Blueprint
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended June 30, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number: 000-25909
FLUX POWER HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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86-0931332
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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2685 S. Melrose Drive, Vista, California
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92081
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(Address
of principal executive offices)
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(Zip
Code)
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877-505-3589
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
(Title
of Class)
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes ☐
No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days.
Yes ☒
No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files).
Yes ☒
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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(Do
not check if a smaller reporting company)
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Emerging growth company ☐
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of voting and non-voting common stock held
by non-affiliates of the registrant as of December 31, 2018 (the
last business day of the registrant’s most recently completed
second fiscal quarter) was approximately $21,710,258.
The
number of shares of registrant’s common stock outstanding as
of September 12, 2019 was 5,104,474.
Documents incorporated by reference:
None.
FLUX
POWER HOLDINGS, INC.
FORM
10-K ANNUAL REPORT
For
the Fiscal Year Ended June 30, 2019
Table
of Contents
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PART I
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PART II
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PART III
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PART IV
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SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
report contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled
“Description of Business,” “Risk Factors,”
and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” These statements
involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to
be materially different from any future results, performances or
achievements expressed or implied by the forward-looking
statements. These risks and uncertainties include, but are not
limited to, the factors described in the section captioned
“Risk Factors” below. In some cases, you can identify
forward-looking statements by terms such as
“anticipates,” “believes,”
“could,” “estimates,”
“expects,” “intends,” “may,”
“plans,” “potential,”
“predicts,” “projects,”
“should,” “would,” and similar expressions
intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events
and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. These
forward-looking statements include, among other things, statements
relating to:
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our ability to
secure sufficient funding and alternative source of funding to
support our current and proposed operations;
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our anticipated
growth strategies and our ability to manage the expansion of our
business operations effectively;
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our ability to
maintain or increase our market share in the competitive markets in
which we do business;
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our ability to
reach the levels of net revenue and gross profit anticipated by
management;
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our ability to keep
up with rapidly changing technologies and evolving industry
standards, including our ability to achieve technological
advances;
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our dependence on
the growth in demand for our products;
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our ability to
compete with larger companies with far greater resources than we
have;
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our continued
ability to obtain raw materials and other supplies for our products
at competitive prices;
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our ability to
diversify our product offerings and capture new market
opportunities;
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our ability to
source our needs for skilled labor, machinery, parts, and raw
materials economically; and
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the loss of key
members of our senior management.
Also,
forward-looking statements represent our estimates and assumptions
only as of the date of this report. You should read this report and
the documents that we reference and file as exhibits to this report
completely and with the understanding that our actual future
results may be materially different from what we expect. Except as
required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in
any forward-looking statements, even if new information becomes
available in the future.
Use
of Certain Defined Terms
Except
where the context otherwise requires and for the purposes of this
report only:
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the
“Company,” “Flux,” “we,”
“us,” and “our” refer to the combined
business of Flux Power Holdings, Inc., a Nevada corporation and its
wholly-owned subsidiary, Flux Power, Inc., a California corporation
(Flux Power).
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“Exchange
Act” refers the Securities Exchange Act of 1934, as
amended;
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“SEC”
refers to the Securities and Exchange Commission; and
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“Securities
Act” refers to the Securities Act of 1933, as
amended.
PART
I
Overview
We
design, develop, and sell advanced rechargeable lithium-ion energy
storage solutions as an alternative to lead-acid batteries [and
propane-based solutions] for lift trucks, airport ground support
equipment (GSE) and other industrial motive applications. Our
“LiFT” battery packs, including our proprietary battery
management system (BMS), provide our customers with a better
performing, cheaper and more environmentally friendly alternative,
in many instances, to traditional lead-acid and propane-based
solutions.
We
launched our LiFT packs for the Class 3 Walkie Pallet Jack (Class 3
Walkie) product line in 2014. We have received Underwriters
Laboratory (UL) Listing on our Class 3 Walkie Pallet Jack (Class 3
Walkie) LiFT pack product line in 2016 and expect to seek UL
Listing during calendar 2019 for our other product lines, which
include Class 1 Counterbalance/Sit down/Ride-on (Class 1 Ride-on)
LiFT packs , Class 2 Narrow Aisle LiFT packs, and Class 3 End Rider
LiFT packs. We believe that a UL Listing demonstrates the safety,
reliability and durability of our products and gives us an
important competitive advantage over other lithium-ion energy
suppliers. Our Class 3 Walkie LiFT packs have been approved for use
by leading industrial motive manufacturers, including Toyota
Material Handling USA, Inc., Crown Equipment Corporation, and
Raymond Corporation.
Within
our industrial market segments, we believe that our LiFT pack
solutions provide cost and performance benefits over existing
lead-acid power products including:
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longer operation
and more shifts with fewer batteries;
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reduced energy and
maintenance costs;
Historically,
lead-acid batteries dominated this market. However, their share has
been gradually declining given significant safety and environmental
issues related to the toxic nature of their components and other
limitations of these legacy solutions. For example, lead-acid
batteries are subject to Environmental Protection Agency lead-acid
battery reporting requirements, may create an environmental hazard
in the event of a cell breach, and emit combustible gases during
charging. Rechargeable
lithium-ion energy solutions such as ours do not pose such
environmental concerns. As lithium-based solutions have declined in
price and improved in reliability, today, they provide a
cost-effective solution with an improved environmental
profile.
As a
result of the advantages lithium-ion battery technology provide
over lead-acid batteries, we have experienced significant growth in
our business. We believe we are at the very early stage of a trend
toward the adoption of lithium-ion technology and the displacement
of lead-acid and propane-based energy storage solutions. We believe
the annual addressable forklift market in North America for
lithium-ion battery is $2.4 billion. We calculate this figure based
on Industrial Truck Association (ITA) U.S. Factory Shipments data
for 2017 (75,446 for Classes 1 and 2 Ride-on and Narrow Aisle, and
68,979 for Class 3 Walkie) and multiplying it by our estimated
mid-point suggested retail prices for the different sizes of
lithium-ion battery packs ($24,000 for Classes 1 and 2 Ride-on and
Narrow Aisle, and $8,250 for Class 3 Walkie). The estimated $2.4
billion addressable market does not include other opportunities
available to us. For example, we estimate that migrating existing
buyers of Classes 4 and 5 Internal Combustion Sit-on to Class 1
Ride-on LiFT packs would expand our addressable market to be around
$2.1 billion based on 87,271 Classes 4 & 5 Internal Combustion
Sit-on LiFT packs shipped in 2017 as reported by ITA.
Critical to our
success is our innovative and proprietary high power BMS that
enables multiple battery cells to work in tandem, optimizes the
performance of our LiFT packs and provides a platform for adding
new battery pack features, including customized telemetry for
customers. The BMS serves as the brain of the battery pack,
managing cell balancing, charging, discharging, monitoring and
communication between the pack and the forklift. We
believe our expertise in managing a variety of lithium cell formats
using a modular, scalable and customizable approach creates a
competitive advantage for us. A key component of this solution is
our proprietary BMS.
Our
engineers design, develop, service, and test our products. We
source our battery cells from multiple suppliers in China and the
remainder of the components primarily from vendors in the United
States. Final assembly, testing and shipping of our products is
done from our ISO 9001 certified facility in Vista, California,
which includes three assembly lines.
Recent
Corporate Transactions
The
Company effected a 1-for-10 reverse split of our common stock and
preferred stock on July 11, 2019 (2019 Reverse Split). No
fractional shares were issued in connection with the 2019 Reverse
Split. If, as a result of the 2019 Reverse Split, a stockholder
would otherwise have been entitled to a fractional share, each
fractional share was rounded up. The 2019 Reverse Split resulted in
a reduction of our outstanding shares of common stock from
51,000,868 to 5,101,580. In addition, it resulted in a reduction of
our authorized shares of common stock from 300,000,000 to
30,000,000, and a reduction of our authorized shares of preferred
stock from 5,000,000 to 500,000. All references to shares of common
stock and related per share data for all periods presented in this
Annual Report on Form 10-K and the accompanying consolidated
financial statements and notes thereto contained have been adjusted
to reflect the 2019 Reverse Split on a retroactive
basis.
DESCRIPTION
OF OUR BUSINESS
Our
Business
We have
leveraged our decade of experience in lithium-ion technology to
design and develop a suite of LiFT pack product lines that we
believe provide attractive solutions to customers seeking an
alternative to lead-acid and propane-based power products. We
believe the following attributes are significant contributors to
our success:
Engineering and integration
experience in lithium-ion for motive
applications: We have been developing
lithium-ion applications for the advanced energy storage market
since 2010, starting with products for automotive electric vehicle
manufacturers. We believe our expertise in management of large
format lithium cells and overall experience in control and
integration of battery modules has enabled us to develop superior
solutions.
UL Listing: We
launched our LiFT packs for the Class 3 Walkie product line in 2014
and obtained our UL Listing for all three different power
configurations in January 2016. We believe this UL Listing gives us
a significant competitive advantage and provides assurance to
customers that our technology has been rigorously tested by an
independent third party and determined to be safe, durable and
reliable. We believe that the process involved in obtaining UL
Listing has enabled us to substantially enhance our entire family
of products, including in the areas of overall design and
durability, which we believe has improved the performance and
overall value of our LiFT packs. We are seeking to obtain
additional UL Listings for our other LiFT pack product lines during
calendar 2019.
Original equipment
manufacturer (OEM) approvals: Our Class 3 Walkie LiFT packs
have been tested and approved for use by Toyota Material Handling
USA, Inc., Crown Equipment Corporation, and Raymond Corporation,
among the top global lift truck manufacturers by revenue according
to Material Handling & Logistics. We also provide a
“private label” LiFT pack for a Class 3 Walkie LiFT
pack to a major forklift OEM.
Broad product offering and
scalable design: We offer LiFT packs for use in a variety of
industrial motive applications. We believe that our modular and
scalable design enables us to optimize design, inventory, and part
count to accommodate natural product extensions of our products to
meet customer requirements. Based on our Class 3 Walkie LiFT pack
design, we have expanded our produce lines to include Class 1
Ride-on, Class 2 Narrow Aisle, and Class 3 End Rider LiFT pack
product lines as well as airport GSE packs. Our modular design
enables us to group cells in certain unit counts and electrical
connections (series vs. parallel) that can be easily modified to
satisfy a wide range of power requirements for varying voltages,
current amperages, and kilowatt power ratings. The modular design
also includes three (3) different physical formats to accommodate a
variety of dimension requirements.
Significant advantages over
lead acid and propane solutions: We believe that lithium-ion
battery systems have significant advantages over existing
technologies and will displace lead-acid batteries and
propane-based solutions, in most applications, because they have a
number of advantages over these legacy technologies. Relative to
lead-acid batteries, such advantages include environmental
benefits, no water maintenance, faster charge times, greater cycle
life and longer run times that provide operational and financial
benefits to customers. Compared to propane solutions, lithium-ion
systems avoid the generation of exhaust emissions and associated
odor and environmental contaminates, and maintenance of an internal
combustion engine, which has substantially more parts than an
electric motor.
Proprietary Battery
Management System:
We have developed a high power BMS that is incorporated into our
entire product family. The BMS serves as the brain of the battery
pack, managing cell balancing, charging, discharging, monitoring
and communication between the battery pack and the forklift. Our
BMS is specifically designed for the industrial motive application
environment and is adaptable to meet custom requirements. The
system is optimized to meet the operational requirements of material handling and
airport ground support equipment and to work with the LiFePO4
battery chemistry (although we can easily accommodate other
lithium-ion chemistries). We have designed our BMS to
interface with telematics systems to enable remote diagnostics,
software upgrades and early warnings to fleet managers. Our next
generation BMS design will be released in fiscal year 2020 and
incorporate advanced automotive chip technologies that will enable
faster, lower cost, more extensive
data logging and easier re-configurations for product
extensions.
Our
Products
We have
developed, tested, and sold our LiFT packs for use in a broad range
of lift trucks, as pictured and described below, including Class 3
Walkie and End Riders, Class 2 Narrow Aisle, and Class 1 Ride-on,
as well as for airport GSE. Within each of these product segments,
there is a range of power and equipment variations. With these
variations in mind, we designed our LiFT packs to address most
variations, with only minor modifications needed to fit the
remaining low volume applications.
Class 3 Walkie Pallet Jack Packs
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Our smallest
product line by weight and size.
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Dedicated assembly
line for production with unique design to fit battery
compartments.
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Used in food and
beverage delivery business, where the “walkie” often
rides on truck deliveries in a very rugged
environment.
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UL Listing received
in 2016 for all three power configurations.
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Power ratings range
from 1.7 to 4.3 kWh.
Class 1 Counterbalance/Sit Down/Ride-on
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Our “large
product” line for Class 1 ride-on forklifts, to meet high
power requirements.
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Utilizes modular
“blade” design
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Used in warehouses
and production facilities, for demanding requirements, especially
multi-shift operations
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Proven to support
3-shift operations and avoid the need for a battery for each
shift.
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Power ratings range
from 21.6 to 32.0 kWh.
Class 2 Narrow Aisle
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Our “medium
product line” utilizes a modular design for medium-size
packs.
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Popular in new
facilities focused on high efficiency operations.
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Power ratings range
from 21.6 to 31.1 kWh.
Class 3 End Rider
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Uses similar design
to our Class 2 Narrow Aisle LiFT packs.
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Equipment and
battery packs designed for use in high volume distribution centers
(DC).
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Power ratings range
from 9.6 to 14.4 kWh.
Airport GSE
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Our first
“large pack” product line, built on our “large
pack” assembly line.
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Utilizes similar
modular design as our large forklift LiFT packs with minor
modifications.
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Used to power
airport GSE including: baggage and cargo trucks, scissor lifts,
pushback tractors, and belt loaders, all used at
airports.
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Used by major
airlines and ground support equipment “service”
companies.
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Power ratings range
from 16.0 to 48.0 kWh.
