for the quarter due to supply chain issues, increasing lead times on some new forklifts and ground support equipment product lines, which all caused delays in anticipated orders and existing orders to be pushed out. We anticipate these extended lead times continuing, although diminishing in the coming months as supply factors normalize.

While cash usage has declined materially from elevated levels experienced in fiscal 2022, it is difficult to envision a path to sustainable free cash flow for the company, particularly when considering consensus expectations for more than 35% revenue growth in fiscal 2024.

In recent quarters, management has done a good job increasing the company's credit facilities when needed thus avoiding additional shareholder dilution.

Disappointingly, Flux Power has returned to selling new common shares into the open market during the March quarter and continued sales in recent weeks.

In aggregate, the company has issued approximately 0.2 million new shares for a little over $1 million in net proceeds so far in 2023.

As of May 10, Flux Power had a cash balance of $1.4 million with an aggregate $7.8 million available under its credit facilities. In addition, the company's at-the-market ("ATM") offering program had a remaining capacity of $4.6 million.

While likely sufficient for the next couple of quarters, I believe Flux Power will have to raise additional capital at some point going forward to accommodate anticipated growth.

Moreover, the company will have to renew or refinance its $14 million credit facility with Silicon Valley Bank ("SVB"), now a division of First Citizens Bank ( FCNCA , OTCPK:FCNCB ), by the end of the year.

Bottom Line

While Flux Power's gross margin and Adjusted EBITDA trajectory remains encouraging, lower-than-expected revenue and weak order intake raises questions about the company's ability to live up to expectations for 35% top-line growth in fiscal 2024.

In addition, liquidity is likely to remain tight thus increasing the risk for additional shareholder dilution going forward.

Particularly the company's ongoing open market sales are likely to put further pressure on the share price as trading volume remains insufficient to absorb meaningful numbers of newly issued shares.

Given elevated risks of weaker-than-expected growth and additional shareholder dilution, I believe investors should avoid Flux Power's shares for the time being.

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