Because
we are addressing a wide range of power and energy requirements
across broad industrial motive applications, we have taken a
modular approach to our battery pack system design. We have three
core design modules that are used in our entire family of forklift
products. Our core modules are designed for small, medium, and
large packs. The design of each core module is driven by power and
physical space sizing. The core module for our small LiFT pack,
which fits a Class 3 Walkie, is a 24-volt lithium pack (figure
below) comprised of individual 3.2-volt cells. The medium and large
cored modules are designed to accommodate larger equipment size and
power by adding more cells and components. These larger designs
support 36-volt, 48-volt, and 72-volt applications with power
requirements up to 900Ah (amps per hour or “current”
rating), which enables us to offer a full product
line-up.
We are
able to offer varying chemistries and configurations based on the
specific application. Currently, our LiFT packs use lithium iron
phosphate (LiFePO4) battery cells, which we source from a variety
of overseas suppliers that meet our power, reliability, safety and
other specifications. Because our BMS is designed to work with
numerous battery chemistries, we believe we can readily adapt our
LiFT packs as new chemistries become available in the market or
customer preferences change.
We also
offer 24-volt onboard chargers for our Class 3 Walkie LiFT packs,
and smart “wall mounted” chargers for larger
applications. Our smart charging solutions are designed to
interface with our BMS.
Industry
Overview
The
motive energy storage markets have evolved from reliance primarily
on lead-acid technologies created in the 1800s to increasing use of
advanced chemistries that have the ability to store energy more
efficiently and with lower environmental impact.
Driven
by overall growth in global demand for lithium-ion battery
solutions, the supply of lithium-ion batteries has rapidly
expanded, leading to price declines of eighty-five percent (85%)
since 2010 according to BloombergNEF. BloombergNEF also estimates
that lithium-ion battery pack prices, which averaged $1,160 per
kilowatt hour in 2010, were $176 per kWh in 2018 and could drop
below $100 in 2024.
The
sharp decline in the price of lithium-ion batteries has commenced a
shift in customer preferences away from lead-acid and propane-based
solutions for power lift equipment to lithium-ion based solutions.
We believe our position as a pioneer in the field and our extensive
experience providing lithium-ion based storage solutions makes us
uniquely positioned to take advantage of this shift in customer
preferences.
Lift Equipment - Material Handling Equipment
We
focus on energy storage solutions for lift equipment and GSE
because we believe they represent large and growing markets that
are just beginning to adopt lithium-ion based technology. Our
market opportunity includes not only solutions for new equipment
but also the replacement market for existing lead acid battery
packs.
Historically, larger lift trucks were powered by
internal combustion engines, using propane as a fuel, with smaller
equipment powered by lead-acid batteries. Over the past thirty (30)
years, there has been a significant shift toward electric power.
According to Liftech/ITA, over this time period the percentage of
lift trucks powered electrically has doubled from approximately
thirty percent (30%) to over sixty percent
(60%).
According to Modern
Materials Handling, worldwide new lift truck orders reached
approximately 1.4 million units in 2017. The Industrial Truck
Association has estimated that approximately 200,000 lift trucks
had been sold yearly since 2013 in North America (Canada, the
United States and Mexico), including approximately 260,000 units
sold in 2018, with sales relatively evenly distributed between
electric rider (Class 1 and Class 2), motorized hand (Class 3), and
internal combustion engine powered lift trucks (Class 4 and Class
5). The ITA estimates that electric products represented
approximately sixty-four percent (64%) of the North American market
in 2018. Driven by growth in global manufacturing, e-commerce and
construction, Research and Markets expects that the global lift
truck market will grow at a compound annual growth rate of six and
four-tenths percent (6.4%) through 2024.
Customer Concentrations
We
currently sell products directly to our customers, through OEMs,
lift equipment dealers, battery distributors and the ultimate
end-user. Our direct customers vary from small companies to Fortune
500 companies.
During
the year ended June 30, 2019, we had four major customers that each
represented more than 10% of our revenues on an individual basis,
or approximately $8,072,000 or 87% of our total
revenues.
During
the year ended June 30, 2018, we had two major customers that each
represented more than 10% of our revenues on an individual basis,
or approximately $3,181,000 or 77% of our total
revenues.
Shift
Toward Lithium-ion Battery Technologies
We expect that
there will be a significant increase in demand for safe and
efficient alternatives to lead-acid and propane-based power
products. There are a number of factors driving the change in
customer preference away from these legacy products and toward
lithium-ion energy storage
solutions:
Duration of Charge/Run
Times: Lithium-based energy storage systems can perform for
a longer duration compared to lead-acid batteries. Lithium-ion
batteries provide up to 50% longer run times than lead-acid
batteries of comparable capacity, or amps-per-hour rating, allowing
equipment to be operated over a long period of time between
charges.
High/Sustained
Power: Lithium-ion batteries are better suited to deliver
high power versus legacy lead-acid. For example, a 100Ah lead acid
battery will only deliver 80Ah if discharged over a four-hour
period. In contrast, a 100Ah lithium-ion system will achieve over
92Ah even during a 30 minute discharge. Additionally, during
discharge, the LiFT pack sustains its initial voltage, maximizing
the performance of the forklift truck, whereas, lead acid voltages,
and hence power, decline over the working shift.
Charging Time: Lead
acid batteries are limited to one shift a day, as they discharge
for eight hours, need eight hours for charging, and another eight
hours for cooling. For multi-shift operations, this typically
requires battery changeout for the equipment. Because lithium
batteries can be recharged in as little as one hour and do not
degrade when subjected to opportunity charging, battery changeout
is unnecessary.
Safe Operation: The
toxic nature of lead-acid batteries presents significant safety and
environmental issues in the event of a cell breach. During
charging, lead-acid batteries emits combustible gases and increases
in temperature. Lithium-ion (particularly LFP) batteries do not get
as hot and avoid many of the safety and environmental issues
associated with lead-acid batteries.
Extended Life: The
performance of lead-acid batteries degrades after approximately 500
charging cycles in industrial equipment applications. In
comparison, lithium-ion batteries last up to five times longer in
the same application.
Size and Weight:
Lithium is about one-third the weight of lead acid for comparable
power ratings, enhancing the ability to provide power to equipment
of many shapes and sizes.
Lower Cost:
Lithium-ion batteries provide power dense solutions with extended
cycle life, reduced maintenance and improved operational
performance, resulting in lower total cost of
ownership.
Marketing
and Sales
In the
industrial motive market, OEMs sell their lift products through
dealer networks and directly to end customers. Because of
environmental issues associated with lead-acid batteries and to
preserve customer choice, industrial lift products are typically
sold without a battery pack. Equipment dealers source battery packs
from battery distributors and battery pack suppliers based on
demand or in response to customer specifications. End customers may
specify a specific type and manufacturer of battery pack to the
equipment dealer or may purchase battery packs from battery
distributors or directly from battery suppliers. Consequently, we
sell our products through a number of different channels, including
directly to end users, OEMs and lift equipment dealers or through
battery distributors.
Our
four-person direct sales team is assigned to major geographies
nation-wide to collaborate with our sales partners who have an
established customer base. We are seeking to hire additional sales
staff to support our expected sales growth. In addition, we have
developed a nation-wide sales network of relationships with
equipment OEMs, their dealers, and battery
distributors.
We have
worked directly with a number of OEMs to secure “technical
approval” for compatibility of our LiFT packs with their
equipment. Once we receive that approval, we focus on developing a
sales network utilizing existing battery distributors and equipment
dealers, along with the OEM corporate national account sales force,
to drive sales through this channel.
As our
LiFT packs have gained acceptance in the marketplace, we have seen
an increase in direct-to-end-customer sales, ranging from small
enterprises to Fortune 500 companies. To expand our customer reach, we
have begun to market directly to end users, primarily focusing on
large fleets operated by Fortune 500 companies seeking productivity
improvements. We have seen initial success in these efforts,
including sales to a Fortune 100 heavy machinery conglomerate. Our
marketing efforts to these customers focus on the economic and cost
benefits of lithium-ion batteries over lead acid batteries in their
equipment.
Our
product development efforts have included pilot programs and trials
with national account end users. This has resulted in increased
sales to these end users as many of them seek to replace lead-acid
batteries with lithium power packs in their fleets as they buy new
equipment.
To
support our products, we have a nation-wide network of service
providers, typically forklift equipment dealers and battery
distributors, who provide local support to large customers. We
utilize a discount price to our standard retail prices to
compensate our partners for customer orders and service
availability. We also maintain a call center and provide Tech
Bulletins and training to our service and sales network out of our
corporate headquarters.
Our
warranty policy for our family of forklift products includes a
limited five-year warranty. Warranty claims are handled by our call
center that determines the appropriate response path: return pack,
field fix by approved technician on location, or technical
resolution by the call center. Our approved field technicians are
typically equipment dealers or battery distributors, charging
agreed upon discounted rates to their “street
rates.”
We
partner with Averest, Inc., an experienced GSE distributor, to
market our lithium-ion battery packs for airport GSE. Our sales
cycle for GSE equipment has required initial multi-month evaluation
periods of packs prior to ordering. After initial shipments,
subsequent ordering is dependent upon operating requirements and
capital budgeting.
We
customarily maintain a relatively small inventory of Class 3 Walkie
LiFT packs, which typically have shorter customer timing
requirements than other lift equipment. For larger packs, we seek
to align our inventory and production with historical OEM order
patterns. Typically, we deliver larger packs on a four- to
eight-week lead time. Because of associated lead times, we provide
six-month rolling forecasts to our battery cell suppliers who
manufacture and deliver to our forecast.
Ordering patterns
primarily reflect ordering patterns of new equipment, commonly done
in monthly or quarterly stages by large customers, as single
fleet-size orders would require significant planning and
operational support to implement. Backlog varies with customers but
is driven by operating timing. Customer payment terms are normally
net 30 days, but certain large customers require extended payment
terms, ranging from 45 to 60 days. We have experienced some
seasonality, particularly in July, August and
December.
Manufacturing
and Assembly
We
source our battery cells from multiple suppliers in China and the
remainder of the components primarily from vendors in the United
States. While we have experienced supply interruptions from time to
time, none have been material. Production rates aligned with our
forecasts have helped us mitigate the risk of
disruption.
We
buy chargers from several sources, including a U.S. based supplier.
Additionally, we are a qualified dealer for a well-known
manufacturer of “high capacity, modular, smart
chargers” which support our larger packs.
Our
BMS is not dependent on a specific lithium-ion chemistry or cell
manufacturer, and we are agnostic to chemistry and supplier. We
monitor and test potential new cell technologies on an ongoing
basis
Our BMS
modules/boards are proprietary and have been granted two patents:
(i) a 12-volt battery design; and (ii) a battery display design.
Component acquisition and assembly of the BMS modules/boards are
outsourced to two local, Southern California board houses, both of
whom meet our quality and other specifications.
Final assembly, testing and shipping of our
products occur at our ISO 9001
certified facility in Vista, California, which includes three
assembly lines.
Research
and Development
Our
engineers design, develop, service, and test our products. We
believe our core competencies and capabilities are designing and
developing proprietary technology for our BMS, systems engineering,
engineering application, and software engineering for both battery
packs and telemetry. We believe that our ability to develop new
features and technology for our BMS is essential to our growth
strategy.
Research and
development expenses for the fiscal years ended June 30, 2019 and
2018 were approximately $4,088,000 and $1,956,000, respectively.
Such expenses consist primarily of materials, supplies, salaries
and personnel related expenses, stock-based compensation expense,
consulting costs and other expenses. Research and development
expenses in fiscal year ended June 30, 2019 were higher than fiscal
year ended June 30, 2018 primarily due to the development,
implementation, and UL testing of the higher capacity packs for
Class 1, 2, and 3 forklifts.
As we
continue to develop our product offerings, we anticipate that
research and development expenses will continue to be a substantial
part of our focus. We perform our research and development at our
facility in Vista, California. We seek to develop innovative new
and improved products for cell and system management along with
associated communication, display, current sensing and charging
tools.
Competition
Our
competitors in the lift equipment market are primarily major
lead-acid battery manufacturers, including Exide Technologies, East
Penn Manufacturing Company, EnerSys Corporation, and Crown Battery
Corporation. We do not believe that these suppliers offer
lithium-based products for lift equipment in any significant volume
to end users, equipment dealers, OEMs or battery distributors.
Several OEMs offer lithium-ion battery packs on Class 3 forklifts
for sale only with their own new forklifts. As the demand for
lithium-ion battery packs has increased, a number of [small]
lithium battery pack providers have entered the market, most of
whom we believe are suppliers of other power products and have
simply added a lithium product to their product lines.
The key
competitive factors in this market are performance, reliability,
durability, safety and price. We believe we compete effectively in
all of these categories in light of our experience with lithium-ion
technology, including our development capabilities and the
performance of our proprietary BMS. We believe that the UL Listing
covering our entire Class 3 Walkie LiFT pack product line is a
significant differentiating competitive advantage and we intend to
extend that advantage by seeking to obtain UL Listings for our
other LiFT pack products during calendar 2019. In addition, because
our BMS is not reliant on any specific battery cell chemistry, we
believe we can adapt rapidly to changes in advanced battery
technology or customer preferences.
Intellectual
Property
Our
success depends, at least in part, on our ability to protect our
core technology and intellectual property. To accomplish this, we
rely on a combination of patents pending, patent applications,
trade secrets, including know-how, employee and third party
nondisclosure agreements, copyright laws, trademarks, intellectual
property licenses and other contractual rights to establish and
protect our proprietary rights in our technology. In addition to
such factors as innovation, technological expertise and experienced
personnel, we believe that a strong patent position is important to
remain competitive.
As of
June 30, 2019, we have two issued patents and three trademark
registrations protecting the Flux Power name and logo. We intend to
file additional patent applications with respect to our technology,
including our next generation BMS 2.0, which we plan to release for
production later this year. We also intend to seek protection of
our intellectual property internationally in a broad range of
areas. We do not know whether any of our efforts will result in the
issuance of patents or whether the examination process will require
us to narrow our claims. Even if granted, there can be no assurance
that these pending patent applications will provide us with
protection. We have two granted patents: (i) a 12-volt battery
design and (ii) a battery display design. Based on next generation
BMS, we plan to file four utility patents within this
year.
Suppliers
We
obtain a limited number of components and supplies included in our
products from a small group of suppliers. During the year ended
June 30, 2019 we had three suppliers who accounted for more than
10% of our total purchases, on an individual basis. Purchases for
these three suppliers totaled $6,855,000 or 62% of our total
purchases.
During
the year ended June 30, 2018 we had three suppliers who accounted
for more than 10% of our total purchases, on an individual basis.
Purchases for these three suppliers totaled $2,285,000 or 50% of
our total purchases.
In the
past we have sourced lithium batteries from a number of suppliers.
We continuously assess our battery sourcing to improve consistency,
responsiveness, and quality.
Government
Regulations
Product Safety
Regulations. Our products are subject to product safety
regulations by Federal, state, and local organizations.
Accordingly, we may be required, or may voluntarily determine to
obtain approval of our products from one or more of the
organizations engaged in regulating product safety. These approvals
could require significant time and resources from our technical
staff and, if redesign were necessary, could result in a delay in
the introduction of our products in various markets and
applications.
Environmental
Regulations. Federal, state, and local regulations impose
significant environmental requirements on the manufacture, storage,
transportation, and disposal of various components of advanced
energy storage systems. Although we believe that our operations are
in material compliance with current applicable environmental
regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on
us or otherwise subject us to future liabilities.
Moreover, Federal,
state, and local governments may enact additional regulations
relating to the manufacture, storage, transportation, and disposal
of components of advanced energy storage systems. Compliance with
such additional regulations could require us to devote significant
time and resources and could adversely affect demand for our
products. There can be no assurance that additional or modified
regulations relating to the manufacture, storage, transportation,
and disposal of components of advanced energy systems will not be
imposed.
Occupational Safety and
Health Regulations. The California Division of Occupational
Safety and Health (Cal/OSHA) and other regulatory agencies have
jurisdiction over the operations of our Vista, California facility.
Because of the risks generally associated with the assembly of
advanced energy storage systems we expect rigorous enforcement of
applicable health and safety regulations. Frequent audits by or
changes, in the regulations issued by Cal/OSHA, or other regulatory
agencies with jurisdiction over our operations, may cause
unforeseen delays and require significant time and resources from
our technical staff.
Employees
As of
June 30, 2019, we had seventy-five (75) full-time employees. We
engage outside consultants for business development and operations
or other functions from time to time. None of our employees are
currently represented by a trade union.
Other
Information
Our
Internet address is www.fluxpower.com. We make available free of
charge on our website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). Other than the
information expressly set forth in this annual report, the
information contained, or referred to, on our website is not part
of this annual report.
The
public may also read and copy any materials we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other
information regarding issuers, such as us, that file electronically
with the SEC.
In June 2019,
we relocated our headquarters and production facility to 2685 South
Melrose Drive, Vista, California, where we are leasing
approximately 45,600 square feet with an option for an additional
15,300 square-feet of warehouse space, which we believe is
sufficient for our projected future growth. Monthly rent for the
new space is approximately $42,400 and escalates 3% per year
through the end of the lease term in January 2024. The new facility
is ISO 9001 certified. The
telephone number at our principal executive office is (760)
741-3589 (FLUX).
An
investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below, together with
all of the other information included in this report, before making
an investment decision. If any of the following risks actually
occur, our business, financial condition or results of operations
could suffer. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment. You
should read the section entitled “Special Note Regarding
Forward Looking Statements” above for a discussion of what
types of statements are forward-looking statements, as well as the
significance of such statements in the context of this
report.
Risk
Factors Relating to Our Business
We will need to raise additional capital to fund our
operations.
Our
continued operations and growth are dependent on our ability to
obtain additional capital from external sources including equity or
equity-linked financings and, credit facilities and/or to generate
positive cash flows from operating activities. We are pursuing
additional sources of funding, however, there is no guarantee that
we will be able
to obtain additional funds or that such funds will be available on
terms acceptable to us, or that shareholders will not experience
dilution as a result of funds raised through the sale of
securities. If such funds are not available, management will be
required to curtail its current operations and investments in
additional sales and marketing and product development resources
and capital expenditures, which may have a material adverse effect
on our future cash flows and results of operations, and its ability
to continue operating as a going concern.
We have a history of losses and negative working capital, and we
will require additional funding to support operations and provide
working capital.
As of
June 30, 2019, we had a cash balance of $102,000 and an accumulated
deficit of $39,076,000. In addition, as of June 30, 2019 and June
30, 2018, we had a negative working capital of $3,644,000 and
$7,446,000, respectively. We have historically experienced net
losses and until we generate sufficient revenue, we anticipate
continuing to experience losses in the future. Despite an increase
in our revenues of $5,199,000 or 126%, our net loss of $12,414,000
represented an increase of $5,449,000 or 78% in comparison to the
year ended June 30, 2018. Based on our current and planned level of
expenditures, we estimate that total financing proceeds of
approximately $12,000,000 will be required to fund current and
planned operations for the next twelve months. The Company does not
currently believe that its existing cash resources are sufficient
to meet its anticipated needs during the next twelve
months. We have substantial indebtedness and have relied on
our credit facilities to provide working capital. As of June 30,
2019 we had an outstanding balance of $6,405,000 under an Amended
and Restated Credit Facility Agreement dated March 28, 2019 (LOC)
with Esenjay Investment, LLC (Esenjay), a majority Stockholder and
a company owned and controlled by Michael Johnson, a
director. The outstanding
principal consists of amounts provided by the following
individuals: $2,405,000 by Esenjay, $2,000,000 by Cleveland
Capital, LP., minority stockholder and creditor (Cleveland),
$1,000,000 by Winn Exploration Co., $500,000 by Otto Candies Jr.,
$250,000 by Paul Candies and $250,000 by Brett Candies.
As of
September 12, 2019, we had $595,000 under the LOC available for
future draws with all parties combined. However, our ability to
borrow under the LOC is at the discretion of the Lenders and they
are under no obligation to disburse additional funds under the
LOC.
Our independent auditors have expressed substantial doubt about our
ability to continue as a going concern.
In
their audit opinion issued in connection with our financial
statements as of June 30, 2019 and June 30, 2018 and for the years
then ended, our independent
registered public accounting firm included a going concern
explanatory paragraph which stated there was substantial doubt
about our ability to continue as a going concern. We have prepared
our financial statements on a going concern basis that contemplates
the realization of assets and
the satisfaction of liabilities in the normal course of business
for the foreseeable future. Our financial statements do not include
any adjustments that would be necessary should we be unable to
continue as a going concern and, therefore, be required to
liquidate our assets and discharge our liabilities
in other than the normal course of business and at amounts
different from those reflected in our financial statements. If we
are unable to continue as a going concern, our stockholders may
lose all or a substantial portion or all of their
investment.
Our level of indebtedness and an event of default under our
existing credit facility and Factoring Agreement could adversely
affect our business, financial condition, results of operations or
liquidity.
We have
substantial indebtedness under our existing credit facility and
unsecured loan with Cleveland. On July 3, 2019, we entered into a
certain loan agreement with Cleveland, pursuant to which Cleveland
agreed to loan the Company a principal amount of $1,000,000 (the
Loan). In connection with the Loan, on July 3, 2019, the Company
issued Cleveland an unsecured short-term promissory in the amount
of $1,000,000 which was originally due on September 1, 2019. On
September 1, 2019, the Company and Cleveland agreed to extend the
maturity date to December 1, 2019. As of September 12, 2019, the
total principal amount due under the credit facility is and Loan is
$1,000,000.
We have
relied on our existing credit facility to provide working capital.
However, our ability to borrow under the credit facility is at the
discretion of Lenders. Also, the Lenders have no obligation to
disburse such funds and have the right not to advance funds under
the credit facility. In addition, on August 23, 2019, we entered a
Factoring Agreement (Factoring Agreement) with CSNK Working Capital
Finance Corp. d/b/a Bay View Funding (CSNK) for a factoring
facility under which CSNK will, from time to time, buy approved
receivables from the Company. The factoring facility provides for
the Company to have access to the lesser of (i) $3 million (Maximum
Credit) or (ii) the sum of all undisputed receivables purchased by
CSNK multiplied by the 90% (which percentages may be adjusted by
CSNK in its sole discretion). The Lenders and CSNK have a security
interest in our assets. Secured parties, upon an event of default,
will have a right to the collateral granted to them under the line
of credit, and we may lose our ownership interest in the
assets. A loss of our collateral will have material adverse effect
on our operations, our business and financial
condition.
We have realigned our marketing focus to a smaller number of
products and selling to customers that do not require extensive
product development.
Since
2010, we have been focused on providing customized solutions to
larger OEM customers. Recent experience has shown that we
could achieve higher revenue more quickly by focusing on a smaller
number of products and selling to customers that do not require
extensive and lengthy product development and negotiation periods.
As a response, we have determined to narrow our focus to product
segments including “lift equipment” and related
verticals. We feel that we are well positioned to address these
markets, which include applications such as industrial electric
vehicles like lift equipment and airport ground support equipment.
However, we cannot guarantee that we will be successful in
transitioning companies in these segments from legacy lead-acid
technologies to our advanced energy storage solutions.
Our success depends on the success of manufacturers, end-user
customers and OEM's that use our battery products and BMS in their
lift equipment and product offerings.
Because
our products are designed to be used in other products such as lift
equipment, our success depends on whether the providers of such
equipment and their equipment dealers incorporate our battery
products and BMS in their products. Although we strive to produce
high quality battery products and BMS, there is no guarantee that
end application manufacturers will accept our products. Our failure
to gain acceptance of our products from these manufacturers could
result in a material adverse effect on our results of
operations.
Additionally, even
if a manufacturer or their equipment dealers decide to use our
batteries, the manufacturer may not be able to market and sell its
products successfully. The manufacturer’s inability to market
and sell its products successfully could materially and adversely
affect our business and prospects because this manufacturer may not
order new products from us. Therefore, our business, financial
condition, results of operations and future success would be
materially and adversely affected.
Economic conditions may adversely affect consumer spending
and the overall general health of our retail customers, which, in
turn, may adversely affect our financial condition, results of
operations and cash resources.
Uncertainty about
the current and future global economic conditions may cause our
customers to defer purchases or cancel purchase orders for our
products in response to tighter credit, decreased cash availability
and weakened consumer confidence. Our financial success is
sensitive to changes in general economic conditions, both globally
and nationally. Recessionary economic cycles, higher interest
borrowing rates, higher fuel and other energy costs, inflation,
increases in commodity prices, higher levels of unemployment,
higher consumer debt levels, higher tax rates and other changes in
tax laws or other economic factors that may affect consumer
spending or buying habits could continue to adversely affect the
demand for our products. In addition, a number of our customers may
be impacted by the significant decrease in available credit that
has resulted from the current financial crisis. If credit pressures
or other financial difficulties result in insolvency for our
customers it could adversely impact our financial results. There
can be no assurances that government and consumer responses to the
disruptions in the financial markets will restore consumer
confidence.
We are dependent on a few end-user customers and "OEMs" for the
majority of our net revenues, and our success depends on demand
from OEMs and other users of our battery products.
Historically a
majority of our product sales have been generated from a small
number of OEMs and end-user customers, including two customers who
made up 77% of our sales for the year ended June 30, 2018, and four
end-user customers who made up 87% of our sales for the year ended
June 30, 2019. As a result, our success depends on continued demand
from this small group of customers and their willingness to
incorporate our battery products in their equipment. The loss of a
significant customer would have an adverse effect on our revenues.
There is no assurance that we will be successful in our efforts to
convince end users to accept our products. Our failure to gain
acceptance of our products could have a material adverse effect on
our financial condition and results of operations.
Additionally, OEMs,
their dealers and battery distributors may be subject to changes in
demand for their equipment which could significantly affect our
business, financial condition and results of
operations.
We do not have long term
contracts with our customers.
We do
not have long-term contracts with our customers. Future agreements
with respect to pricing, returns, promotions, among other things,
are subject to periodic negotiation with each customer. No
assurance can be given that our customers will continue to do
business with us. The loss of any of our significant customers will
have a material adverse effect on our business, results of
operations, financial condition and liquidity. In addition, the
uncertainty of product orders can make it difficult to forecast our
sales and allocate our resources in a manner consistent with actual
sales, and our expense levels are based in part on our expectations
of future sales. If our expectations regarding future sales are
inaccurate, we may be unable to reduce costs in a timely manner to
adjust for sales shortfalls.
Real or perceived hazards associated with Lithium-ion battery
technology may affect demand for our products.
Press
reports have highlighted situations in which lithium-ion batteries
in automobiles and consumer products have caught fire or exploded.
In response, the use and transportation of lithium-ion batteries
has been prohibited or restricted in certain circumstances. This
publicity has resulted in a public perception that lithium-ion
batteries are dangerous and unpredictable. Although we believe our
battery packs are safe, these perceived hazards may result in
customer reluctance to adopt our lithium-ion based
technology.
Our products may experience quality problems from time to time that
could result in negative publicity, litigation, product recalls and
warranty claims, which could result in decreased revenues and harm
to our brands.
A
catastrophic failure of our battery modules could cause personal or
property damages for which we would be potentially liable. Damage
to or the failure of our battery packs to perform to customer
specifications could result in unexpected warranty expenses or
result in a product recall, which would be time consuming and
expensive. Such circumstances could result in negative publicity or
lawsuits filed against us related to the perceived quality of our
products which could harm our brand and decrease demand for our
products.
We may be subject to
product liability claims.
If one
of our products were to cause injury to someone or cause property
damage, including as a result of product malfunctions, defects, or
improper installation, then we could be exposed to product
liability claims. We could incur significant costs and liabilities
if we are sued and if damages are awarded against us. Further, any
product liability claim we face could be expensive to defend and
could divert management’s attention. The successful assertion
of a product liability claim against us could result in potentially
significant monetary damages, penalties or fines, subject us to
adverse publicity, damage our reputation and competitive position,
and adversely affect sales of our products. In addition, product
liability claims, injuries, defects, or other problems experienced
by other companies in the solar industry could lead to unfavorable
market conditions for the industry as a whole, and may have an
adverse effect on our ability to attract new customers, thus
harming our growth and financial performance. Although we carry
product liability insurance, it may be insufficient in amount to
cover our claims.
Tariffs that might be imposed on lithium-ion batteries by the
United States government, including those resulting from trade
disputes with China, could have a material adverse effect on our
results of operations.
In
2018, the United States government announced tariffs on certain
steel and aluminum products imported into the United States, which
has led to reciprocal tariffs being imposed by the European Union
and other governments on products imported from the United States.
The United States government has implemented tariffs on goods
imported from China, and additional tariffs on goods imported from
China are under consideration.
Currently the
lithium-ion battery industry has not been subjected to tariffs
implemented by the United States government on goods imported from
China. If the U.S. and China are not able to resolve their
differences, new and additional tariffs may be put in place and
additional products, including lithium-ion batteries, may become
subject to tariffs. Since all of our lithium-ion batteries are
manufactured in China, potential tariffs on lithium-ion batteries
imported by us from China would increase our costs, require us to
increase prices to our customers or, if we are unable to do so,
result in lower gross margins on the products sold by
us.
The imposition of
additional tariffs by the United States could trigger the adoption
of tariffs by other countries as well. Any resulting escalation of
trade tensions, including a “trade war,” could have a
significant adverse effect on world trade and the world economy, as
well as on our results of operations. At this time, we cannot
predict how the recently enacted tariffs will impact our
business. Tariffs on components imported by us from
China could have a material adverse effect on our business and
results of operations.
We are currently dependent on suppliers for our battery cells, and
unwillingness or inability of this manufacturer to deliver our
battery cells at prices and volumes acceptable to us would have a
material adverse effect on our business, prospects and operating
results.
We do
not manufacture the battery cells used in our LiFT battery packs.
Our battery cells, which are an integral part of our battery
products and systems, are currently sourced from one manufacturer,
which is located in China and has distribution in the United
States. While we obtain components for our products and systems
from multiple sources whenever possible, we have spent a great deal
of time in developing and testing our battery cells that we receive
from our supplier. To date we have no qualified alternative sources
for our battery cells although we research and assess cells from
other suppliers on an ongoing basis. We generally do not maintain
long-term agreements with our limited source suppliers. While we
believe that we will be able to establish an additional supplier
relationship for our battery cells, we may be unable to do so in
the short term or at all at prices, quality or costs that are
favorable to us.
Changes
in business conditions, wars, governmental changes and other
factors beyond our control could also affect our suppliers’
ability to deliver components to us on a timely basis or cause us
to terminate our relationship with them and require us to find
replacements, which we may have difficulty doing. Furthermore, if
we experience significant increased demand, or need to replace our
existing suppliers, there can be no assurance that additional
supplies of component parts will be available when required on
terms that are favorable to us, at all, or that any supplier would
allocate sufficient supplies to us in order to meet our
requirements or fill our orders in a timely manner. In the past, we
have replaced certain suppliers because of their failure to provide
components that met our quality control standards. The loss of any
limited source supplier or the disruption in the supply of
components from these suppliers could lead to delays in the
deliveries of our battery products and systems to our customers,
which could hurt our relationships with our customers and also
materially adversely affect our business, prospects and operating
results.
Increases in costs, disruption of supply or shortage of any of our
raw materials, in particular lithium-iron phosphate cells, could
harm our business.
We may
experience increases in the costs or a sustained interruption in
the supply or shortage of raw materials. Any such increase or
supply interruption could materially negatively impact our
business, prospects, financial condition and operating results. For
instance, we are exposed to multiple risks relating to price
fluctuations for lithium-iron phosphate cells.
These
risks include:
●
the
inability or unwillingness of current battery manufacturers to
supply the number of lithium-ion phosphate cells required to
support our demand for such rechargeable battery cells
increases;
●
disruption
in the supply of cells due to quality issues or recalls by the
battery cell manufacturers; and
●
an
increase in the cost of raw materials, such as iron and phosphate,
used in lithium-iron phosphate cells.
We may be unable to successfully execute our long-term growth
strategy or increase our current revenue levels.
We can
provide no assurance that our revenues will grow. Our ability to
maintain our revenue levels or to grow in the future depends upon,
among other things, adequate capital to support current operations
and the continued success of our efforts to maintain our brand
image and bring new products to market and our ability to expand
within our current distribution channels.
Our success is highly dependent on continually developing new and
advanced products, technologies, and processes and failure to do so
may cause us to lose our competitiveness in the battery industry
and may cause our profits to decline.
To
remain competitive in the battery industry, it is important to
continually develop new and advanced products, technologies, and
processes. There is no assurance that competitors’ new
products, technologies, and processes will not render our existing
products obsolete or non-competitive. Alternately, changes in
legislative, regulatory or industry requirements or in competitive
technologies may render certain of our products obsolete or less
attractive. Our competitiveness in the renewable battery market
will rely upon our ability to enhance our current products,
introduce new products, and develop and implement new technologies
and processes. Our battery system predominately uses lithium-iron
phosphate cells. If our competitors develop alternative products
with more enhanced features than our battery system, our financial
condition and results of operations would be materially and
adversely affected.
The
research and development of new products and technologies is costly
and time consuming, and there are no assurances that our research
and development of new products will be either successful or
completed within anticipated timeframes, if at all. Our failure to
technologically evolve and/or develop new or enhanced products may
cause us to lose competitiveness in the battery market. In
addition, in order to compete effectively in the renewable battery
industry, we must be able to launch new products to meet our
customers’ demands in a timely manner. However, we cannot
provide assurance that we will be able to install and certify any
equipment needed to produce new products in a timely manner, or
that the transitioning of our manufacturing facility and resources
to full production under any new product programs will not impact
production rates or other operational efficiency measures at our
manufacturing facility. In addition, new product introductions and
applications are risky, and may suffer from a lack of market
acceptance, delays in related product development and failure of
new products to operate properly. Any failure by us to successfully
launch new products, or a failure by our customers to accept such
products, could adversely affect our results.
Our business will be adversely affected if we are unable to protect
our intellectual property rights from unauthorized use or
infringement by third parties.
Our
success depends, at least in part, on our ability to protect our
core technology and intellectual property. Any failure to
protect our intellectual proprietary rights could result in our
competitors offering similar products, potentially resulting in the
loss of some of our competitive advantage and a decrease in our
revenue, which would adversely affect our business, prospects,
financial condition and operating results. We rely on a combination
of patents, patent applications, trade secrets, including know-how,
employee and third party nondisclosure agreements, copyright laws,
trademarks, intellectual property licenses and other contractual
rights to establish and protect our proprietary rights in our
technology.
The
protections provided by patent laws will be important to our future
opportunities. However, such patents and agreements and various
other measures we take to protect our intellectual property from
use by others may not be effective for various reasons, including
the following:
●
the
patents we have been granted may be challenged, invalidated or
circumvented because of the pre-existence of similar patented or
unpatented intellectual property rights or for other
reasons;
●
the
costs associated with enforcing patents, confidentiality and
invention agreements or other intellectual property rights may make
aggressive enforcement impracticable; and
●
current
and future competitors may independently develop similar technology
and/or duplicate our systems in a way that circumvents our
patents.
Our patent applications may not result in issued patents, which may
have a material adverse effect on our ability to prevent others
from commercially exploiting products similar to ours.
We
cannot be certain that we are the first creator of inventions
covered by pending patent applications or the first to file patent
applications on these inventions, nor can we be certain that our
pending patent applications will result in issued patents or that
any of our issued patents will afford protection against a
competitor. In addition, patent applications that we intend to file
in foreign countries are subject to laws, rules and procedures that
differ from those of the United States, and thus we cannot be
certain that foreign patent applications related to issue United
States patents will be issued. Furthermore, if these patent
applications issue, some foreign countries provide significantly
less effective patent enforcement than in the United
States.
Legal
and other factors related to our technologies are complex and the
breadth of claims of our patent applications will be subject to
review. As a result, we cannot be certain that the patent
applications that we file will result in patents being issued, or
that our patents and any patents that may be issued to us in the
near future will afford protection against competitors with similar
technology. In addition, patents issued to us may be infringed upon
or designed around by others and others may obtain patents that we
need to license or design around, either of which would increase
costs and may adversely affect our business, prospects, financial
condition and operating results.
We rely on trade secret protections through confidentiality
agreements with our employees, customers and other parties; the
breach of such agreements could adversely affect our business and
results of operations.
We rely
on trade secrets, which we seek to protect, in part, through
confidentiality and non-disclosure agreements with our employees,
customers and other parties. There can be no assurance that these
agreements will not be breached, that we would have adequate
remedies for any such breach or that our trade secrets will not
otherwise become known to or independently developed by
competitors. To the extent that consultants, key employees or other
third parties apply technological information independently
developed by them or by others to our proposed projects, disputes
may arise as to the proprietary rights to such information that may
not be resolved in our favor. We may be involved from time to time
in litigation to determine the enforceability, scope and validity
of our proprietary rights. Any such litigation could result in
substantial cost and diversion of effort by our management and
technical personnel.
Our production capacity might not be able to meet with growing
market demand or changing market conditions.
We
cannot give assurance that our production capacity will be able to
meet our obligations and the growing market demand for our products
in the future. Furthermore, we may not be able to expand our
production capacity in response to the changing market conditions.
If we fail to meet demand from our customers, we may lose our
market share.
Our business depends substantially on the continuing efforts of the
members of our senior management team, and our business may be
severely disrupted if we lose their services.
We
believe that our success is largely dependent upon the continued
service of the members of our senior management team, who are
critical to establishing our corporate strategies and focus, and
ensuring our continued growth. Our continued success will depend on
our ability to attract and retain a qualified and competent
management team in order to manage our existing operations and
support our expansion plans. Although we are not aware of any
change, if any of the members of our senior management team are
unable or unwilling to continue in their present positions, we may
not be able to replace them readily. Therefore, our business may be
severely disrupted, and we may incur additional expenses to recruit
and retain their replacement. In addition, if any of the members of
our senior management team joins a competitor or forms a competing
company, we may lose some of our customers.
If we are forced to implement
workforce reductions, our staff resources will be stretched making
our ability to comply with legal and regulatory requirements as a
Public Company difficult.
There
can be no assurance that our management team will be able to
implement and affect programs and policies in an effective and
timely manner especially if subject to workforce reductions, that
adequately respond to increased legal, regulatory compliance and
reporting requirements imposed by such laws and regulations. Our
failure to comply with such laws and regulations could lead to the
imposition of fines and penalties and further result in the
deterioration of our business.
Compliance with changing regulations concerning corporate
governance and public disclosure may result in additional
expenses.
There
have been changing laws, regulations and standards relating to
corporate governance and public disclosure, including the
(Sarbanes-Oxley) Act of 2002, new regulations promulgated by the
SEC and rules promulgated by the national securities exchanges.
These new or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of
specificity, and, as a result, their application in practice may
evolve over time as new guidance is provided by regulatory and
governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. As a
result, our efforts to comply with evolving laws, regulations and
standards are likely to continue to result in increased general and
administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance
activities. Members of our Board of Directors and our chief
executive officer and chief financial officer could face an
increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty
attracting and retaining qualified directors and executive
officers, which could harm our business. If the actions we take in
our efforts to comply with new or changed laws, regulations and
standards differ from the actions intended by regulatory or
governing bodies, we could be subject to liability under applicable
laws or our reputation may be harmed.
In
addition, Sarbanes-Oxley specifically requires, among other things,
that we maintain effective internal controls for financial
reporting and disclosure of controls and procedures. In particular,
we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management to
report on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of Sarbanes-Oxley. Our
testing, or the subsequent testing by our independent registered
public accounting firm, when required, may reveal deficiencies in
our internal controls over financial reporting that are deemed to
be material weaknesses. Our compliance with Section 404 will
require that we incur substantial accounting expense and expend
significant management efforts. We currently do not have an
internal audit group, and we will need to hire additional
accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are
not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public
accounting firm identifies deficiencies in our internal controls
over financial reporting that are deemed to be material weaknesses,
the market price of our stock could decline, and we could be
subject to sanctions or investigations by the SEC or other
regulatory authorities, which would require additional financial
and management resources.
We may be required to obtain the approval of various government
agencies to market our products.
Our
products are subject to product safety regulations by Federal,
state, and local organizations. Accordingly, we may be required, or
may voluntarily determine to, obtain approval of our products from
one or more of the organizations engaged in regulating product
safety. These approvals could require significant time and
resources from our technical staff, and, if redesign were
necessary, could result in a delay in the introduction of our
products in various markets and applications. There can be no
assurance that we will obtain any or all of the approvals that may
be required to market our products.
We need to comply with various Federal, state and local government
environmental and other regulations and we may incur significant
costs to do so.
Federal, state, and
local regulations impose significant environmental requirements on
the manufacture, storage, transportation, and disposal of various
components of advanced energy storage systems. Although we believe
that our operations are in material compliance with current
applicable environmental regulations, there can be no assurance
that changes in such laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future
liabilities. Moreover, Federal, state, and local governments may
enact additional regulations relating to the manufacture, storage,
transportation, and disposal of components of advanced energy
storage systems. Compliance with such additional regulations could
require us to devote significant time and resources and could
adversely affect demand for our products. There can be no assurance
that additional or modified regulations relating to the
manufacture, storage, transportation, and disposal of components of
advanced energy systems will not be imposed.
We may face significant costs relating to Occupational Safety and
Health Regulations.
Cal/OSHA and other
regulatory agencies have jurisdiction over the operations of our
Vista, California facility. Because of the risks generally
associated with the assembly of advanced energy storage systems, we
expect rigorous enforcement of applicable health and safety
regulations. Frequent audits by or changes in the regulations
issued by Cal/OSHA, or other regulatory agencies with jurisdiction
over our operations, may cause unforeseen delays and require
significant time and resources from our technical
staff.
Natural
disasters such as fires, earthquakes and
flooding and other catastrophic events or other
events outside of our control may damage our sole facility or the
facilities of third parties on which we depend.
Our
sole production facility is located in southern California near
major geologic faults that have experienced earthquakes in the
past. An earthquake or other natural disaster or power shortages or
outages could disrupt our operations or impair critical systems.
Any of these disruptions or other events outside of our control
could affect our business negatively, harming our operating
results. In addition, if our sole facility, or the facilities of
our suppliers, third-party service providers or customers, is
affected by natural disasters, such as earthquakes, tsunamis, power
shortages or outages, floods or monsoons, public health crises,
such as pandemics and epidemics, political crises, such as
terrorism, war, political instability or other conflict, or other
events outside of our control, our business and operating results
could suffer.
Unfavorable macroeconomic conditions, political crises and other
catastrophic events could also weaken our suppliers and customers
on which we depend.
Various
macroeconomic factors could adversely affect our business and the
business of our suppliers and customers, including changes in
inflation, interest rates and overall economic conditions and
uncertainties, including those resulting from political instability
(including workforce uncertainty) and the current and future
conditions in the global financial markets.
Interest
rates and the ability to access credit markets could also adversely
affect the ability of our suppliers and customers to run their
businesses. Similarly, these macroeconomic factors could affect the
ability of our current or potential future third-party
manufacturers, sole source or single source suppliers to remain in
business, or otherwise manufacture or supply the components of our
products. Failure by any of them to remain in business could have a
material adverse effect on our business.
Moreover,
these types of events could negatively impact consumer spending
regionally or globally, which could adversely impact our operating
results.
Security breaches, loss of data and other disruptions could
compromise sensitive information related to our business, prevent
us from accessing critical information or expose us to liability,
which could adversely affect our business and our
reputation.
We
utilize information technology systems and networks to process,
transmit and store electronic information in connection with our
business activities. As the use of digital technologies has
increased, cyber incidents, including deliberate attacks and
attempts to gain unauthorized access to computer systems and
networks, have increased in frequency and sophistication. These
threats pose a risk to the security of our systems and networks and
the confidentiality, availability and integrity of our data, all of
which are vital to our operations and business strategy. There can
be no assurance we will succeed in preventing cyber-attacks or
successfully mitigating their effects.
Despite
implementing security measures, any of the internal computer
systems belonging to us or our suppliers are vulnerable to damage
from computer viruses, unauthorized access, natural disasters,
terrorism, war, and telecommunication and electrical failure. Any
system failure, accident, security breach or data breach that
causes interruptions could result in a material disruption of our
product development programs. Further, our information technology
and other internal infrastructure systems, including firewalls,
servers, leased lines and connection to the Internet, face the risk
of systemic failure, which could disrupt our operations. If any
disruption or security breach results in a loss or damage to our
data or applications, or inappropriate disclosure of confidential
or proprietary information, we may incur resulting liability, and
competitive position may be adversely affected, and the further
development of our products may be delayed. Furthermore, we may
incur additional costs to remedy the damage caused by these
disruptions or security breaches.
Risks
Related to Our Common Stock and Market
Today, our shares of common stock rarely trade given the lack of
liquidity and in the future, market price of our common
stock can become volatile, leading to the possibility of its value
being depressed at a time when you may want to sell your
holdings.
The
market price of our common stock can become volatile. Numerous
factors, many of which are beyond our control, may cause the market
price of our common stock to fluctuate significantly. These factors
include:
●
our
earnings releases, actual or anticipated changes in our earnings,
fluctuations in our operating results or our failure to meet the
expectations of financial market analysts and
investors;
●
changes
in financial estimates by us or by any securities analysts who
might cover our stock;
●
speculation
about our business in the press or the investment
community;
●
significant
developments relating to our relationships with our customers or
suppliers;
●
stock
market price and volume fluctuations of other publicly traded
companies and, in particular, those that are in our
industry;
●
limited
“public float” in the hands of a small number of
persons whose sales or lack of sales could result in positive or
negative pricing
pressure on the market price for our common stock;
●
customer
demand for our products;
●
investor
perceptions of our industry in general and our Company in
particular;
●
general
economic conditions and trends;
●
announcements
by us or our competitors of new products, significant acquisitions,
strategic partnerships or divestitures;
●
changes
in accounting standards, policies, guidance, interpretation or
principles;
●
loss
of external funding sources;
●
sales
of our common stock, including sales by our directors, officers or
significant stockholders; and
●
additions
or departures of key personnel.
You may experience dilution as a result of
our plans to fund our continued operations and growth through the
sale of equity securities.
In
order to continue operations and fund any growth, we will need to
raise additional capital through the sale of shares of our common
stock, securities convertible into or exchangeable for our common
stock or the issuance of debt securities. If we sell shares or
other securities at a price per share that is less than our public
per share, and our investors will experience dilution. If we issue
shares or other securities in the future, they could have rights
superior to those of our common stockholders. The price and terms
under which we sell additional shares of our common stock, or
securities convertible or exchangeable into common stock, may harm
our existing shareholders.
The ownership of our stock is highly concentrated in our
management, and we have one controlling stockholder.
As
of September 12, 2019, our present directors and executive
officers, and their respective affiliates beneficially owned
approximately 66.7% of our outstanding common stock, including
common shares underlying options, warrants and convertible debt
that were exercisable or convertible or which would become
exercisable or convertible within 60 days. More specifically,
Michael Johnson, our director and beneficial owner of Esenjay,
beneficially owns approximately 61.4% of such outstanding common
stock. As a result of their ownership, our directors and
executive officers and their respective affiliates collectively,
and Esenjay, individually, are able to significantly influence all
matters requiring stockholder approval, including the election of
directors and approval of significant corporate
transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in
control.
We do not intend to pay dividends on shares of our common stock for
the foreseeable future.
We have
never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings to fund the
operation and expansion of our business and, therefore, we do not
anticipate paying cash dividends on shares of our common stock in
the foreseeable future.
Our common stock is illiquid and thinly traded which may adversely
affect the price of our common stock.
Our
common stock currently is quoted on the OTCQB under the symbol
“FLUX.” We have a limited trading history on a trading
market that does not represent an “established trading
market,” a limited current public float, volatility in the
bid and asked prices our shares are very thinly traded, making it
difficult for investors to buy and sell our shares and increasing
the risks of losing all or a substantial portion of their
investment. In addition, potential dilutive effects of future sales
of shares of common stock by us and our stockholders, and
subsequent sale of common stock by the holders of warrants and
options, could have an adverse effect on the price of our
securities, which could hinder our ability to raise additional
capital to fully implement our business, operating and development
plans.
Penny stock regulations affect our stock price, which may make it
more difficult for investors to sell their stock.
Broker-dealer
practices in connection with transactions in “penny
stocks” are regulated by certain penny stock rules adopted by
the SEC. Penny stocks generally are equity securities with a price
per share of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ Stock
Market, provided that current price and volume information with
respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny
stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market
value of each penny stock held in the customer’s account. In
addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may
have the effect of reducing the level of trading activity in the
secondary market for a stock that becomes subject to the penny
stock rules. Our securities are subject to the penny stock rules,
and investors may find it more difficult to sell their
securities.
Preferred Stock may be issued under our Articles of
Incorporation.
Our
Articles of Incorporation authorize the issuance of up to 500,000
shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of
issuance. These terms may include voting rights including the right
to vote as a series on particular matters, preferences as to
dividends and liquidation, conversion rights, redemption rights and
sinking fund provisions. The issuance of any preferred stock could
diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock.
We were a “shell company” and are subject to additional
restrictions under Rule 144 on resales of our Restricted
Securities.
We
were a “shell company” immediately prior to the reverse
acquisition of Flux Power, Inc. in 2012 (Reverse Acquisition) and
resale of our securities are subject to additional restrictions
under Rule 144 which provides that no sales of our restricted
securities could be sold until we have (1) filed all reports and
other materials required to be filed by section 13 or 15(d) of the
Exchange Act, as applicable, during the preceding 12 months other
than Form 8-K reports; and (2) filed current “Form 10
information” with the Commission. If we are not current in
our reporting obligations and you hold restricted securities, you
may not be able to resell your restricted securities under Rule 144
and it may be more difficult for you to sell your
securities.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
The
Company’s corporate headquarters totals 45,600 square feet
and is located in Vista, California. Effective June 28,
2019, the Company entered into a 88 month lease agreement for this
facility with average monthly rent payments of approximately
$44,000 per month and paid a security deposit of $127,000, or
approximately 3 months of rent. Prior to this lease, the
Company’s corporate headquarters had a total of 22,100 square
feet with an average rent expense of approximately $15,000 per
month.
The
Company also subleased space to a related party, Epic Boats, on a
month-to-month basis at a rate of 10% of lease expense during
Fiscal 2019. The sublease ended when the Company moved to the new
facility.
Total
rent expense was approximately $168,000 and $160,000 for the years
ended June 30, 2019 and 2018, respectively, net of sublease
income.
ITEM 3 - LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to
time that may harm our business. To the best knowledge of
management, there are no material legal proceedings pending against
the Company.
ITEM 4 - MINE
SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market
Data
Our
common stock is quoted on the OTCQB under the stock symbol
“FLUX.” The following table sets forth the range of the
high and low prices for our common stock during each quarter for
the period July 1, 2017 through June 30, 2019, as set forth below,
which has been adjusted retroactively to reflect the 1 for 10
reverse stock split, effective July 11, 2019. Such
prices do not represent actual transactions, and do not include
retail mark-ups, mark-downs or commissions.
|
|
|
|
|
Fiscal
year ended June 30, 2019
|
|
|
|
First
quarter
|
$30.60
|
$14.50
|
|
Second
quarter
|
$21.00
|
$13.50
|
|
Third
quarter
|
$18.50
|
$12.00
|
|
Fourth
quarter
|
$16.00
|
$7.50
|
|
|
|
|
|
Fiscal
year ended June 30, 2018
|
|
|
|
First
quarter
|
$10.00
|
$3.90
|
|
Second
quarter
|
$6.30
|
$1.40
|
|
Third
quarter
|
$5.20
|
$3.50
|
|
Fourth
quarter
|
$33.50
|
$4.40
|
Stockholders
The
approximate number of record holders of our common stock as of
September 12, 2019 was 1,383, based on information provided by our
transfer agent. The foregoing number of record holders does not
include an unknown number of stockholders who hold their stock in
“street name.”
Recent
Sales of Unregistered Securities
In
addition, to the securities previously reported on a Quarterly
Report on Form 10-Q or in a Current Report on Form 8-K, the Company
issued the following shares of common stock:
On
July 3, 2019, we issued Cleveland a three-year warrant (the
Cleveland Warrant) to purchase the Company’s common stock in
a number equal to one-half percent (0.5%) of the number of shares
of common stock outstanding after giving effect to the total number
of shares of common stock sold in a public offering. The Cleveland
Warrant had an exercise price equal to the per share public
offering price. On September 1, 2019, the Cleveland Warrant was
amended and restated to change the warrant coverage from 0.5% to 1%
of the number of shares of common stock outstanding after giving
effect to the total number of shares of common stock sold in the
next private or public offering (Offering). In addition, the
exercise price was also changed to equal the per share price of
common stock sold in the Offering. The Warrant and the common stock
underlying the Cleveland Warrant, as amended, have not been
registered under the Securities Act of 1933, as amended (Securities
Act), and may not be offered or sold in the United States absent
registration or an applicable exemption from the registration
requirements of the Securities Act. Such securities were offered
and sold in reliance upon exemptions from registration pursuant to
Rule 506(b) of Regulation D promulgated under Section 4(a)(2) under
the Securities Act.
Purchases
of Equity Securities
We have
never repurchased any of our equity securities.
Dividends
The
Company did not declare or pay dividends on its common stock during
fiscal years 2019 and 2018 and we presently do not expect to
declare or pay such dividends in the foreseeable future and expect
to reinvest all undistributed earnings to expand our operations,
which the management believes would be of the most benefit to our
stockholders. The declaration of dividends, if any, will be subject
to the discretion of our Board of Directors, which may consider
such factors as our results of operations, financial condition,
capital needs and acquisition strategy, among others.
Equity
Compensation Plan Information
Information for our
equity compensation plans in effect as of June 30, 2019 is as
follows:
|
|
|
|
|
|
|
Number
of securities
to be
issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column a)
|
|
Equity compensation plans approved by security
holders(1)
|
550,689
|
11.14
|
449,311
|
|
Equity compensation plans not approved by security
holders(2)
|
29,482
|
9.37
|
-
|
|
|
|
|
|
|
Total
|
580,171
|
11.05
|
449,311
|
(1)
An additional
211,800 incentive stock options (ISO) and 80,700 non-qualified
stock options (NQSO) of the Company’s common stock was
granted under the 2014 Option Plan during the fiscal year ended
June 30, 2018. We granted 147,411 incentive stock options and
97,616 non-qualified stock options under the 2014 plan during
Fiscal 2019. The 2014 Option Plan was approved February 17, 2015,
and was amended on October 25, 2017.
(2)
Consists of 7,200
options granted under the 2010 Stock Option Plan (2010 Option Plan)
and assumed by the Company in a Reverse Acquisition. An additional
30,700 non-qualified options were issued under the 2010 Option
Plan.
ITEM 6 - SELECTED FINANCIAL DATA
As a
Smaller Reporting Company as defined by Rule12b-2 of the Exchange
Act and in item 10(f)(1) of Regulation S-K, we are electing scaled
disclosure reporting obligations and therefore are not required to
provide the information requested by this Item.
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management
believes is relevant to an assessment and understanding of the
Company’s results of operations and financial condition. The
discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto contained in this Annual
Report on Form 10-K.
Some of the statements contained in the following discussion of the
Company’s financial condition and results of operations refer
to future expectations or include other
“forward-looking” information. Those statements are
subject to known and unknown risks, uncertainties and other factors
that could cause the actual results to differ materially from those
contemplated, including, but not limited to, those discussed in
Part I, Item 1A of this report under the heading “Risk
Factors,” which are incorporated herein by reference. See
“Special Note regarding Forward-Looking Statements”
included in this Report on Form 10-K for a discussion of factors to
be considered when evaluating forward-looking information detailed
below. These factors could cause our actual results to differ
materially from the forward-looking statements.
Overview
We
design, develop and sell rechargeable lithium-ion energy storage
systems for industrial applications, such as, electric fork lifts
and airport ground support equipment. We have structured our
business around our BMS which provides three critical functions to
our battery systems: cell balancing, monitoring and error
reporting. Using our proprietary management technology, we are able
to offer complete integrated energy storage solutions or custom
modular standalone systems to our customers. We have also developed
a suite of complementary technologies and products that accompany
our core products.
The
Company effected a 1-for-10 reverse split of its common stock and
preferred stock on July 11, 2019 (2019 Reverse Split). No
fractional shares were issued in connection with the 2019 Reverse
Split. If, as a result of the 2019 Reverse Split, a stockholder
would otherwise have been entitled to a fractional share, each
fractional share was rounded up. The 2019 Reverse Split resulted in
a reduction of our outstanding shares of common stock from
51,000,868 to 5,101,580. In addition, it resulted in a reduction of
our authorized shares of common stock from 300,000,000 to
30,000,000, and a reduction of our authorized shares of preferred
stock from 5,000,000 to 500,000. The par value of the Company's
stock remained unchanged at $0.001. In addition, by reducing the
number of the Company's outstanding shares, the Company's loss per
share in all periods presented was increased by a factor of
ten.
Recent
Financing Activities
In
connection with our private placement offering in December 2018 and
January 2019 (Offering), we sold a total of 339,257 shares of our
common stock to accredited investors for total gross proceeds of
$4,391,820. A portion of the proceeds from the Offering was used to
repay in full approximately $2.6 million in borrowings and accrued
interest under two short-term credit facilities provided by
Cleveland and a stockholder.
On
March 22, 2018, Flux Power entered into a credit facility agreement
with Esenjay Investments, LLC, (Esenjay) with a maximum borrowing
amount of $5,000,000. Proceeds from the credit facility were to be
used to purchase inventory and related operational expenses and
accrue interest at a rate of 15% per annum (the Inventory Line of
Credit). The outstanding balance of the Inventory Line of Credit
and all accrued interest was due and payable on March 31, 2019.
Funds received from Esenjay since December 5, 2017 were transferred
to the Inventory Line of Credit resulting in $2,405,000 outstanding
as of June 30, 2018 and $2,595,000 available for future draws. On
October 31, 2018, the Company entered into an Early Note Conversion
Agreement (the Early Note Conversion Agreement) with Esenjay,
pursuant to which Esenjay agreed to immediately exercise its
conversion rights under the Unrestricted and Open Line of Credit,
dated September 24, 2012 to convert the outstanding principal
amount of $7,975,000 plus accrued and unpaid interest of $1,041,280
for 1,502,714 shares of the Company’s common stock. The
Company followed FASB ASC Topic No.470, Debt to record the early conversion of
debt to equity. The Early Note Conversion Agreement had an induced
conversion which included issuance of 26,802 additional shares of
common stock and recorded as interest expense at the stock’s
fair value of $466,351 at October 31, 2018.
On
March 28, 2019, the Company, entered into an amended and restated
credit facility agreement (Amended and Restated Credit Facility
Agreement) with Esenjay and, Cleveland Capital, L.P., a Delaware
limited partnership and a minority stockholder of the Company
(Cleveland and Esenjay, together with additional parties that may
join as a lender, the Lenders) to amend and restate the terms of
the Credit Facility Agreement dated March 22, 2018 between the
Company and Esenjay (the Original Agreement) in its entirety. The
Original Agreement was amended, among other things, to (i) increase
the maximum principal amount available under line of credit from
$5,000,000 to $7,000,000 (LOC), (ii) add Cleveland as additional
lender to the LOC pursuant to which each lender has a right to
advance a pro rata amount of the principal amount available under
the LOC, (iii) extend the maturity date from March 31, 2019 to
December 31, 2019, and (iv) to provide for additional parties to
become a Lender under the Amended and Restated Credit Facility
Agreement. In connection with the LOC, on March 28, 2019 the
Company issued a secured promissory note to Cleveland (the
Cleveland Note), and an amended and restated secured promissory
note to Esenjay which amended and superseded the secured promissory
note dated March 22, 2018 (Esenjay Note and together with the
Cleveland Note, the Notes). The Notes provided for issuance of
principal of up to $7,000,000 or such lesser principal amount
advanced by the respective Lender under the Amended and Restated
Credit Facility Agreement (the Principal Amount). The Notes bear an
interest of fifteen percent (15%) per annum and have a maturity
date of December 31, 2019. The outstanding balance as of June 30,
2019 and September 12, 2019 was $6,405,000. The outstanding
principal consists of amounts provided by the following
individuals: $2,405,000 by Esenjay, $2,000,000 by Cleveland
Capital, LP., minority stockholder and creditor (Cleveland),
$1,000,000 by Winn Exploration Co., $500,000 by Otto Candies Jr.,
$250,000 by Paul Candies and $250,000 by Brett Candies.
As
of September 12, 2019, we had $595,000 under the LOC available for
future draws with all parties combined.
On July
3, 2019, the Company entered into a certain loan agreement with
Cleveland pursuant to which Cleveland agreed to loan the Company
$1,000,000 (the Loan). In connection with the Loan, on July 3,
2019, the Company issued Cleveland an unsecured short-term
promissory in the amount of $1,000,000 (the Unsecured Promissory
Note). The promissory note bears an interest rate of 15.0% per
annum and was originally due on September 1, 2019, unless repaid
earlier from a percentage of proceeds from certain identified
accounts receivable. In connection with the Loan, the Company
issued Cleveland a three-year warrant (the Cleveland Warrant) to
purchase the Company’s common stock in a number equal to
one-half percent (0.5%) of the number of shares of common stock
outstanding after giving effect to the total number of shares of
common stock sold in a public offering. The Cleveland Warrant has
an exercise price equal to the per share public offering price.
Effective September 1, 2019, the Company entered into that certain
Amendment No. 1 to the Unsecured Promissory Note pursuant to which
the maturity date was modified from September 1, 2019 to December
1, 2019 (the Amendment). In
connection with the Amendment, the Company replaced the Cleveland
Warrant with a certain Amended and Restated Warrant Certificate
(the Amended Warrant). The Amended Warrant increased the warrant
coverage from 0.5% to 1% of the number of shares of common stock
outstanding after giving effect to the total number of shares of
common stock sold in the next private or public offering
(Offering). In addition, the exercise price was also changed to
equal the per share price of common stock sold in the Offering. As
of September 12, 2019, $1,000,000 in principal remains outstanding
under the Loan.
On
August 23, 2019, the Company entered into a Factoring Agreement
(Factoring Agreement) with CSNK Working Capital Finance Corp. d/b/a
Bay View Funding (CSNK) for a factoring facility under which CSNK
will, from time to time, buy approved receivables from the Company.
The factoring facility provides for the Company to have access to
the lesser of (i) $3 million (Maximum Credit) or (ii) the sum of
all undisputed receivables purchased by CSNK multiplied by the 90%
(which percentages may be adjusted by CSNK in its sole discretion).
Upon receipt of any advance, Company will have sold and assigned
all of its rights in such receivables and all proceeds thereof. The
factoring facility is secured by the Company’s accounts,
equipment, inventory, financial assets, chattel paper, electronic
chattel paper, letters of credit, letters of credit rights, general
intangibles, investment property, deposit accounts, documents,
instruments, supporting obligations, commercial tort claims, the
reserve, motor vehicles, all books, records, files and computer
data relating to the foregoing, and all proceeds of the foregoing.
Company is required to pay CSNK a facility fee of 1.0% of the
Maximum Credit upon execution of the Factoring Agreement and a
factoring fee of 0.75% of the face value of purchased receivables
for 1st 30-days such receivables are outstanding after purchase and
0.35% for each 15-days thereafter until the receivables are repaid
in full or otherwise repurchased by Company or otherwise written
off by CSNK. In addition, Company is required to pay financing fees
on the outstanding advances equal to a floating rate per annum
equal to the Prime + 2.0% (8.0% floor). In the event, the aggregate
factoring fee and financing fee is less than 0.5% of the Maximum
Credit in any one month, Company will pay CSNK the difference for
such month. CSNK has the right to demand repayment of any purchased
receivables which remain unpaid for 90-days after purchase or with
respect to which any account debtor asserts a dispute.
The
factoring facility is for an initial term of twelve months and will
renew on a year to year basis thereafter, unless terminated in
accordance with the Factoring Agreement. Company may terminate the
Factoring Agreement at any time upon 60 days prior written notice
and payment to CSNK of an early termination fee equal to 0.5% of
the Maximum Credit multiplied by the number of months remaining in
the current term. As of September 11, 2019, the Company has
received $302,600 for the sale of receivables pursuant to Factoring
Agreement.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations are based upon our Financial Statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and the related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our
estimates based on its historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies and estimates
affect the preparation of our financial statements:
Accounts Receivable
Accounts receivable
are carried at their estimated collectible amounts. The Company has
not experienced collections issues related to its accounts
receivable and has not recorded an allowance for doubtful accounts
during the fiscal years ended June 30, 2019 and 2018.
Inventories
Inventories consist
primarily of battery management systems and the related
subcomponents, and are stated at the lower of cost (first-in,
first-out) or net realizable value. The Company evaluates
inventories to determine if write-downs are necessary due to
obsolescence or if the inventory levels are in excess of
anticipated demand at market value based on consideration of
historical sales and product development plans. The Company
recorded an adjustment related to obsolete inventory in the amount
of approximately $90,000 and $27,000 during the years ended June
30, 2019 and 2018, respectively.
Revenue Recognition
On July
1, 2018, the Company adopted the new accounting standard FASB
Accounting Standards Codification (ASC) Topic 606, Revenue from
Contracts with Customers (ASC 606) for all contracts using the
modified retrospective method. Based on the Company’s
analysis of contracts with customers in prior periods, there was no
cumulative effect adjustment to the opening balance of the
Company’s accumulated deficit as a result of the adoption of
this new standard.
The
Company derives its revenue from the sale of products to customers.
The Company sells its products primarily through a distribution
network of equipment dealers, OEMs and battery distributors in
North America. The Company recognizes revenue for products when all
the significant risks and rewards have been transferred to the
customer, no continuing managerial involvement usually associated
with ownership of the goods is retained, no effective control over
the goods sold is retained, the amount of revenue can be measured
reliably, it is probable that the economic benefits associated with
the transactions will flow to the Company and the costs incurred or
to be incurred in respect of the transaction can be measured
reliably.
Product
revenue is recognized as a distinct single performance obligation
which represents the point in time that our customer receives
delivery of the products. Our customers do have a right to return
product but our returns have historically been
insignificant.
Product Warranties
The
Company evaluates its exposure to product warranty obligations
based on historical experience. Our products, primarily lift
equipment packs, are warrantied for five years unless modified by a
separate agreement. As of June 30, 2019 and 2018, the Company
carried warranty liability of approximately $361,000 and $158,000,
respectively, which is included in accrued expenses on the
Company’s consolidated balance sheets.
Stock-based Compensation
Pursuant to the
provisions of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic No. 718-10,
Compensation-Stock
Compensation, which establishes accounting for equity
instruments exchanged for employee service, we utilize the
Black-Scholes option pricing model to estimate the fair value of
employee stock option awards at the date of grant, which requires
the input of highly subjective assumptions, including expected
volatility and expected life. Changes in these inputs and
assumptions can materially affect the measure of estimated fair
value of our share-based compensation. These assumptions are
subjective and generally require significant analysis and judgment
to develop. When estimating fair value, some of the assumptions
will be based on, or determined from, external data and other
assumptions may be derived from our historical experience with
stock-based payment arrangements. The appropriate weight to place
on historical experience is a matter of judgment, based on relevant
facts and circumstances.
Common
stock or equity instruments such as warrants issued for services to
non-employees are valued at their estimated fair value at the
measurement date (the date when a firm commitment for performance
of the services is reached, typically the date of issuance, or when
performance is complete). If the total value exceeds the par value
of the stock issued, the value in excess of the par value is added
to the additional paid-in-capital.
Segment
and Related Information
We
operate as a single reportable segment.
Comparison
of Results of Operations of the Years ended June 30, 2019 and
2018
The
following discussion should be read in conjunction with our
financial statements and the related notes that appear elsewhere in
this Annual Report.
The
following table represents our statement of operations for the
years ended June 30, 2019 (Fiscal 2019) and June 30, 2018 (Fiscal
2018).
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$9,317,000
|
100%
|
$4,118,000
|
100%
|
|
Cost
of goods sold
|
8,768,000
|
94%
|
4,913,000
|
119%
|
|
Gross
profit (loss)
|
549,000
|
6%
|
(795,000)
|
-19%
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling
and administrative expenses
|
7,712,000
|
83%
|
3,462,000
|
84%
|
|
Research
and development
|
4,088,000
|
44%
|
1,956,000
|
47%
|
|
Total
operating expenses
|
11,800,000
|
127%
|
5,418,000
|
132%
|
|
|
|
|
|
|
|
Operating
loss
|
(11,251,000)
|
-121%
|
(6,213,000)
|
-151%
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
Other
Income
|
84,000
|
1%
|
-
|
-
|
|
Interest
expense, net
|
(1,247,000)
|
-13%
|
(752,000)
|
-18%
|
|
|
|
|
|
|
|
Net
loss
|
$(12,414,000)
|
-133%
|
$(6,965,000)
|
-169%
|
Revenues
Our
product focus is primarily on lift equipment, reflecting our
current products for walkie pallet jacks, and higher capacity packs
for Class 1, 2, and 3 forklifts. We are also expanding on an
opportunistic basis to adjacent applications, including airport
ground support equipment (GSE). We feel that we are well positioned
to address these markets, which would utilize our modular and
scalable battery pack design and technology.
We
currently sell most of our products through a distribution network
of equipment dealers, OEMs and battery distributors in North
America. This distribution network mostly sells to large company,
national accounts. However, we do sell certain battery packs
directly to other accounts including industrial equipment
manufacturers and the ultimate end-user.
Revenues for Fiscal
2019 increased $5,199,000 or 126%, compared to Fiscal 2018. This
increase in revenues during Fiscal 2019 was primarily attributable
to expansion into the fleets of existing customers. Revenue
increases also reflected a smaller mix of airport ground support
equipment for initial purchases by a large international airport
service company.
Cost of Sales
Cost of
sales for Fiscal 2019 increased $3,855,000 or 78%, compared to
Fiscal 2018. The increase in cost of sales was directly
attributable to the increase in revenues during Fiscal 2019. The
cost of materials per LiFT Pack in Fiscal 2019 decreased compared
to Fiscal 2018 as higher purchase quantities resulted in lower
costs of materials per pack. The improvement in lower costs per
pack and the increase in larger pack sales provided a gross profit
during Fiscal 2019 as compared to a gross loss for Fiscal 2018.
Warranty expense for Fiscal 2019 increased as a result of the
higher sales volume. As of June 30, 2019, we had approximately
$361,000 accrued for product warranty liability.
Selling and Administrative Expenses
Selling
and administrative expenses consist primarily of salaries and
personnel related expenses, stock-based compensation expense,
public company costs, consulting costs, professional fees and other
expenses. Such expenses for Fiscal 2019 increased $4,250,000 or
123%, compared to Fiscal 2018. The increase was for marketing to
promote the new products, additional payroll costs and stock-based
compensation related to new employees, and additional legal fees
for capital raises.
Research and Development
Research and
development expenses for Fiscal 2019 increased $2,132,000 or 109%,
compared to Fiscal 2018. Such expenses consist primarily of
materials, supplies, salaries and personnel related expenses,
testing costs, consulting costs, and other expenses associated with
the continued development of our LiFT pack, as well as, research
into new product opportunities. The increase in expenses in Fiscal
2019 was primarily due to the continued development and
implementation of the higher capacity packs for Class 1, 2, and 3
forklifts and UL listings for those packs. We anticipate research
and development expenses will remain a significant portion of our
expenses as we continue to develop and add new and improved
products to our product line-up.
Other Income
Other
income during Fiscal 2019 was $84,000 and was related to the
liability release of a related party customer deposit.
Interest Expense
Interest expense
for Fiscal 2019 increased $495,000 or 66%, compared to Fiscal 2018
and was primarily due to interest expense related to our
outstanding lines of credit. Interest expense in Fiscal 2019 and
Fiscal 2018 was approximately $1,247,000 and $752,000,
respectively, related to our outstanding lines of credit (see Note
8 to the audited consolidated financial statements).
Net Loss
Net
loss during Fiscal 2019 increased $5,499,000 or 78%, compared to
Fiscal 2018. The increase is due primarily to increased selling,
administrative, and research and development expenses, as discussed
above.
Liquidity
and Capital Resources
Overview
As of
June 30, 2019, we had a cash balance of $102,000 and an accumulated
deficit of $39,076,000. We do not have sufficient liquidity and
capital resources to fund planned operations for the twelve months
following the date of this Annual Report. See “Future
Liquidity Needs” below.
These
circumstances raise substantial doubt about our ability to continue
as a going concern. The accompanying financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and reclassification of assets or the amounts
and classifications of liabilities that may result from the outcome
of the uncertainty of our ability to remain a going concern. See
“Going Concern” below.
Cash Flows
Operating Activities
Our
operating activities resulted in net cash used in operations of
$10,712,000 for Fiscal 2019, compared to net cash used in
operations of $6,500,000 for Fiscal 2018.
The net
cash used in operating activities for Fiscal 2019 reflects the net
loss of $12,414,000 for the period offset primarily by non-cash
items including depreciation, stock-based compensation, and stock
issued for services, as well as, the purchase of inventory, and the
payment of accounts payable.
The net
cash used in operating activities for Fiscal 2018 reflects the net
loss of $6,965,000 for the period offset primarily by non-cash
items including depreciation, stock-based compensation, and stock
issued for services, as well as, the purchase of inventory and the
payment of accounts payable.
Investing Activities
Net
cash used in investing activities for Fiscal 2019 and Fiscal 2018
totaled $275,000 and $85,000, respectively, which consisted
primarily of office and warehouse equipment purchases.
Financing Activities
Net
cash provided by financing activities during Fiscals 2019 and 2018
was $8,383,000 and $9,170,000, respectively. The increase in cash
provided by financing activities primarily results from the
borrowings from our lines of credit totaling $6,500,000, as well
as, proceeds from a $4,390,000 private placement sale of common
stock.
Future Liquidity Needs
We have
evaluated our expected cash requirements over the next twelve
months, which include, but are not limited to, investments in
additional sales and marketing initiatives, research and
development activities, capital expenditures, and working capital
requirements and have determined that our existing cash resources
are not sufficient to meet our anticipated needs during the next
twelve months, and that additional financing is required to support
current operations. Based on our current and planned levels of
expenditure, we estimate that total financing proceeds of
approximately $12,000,000 will be required to fund current and
planned operations for the twelve months following the date of this
Annual Report on Form 10-K filed on September 12, 2019. In
addition, we anticipate that further additional financing may be
required to fund our business plan subsequent to that date, until
such time as revenues and related cash flows become sufficient to
support our operating costs. The Company does not currently believe
that its existing cash resources are sufficient to meet its
anticipated needs during the next twelve months. We have
substantial indebtedness and have relied on our credit facilities
to provide working capital.
Although
management’s plans are to continue to seek funding, as
necessary, through the sale of securities, utilization of our
existing related party credit facility and Factoring Agreement,
there is no guarantee we will be able to obtain the additional
required funds in the future or that funds will be available on
terms acceptable to us. If such funds are not available, management
will be required to curtail our operations, and our investments in
additional sales and marketing and product development resources,
and capital expenditures, which will have a material adverse effect
on our future cash flows and results of operations, and our ability
to continue operating as a going concern.
To the
extent that we raise additional funds by issuing equity or debt
securities, our stockholders may experience additional significant
dilution and such financing may involve restrictive covenants. To
the extent that we raise additional funds through collaboration and
licensing arrangements, it may be necessary to relinquish some
rights to our technologies or our product candidates, or grant
licenses on terms that may not be favorable to us. Such actions may
have a material adverse effect on our business.
Going Concern
We
prepared the accompanying consolidated financial statements on a
going concern basis, which assumes that we will realize our assets
and satisfy our liabilities in the normal course of
business. During Fiscal 2019, we incurred net losses from
operations of $12,414,000 and have incurred an accumulated deficit
of $39,076,000 as of June 30, 2019. In addition, as of June 30,
2019 we had limited available cash balances and were in need of
additional capital to fund operations. In their report on the
annual consolidated financial statements for Fiscal 2019, our
independent auditors included an explanatory paragraph in which
they expressed substantial doubt regarding the Company’s
ability to continue as a going concern. Our ability to
continue as a going concern is dependent upon our ability to raise
additional capital on a timely basis until such time as revenues
and related cash flows are sufficient to fund our operations.
Management’s plans are to continue to seek funding, as
necessary, through the sale of equity securities through private
placements, credit line extensions and convertible debt
placements.
The
issuance of additional equity securities by us could result in a
significant dilution in the equity interests of our current
stockholders. (See Note 2 to the audited consolidated financial
statements)
Off-Balance
Sheet Arrangements
As of
June 30, 2019, we did not have any other relationships with
unconsolidated entities or financial partners, such as entities
often referred to as structured finance or special purpose
entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to any
financing, liquidity, market or credit risk that could arise if we
had engaged in such relationships.
Recent Accounting
Pronouncements
Recently
Adopted Accounting Pronouncements
In May
2014, the FASB issued ASU No.2014-09, Revenue from Contracts with
Customers (ASU 2014-09), which requires an entity to recognize
the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. ASU 2014-09
will replace most existing revenue recognition guidance in U.S.
generally accepted accounting principles when it becomes effective.
In July 2015, the FASB deferred the effective date of the standard
by an additional year; however, it provided companies the option to
adopt one year earlier, commensurate with the original effective
date. Accordingly, the standard was effective for the Company in
the fiscal year beginning July 1, 2018. Subsequently, the FASB
issued additional guidance (ASUs 2015-14; 2016-08; 2016-10;
2016-12; 2016-13; 2016-20). The adoption of this guidance by the
Company, effective July 1, 2018, did not have a material impact on
the Company’s consolidated financial statements (see Revenue
Recognition, for further detail).
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments,
which provides guidance on reducing the diversity in how certain
cash receipts and cash payments are presented and classified in the
statement of cash flows. In addition to other specific cash flow
issues, ASU 2016-15 provides clarification on when an entity should
separate cash receipts and cash payments into more than one class
of cash flows and when an entity should classify those cash
receipts and payments into one class of cash flows on the basis of
predominance. The new guidance is effective for the fiscal years
beginning after December 31, 2017, and interim periods within those
fiscal years. Early adoption is permitted including an adoption in
an interim period. The adoption of this ASU is not expected to have
a material impact on our consolidated financial
statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In 2016, the FASB issued ASU
2016-02, Leases (ASU
2016-02). ASU 2016-02 requires a lessee to recognize a lease asset
representing its right to use the underlying asset for the lease
term, and a lease liability for the payments to be made to lessor,
on its balance sheet for all operating leases greater than 12
months. ASU 2016-02 will be effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. The new standard became effective for us on July 1, 2019, and
will be adopted using the modified retrospective method through a
cumulative-effect adjustment directly to retained earnings as of
that date. Based on our preliminary analysis, we expect the new
standard to increase right-of-use assets and the lease liability by
approximately $2.7 million and $2.7 million, respectively. The
cumulative-effect adjustment to retained earnings is expected to be
immaterial.
On June 20, 2018, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2018-07, Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. ASU 2018-07 is
intended to reduce the cost and complexity and to improve financial
reporting for share-based payments to nonemployees for goods and
services. The amendments in ASU 2018-07 are effective for fiscal
years beginning after December 15, 2018, including interim periods
therein.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The
Company is a smaller reporting company as defined by Rule 12b-2 of
the Exchange Act and is not required to provide the information
required under this item.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
financial statements required by this item begin on page F-1 with
the index to financial statements followed by the financial
statements.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, as of the end of the period covered by this report, we
conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our
disclosure controls and procedures are designed to provide
reasonable assurance that the information required to be included
in our SEC reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, relating
to the Company, including our consolidated subsidiaries, and was
made known to them by others within those entities, particularly
during the period when this report was being prepared. Based on the
management's assessment and review of our financial statements and
results for the fiscal year ended June 30, 2019, we have concluded
that our disclosure controls and procedures were effective for
purposes stated above.
The
management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a
process designed under the supervision of the Company’s
principal executive officer and principal financial officer to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial
statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only
reasonable assurances with respect to financial statement
preparation and presentation. Additionally, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management’s
Report on Internal Control over Financial Reporting
Our
management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. As of June 30, 2019 management assessed the
effectiveness of the Company’s internal control over
financial reporting based on the criteria for effective internal
control over financial reporting established in “Internal
Control - Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Based on the assessment, management determined that the
Company maintained effective internal control over financial
reporting as of June 30, 2019 based on the COSO
criteria.
This
Annual Report on Form 10-K does not include an attestation report
of the Company’s independent registered public accounting
firm regarding the effectiveness of the Company’s internal
control over financial reporting, as such report is not required
due to the Company’s status as a smaller reporting
company.
Change
in Internal Control over Financial Reporting
There
have been no changes in the Company’s internal controls over
financial reporting during the fiscal year ended June 30, 2019 that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
ITEM 9B - OTHER INFORMATION
None.
PART
III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors,
Executive Officers and Significant Employees
Identification of Directors, Executive Officers and Significant
Employees
The
following table and text set forth the names and ages of our
current directors, executive officers and significant employees as
of September 12, 2019. Our Board of Directors is comprised of only
one class. All of the directors will serve until the next annual
meeting of stockholders or until their successors are elected and
qualified, or until their earlier death, retirement, resignation or
removal. There are no family relationships among any of the
directors and executive officers. From time to time, our directors
have received compensation in the form of stock grant for their
services on the Board.
|
Name
|
|
Age
|
|
Position
|
|
Ronald
F. Dutt
|
|
72
|
|
Director,
Chief Executive Officer and President
|
|
Charles
A. Scheiwe
|
|
53
|
|
Chief
Financial Officer and Secretary
|
|
Jonathan
A. Berry
|
|
51
|
|
Chief
Operating Officer
|
|
Michael
Johnson
|
|
71
|
|
Director
|
|
James
Gevarges
|
|
55
|
|
Director
|
|
Lisa
Walters-Hoffert
|
|
61
|
|
Director
|
|
Dale
Robinette
|
|
55
|
|
Director
|
There
are no arrangements or understandings between our directors and
executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or
officer.
Business Experience
Ronald F. Dutt. Chairman, Chief Executive
Officer, President, and Director . Mr. Dutt has been our
chief executive officer, former interim chief financial officer and
director since March 19, 2014. He became our chairman on June 28,
2019. On September 19, 2017, he was also appointed as our
president, chief financial officer and corporate secretary. He
resigned as chief financial officer and corporate secretary as of
December 16, 2018. Previously, he was our chief financial officer
since December 7, 2012, and our interim chief executive officer
since June 28, 2013. Mr. Dutt has served as the Company’s
interim corporate secretary since June 28, 2013. Prior to Flux
Power, Mr. Dutt provided chief financial officer and chief
operating officer consulting services during 2008 through 2012. In
this capacity Mr. Dutt provided financial consulting, including
strategic business modeling and managed operations. Prior to 2008,
Mr. Dutt served in several capacities as executive vice president,
chief financial officer and treasurer for various public and
private companies including SOLA International, Directed
Electronics, Fritz Companies DHL Americas, Aptera Motors, Inc., and
Visa International. Mr. Dutt holds an MBA in Finance from
University of Washington and an undergraduate degree in Chemistry
from the University of North Carolina. Additionally, Mr. Dutt
served in the United States Navy and received an honorable
discharge as a Lieutenant.
Charles A. Scheiwe, Chief Financial Officer and
Secretary. Mr. Scheiwe joined the Company in July of 2018
and has been acting as the Company’s Controller since July 9,
2018. He was appointed as our chief financial officer and secretary
on December 17, 2018. Prior to joining the Company, Mr. Scheiwe was
the controller of Senstay, Inc. and provided financial and
accounting consulting services to start-up companies from 2016 to
2018. From 2006 to 2016, Mr. Scheiwe was the vice president of
finance and controller for GreatCall, Inc. Mr. Scheiwe’s
experience in accounting, financial planning and analysis, business
intelligence, cash management, and equity management has prepared
and qualified him for the position of chief financial officer and
secretary of the Company. Mr. Scheiwe has a Bachelor of Science
degree in Business Management, with emphasis in Accounting, from
the University of Colorado. Mr. Scheiwe also holds a CPA
certificate.
Jonathan A. Berry, Chief Operating
Officer. Mr. Berry joined the Company in 2016 and has been
our director of operations since 2016. On June 29, 2018, he was
appointed as our chief operating officer. Prior to joining the
Company in 2016, Mr. Berry was Clean Air Power, Inc.’s group
operations director and general manager of the USA operations from
2014 to 2016, and operations director of the UK, Australia, and USA
market from 2012 to 2014. Mr. Berry’s experience in the
development, implementation, and management of all aspects of
supply chain, production, and sales has prepared and qualified him
for the position of chief operating officer. Mr. Berry has an MBA
from Ashford Business School in London, England, and an
undergraduate degree in electrical engineering from Leeds
University.
Michael Johnson, Director. Mr. Johnson
has been our director since July 12, 2012. Mr. Johnson has been a
director of Flux Power since it was incorporated. Since 2002, Mr.
Johnson has been a director and the chief executive officer of
Esenjay Petroleum Corporation (Esenjay Petroleum), a Delaware
company located in Corpus Christi, Texas, which is engaged in the
business oil exploration and production. Mr. Johnson’s
primary responsibility at Esenjay Petroleum is to manage the
business and company as chief executive officer. Mr. Johnson is a
director and beneficial owner of Esenjay Investments LLC, a
Delaware company engaged in the business of investing in companies,
and an affiliate of the Company owning approximately 61.4% of our
outstanding shares, including common stock underlying options,
warrants and convertible debt that were exercisable or convertible
or which would become exercisable or convertible within 60 days. As
a result of Mr. Johnson’s leadership and business experience,
he is an industry expert in the natural gas exploration industry
and brings a wealth of management and successful company building
experience to the board. Mr. Johnson received a Bachelor of Science
degree in mechanical engineering from the University of
Southwestern Louisiana.
James Gevarges, Director. Mr. Gevarges
served on our Board as director from July 14, 2012 to October 24,
2014, at which time he resigned. On September 30, 2015, Mr.
Gevarges was reinstated as a director. Mr. Gevarges is the
president, chief executive officer, and a majority owner of Current
Ways, Inc., a California company engaged in the business of
manufacturing chargers and other components for electric vehicles,
which he founded in 2010. Current Ways, Inc. is not an affiliate of
the Company. Since 1991, Mr. Gevarges has also been a Director and
the chief executive officer of LHV Power Corporation (formerly
known as HiTek Power, Corp) (LHV Power), a California company
located in Santee, California, which is engaged in the business of
designing, manufacturing and marketing of power supply systems. Mr.
Gevarges is the sole owner of LHV Power. LHV Power is not an
affiliate of the Company. Mr. Gevarges’ primary
responsibilities at LHV Power are to manage the company and
business as chief executive officer and president. As a result of
Mr. Gevarges’ management and industry experience, he is a
power supply industry expert and brings an enormous amount of
manufacturing and successful company management experience to the
Company. Mr. Gevarges has a Bachelor of Science degree in
electrical engineering from Louisiana State
University.
Lisa Walters-Hoffert, Director. Ms.
Walters-Hoffert was appointed to our Board on June 28, 2019. Ms.
Walters-Hoffert co-founded Daré Bioscience Operations, Inc.
(Daré) in 2015 and served as Daré’s Chief Business
Officer. Following Daré’s business combination with
Cerulean Pharma Inc. on July 19, 2017, she became the Chief
Financial Officer of the renamed company, Daré Bioscience,
Inc. During the 25 years prior to joining the team, Ms.
Walters-Hoffert was an investment banker focused primarily on
raising equity capital for, and providing advisory services to,
small-cap public companies. From 2003 to 2015, Ms. Walters-Hoffert
worked for Roth Capital Partners, an investment banking firm, most
recently serving as Managing Director in the Investment Banking
Division, overseeing the firm’s San Diego office and its
activities with respect to medical device, diagnostic and specialty
pharma companies. Ms. Walters-Hoffert has held various positions in
the corporate finance and investment banking divisions of Citicorp
Securities in San José, Costa Rica and Oppenheimer & Co,
Inc. in New York City, New York. Ms. Walters-Hoffert has served as
a member of the Board of Directors of the San Diego Venture Group,
as Past Chair of the UCSD Librarian’s Advisory Board, and as
Immediate Past Chair of the Board of Planned Parenthood of the
Pacific Southwest. Ms. Walters-Hoffert graduated magna cum laude
from Duke University with a B.S. in Management Sciences. As a
senior financial executive with over twenty-five years of
experience in investment banking and corporate finance and based on
Ms. Walters-Hoffert’s expertise in audit, compliance,
valuation, equity finance, mergers, and corporate strategy, the
Company believes Ms. Walters-Hoffert is qualified to be on the
Board.
Dale T. Robinette, Director. Dale T.
Robinette, Director. Mr. Robinette was appointed to our Board on
June 28, 2019. Mr. Robinette has been a CEO Coach and Master Chair
since 2013 as an independent contractor to Vistage Worldwide, Inc.,
an executive coaching company. In addition, since 2013 Mr.
Robinette has been providing business consulting related to
top-line growth and bottom line improvement through his company
EPIQ Development. Since 2016, Mr. Robinette has been a director of
Lenslock, Inc., a mobile technology company that provides mobile
video solutions to law enforcement agencies. From 2013 –
2019, Mr. Robinette was the Founder and CEO of EPIQ Space, a
marketing website for the satellite industry, a member based
community of suppliers promoting their offerings. Mr. Robinette was
with Peregrine Semiconductor, Inc., a manufacturer of
high-performance RF CMOS integrated circuits, from 2013 –
2019 in two roles as a Director of Worldwide Sales as well as the
Director of the High Reliability Business Unit. Mr. Robinette
started his career from 1991 – 2007 at Tyco Electronics Ltd.
(known today as TE Connectivity Ltd.), a passive electronics
manufacturer, in various sales, sales leadership and product
development leadership roles. Mr. Robinette received a Bachelor of
Science degree in Business Administration, Marketing from San Diego
State University. Based on the above qualifications, the Company
believes Mr. Robinette is qualified to be on the
Board.
Involvement in Certain Legal Proceedings
To the
best of our knowledge, during the past ten years, none of our
directors or executive officers were involved in any of the
following: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years
prior to that time; (2) any conviction in a criminal proceeding or
being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being subject to any
order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.
Board Leadership Structure and Role in Risk Oversight
The
Board does not have a policy as to whether the roles of our
chairman and chief executive officer should be separate. Instead,
the Board makes this determination based on what best serves our
Company’s needs at any given time.
In its
governance role, and particularly in exercising its duty of care
and diligence, the Board is responsible for ensuring that
appropriate risk management policies and procedures are in place to
protect the Company’s assets and business. Our Board has
broad and ultimate oversight responsibility for our risk management
processes and programs and executive management is responsible for
the day-to-day evaluation and management of risks to the
Company.
Board Committees and Independence
Our
Board has established an Audit Committee, a Compensation Committee,
and a Nominating and Governance Committee. Our Board has undertaken
a review of the independence of each director pursuant to the
definition criteria set forth in Rule 10 A-3 under the Exchange Act
and definition under the listing standards of NASDAQ. In connection
with the Board’s review, the Board considered whether any
director has a material relationship with us that could compromise
the director's ability to exercise independent judgment in carrying
out his or her responsibilities. As a result of this review, our
Board determined that Ms. Walters-Hoffert, Mr. Gevarges and Mr.
Robinette are independent directors as defined in the listing
standards of NASDAQ and SEC rules and regulations. A majority of
our directors are independent. The composition and responsibilities
of each of the committees is described below.
Audit Committee
The
Audit Committee of the Board of Directors currently consists of
three independent directors of which at least one, the Chairman of
the Audit Committee, qualifies as a qualified financial expert as
defined in Item 407(d)(5)(ii) of Regulation S-K. Ms.
Walters-Hoffert is the Chairperson of the Audit Committee and
financial expert, and Mr. Robinette and Mr. Gevarges are the other
directors who are members of the Audit Committee. The Audit
Committee's duties are to recommend to our Board of Directors the
engagement of the independent registered public accounting firm to
audit our consolidated financial statements and to review our
accounting and auditing principles. The Audit Committee reviews the
scope, timing and fees for the annual audit and the results of
audit examinations performed by any internal auditors and
independent public accountants, including their recommendations to
improve the system of accounting and internal controls. The Audit
Committee will at all times be composed exclusively of directors
who are, in the opinion of our Board of Directors, free from any
relationship that would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of
consolidated financial statements and generally accepted accounting
principles. Our Audit Committee operates under a written charter,
which is available on our website at
www.fluxpower.com.
Compensation Committee
The
Compensation Committee establishes our executive compensation
policy, determines the salary and bonuses of our executive officers
and recommends to the Board stock option grants for our executive
officers. The members of the Compensation Committee are Ms.
Walters- Hoffert, Mr. Robinette and Mr. Gevarges. Each of the
members of our Compensation Committee is independent under
NASDAQ’s independence standards for compensation committee
members. Our chief executive officer often makes recommendations to
the Compensation Committee and the Board concerning compensation of
other executive officers. The Compensation Committee seeks input on
certain compensation policies from the chief executive officer. Our
Compensation Committee operates under a written charter, which is
available on our website at www.fluxpower.com.
Nominating and Governance Committee
The
Nominating and Governance Committee is responsible for matters
relating to the corporate governance of our Company and the
nomination of members of the Board and committees of the Board. The
members of the Nominating and Governance Committee are Ms.
Walters-Hoffert, Mr. Robinette and Mr. Gevarges. Each of the
members of our Nominating and Governance Committee is independent
under NASDAQ’s independence standards. The Nominating and
Governance Committee operates under a written charter, which is
available on our website at www.fluxpower.com.
Code of Conduct and Ethics
Our
Board has adopted a Code of Business Conduct and Ethics (the Code)
that applies to all of our directors, officers, and employees. Any
waivers of any provision of this Code for our directors or officers
may be granted only by the Board or a committee appointed by the
Board. Any waivers of any provisions of this Code for an employee
or a representative may be granted only by our chief executive
officer or chief financial officer. We have filed a copy of the
Code with the SEC and have made it available on our website at
www.fluxpower.com. In addition, we will provide any person, without
charge, a copy of this Code. Requests for a copy of the Code may be
made by writing to the Company at c/o Flux Power Holdings, Inc.,
2685 S. Melrose Drive, Vista, California 92081.
.
Indemnification Agreements
We have
executed a standard form of indemnification agreement
(Indemnification Agreement) with each of our Board members and
executive officers (each, an Indemnitee).
Pursuant to and
subject to the terms, conditions and limitations set forth in the
Indemnification Agreement, we agreed to indemnify each Indemnitee,
against any and all expenses incurred in connection with the
Indemnitee’s service as our officer, director and or agent,
or is or was serving at our request as a director, officer,
employee, agent or advisor of another corporation, partnership,
joint venture, trust, limited liability company, or other entity or
enterprise but only if the Indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to our best
interest, and in the case of a criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. In
addition, the indemnification provided in the indemnification
agreement is applicable whether or not negligence or gross
negligence of the Indemnitee is alleged or proven. Additionally,
the Indemnification Agreement establishes processes and procedures
for indemnification claims, advancement of expenses and costs and
contribution obligations.
Compliance
with Section 16 of the Securities Exchange Act of 1934
Section 16(a) of
the Securities Exchange Act of 1934, as amended, requires our
executive officers and directors and persons who own more than 10%
of a registered class of our equity securities, to file with the
SEC initial statements of beneficial ownership, reports of changes
in ownership and Annual Reports concerning their ownership, of
Common Stock and other of our equity securities on Forms 3, 4, and
5, respectively. Executive officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish us with
copies of all Section 16(a) reports they file. Based solely on our
review of Forms 3, 4 and 5 and amendments thereto filed
electronically with the SEC during the most recent fiscal year, we
believe that all reports required by Section 16(a) for transactions
in the fiscal year ended June 30, 2019, were timely filed except as
follows: late
filing of a Form 3 and a Form 4 by Cleveland Capital Management,
L.L.C., and late filing of a Form 3 by Jonathan
Berry.
ITEM 11 - EXECUTIVE COMPENSATION
Compensation for our Named Executive Officers
The
following table sets forth information concerning all forms of
compensation earned by our named executive officers during the
fiscal years ended June 30, 2019 and 2018 for services provided to
the Company and its subsidiaries.
Name and Principal Position
|
|
|
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
All Other
Compensation
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald F.
Dutt, Chief Executive
|
2019
|
$178,654
|
$-
|
$-
|
$1,484,356
|
$-
|
$-
|
$1,663,010
|
|
Officer,
President, and Director
|
2018
|
$170,000
|
$-
|
$-
|
$677,538
|
$-
|
$-
|
$847,538
|
|
|
|
|
|
|
|
|
|
|
Charles A.
Scheiwe, Chief Financial Officer and Secretary
(2)
|
2019
|
$131,231
|
$-
|
$-
|
$338,021
|
$-
|
$-
|
$469,252
|
|
|
|
|
|
|
|
|
|
|
Jonathan
Berry, Chief Operating Officer(3)
|
2019
|
$152,500
|
$-
|
$-
|
$338,021
|
$-
|
$-
|
$490,521
|
|
|
2018
|
$145,000
|
$-
|
$-
|
$541,741
|
$-
|
$-
|
$686,741
|
(1)
The
grant date fair value was determined in accordance with the
provisions of FASB ASC Topic No. 718 using the Black-Scholes
valuation model with assumptions described in more detail in the
notes to our audited financial statements included in this
report.
(2)
Mr.
Scheiwe became our chief financial officer and secretary on
December 17, 2018.
(3)
Mr.
Berry became our chief operating officer on June 29,
2018.
Benefit Plans
We do
not have any profit sharing plan or similar plans for the benefit
of our officers, directors or employees. However, we may establish
such plan in the future.
Equity Compensation Plan Information
In
connection with the reverse acquisition of Flux Power, Inc in 2012,
we assumed the 2010 Option Plan. As of June 30, 2019, the number of
options outstanding to purchase common stock under the 2010 Option
Plan was 29,482. No additional options to purchase common stock may
be granted under the 2010 Option Plan.
On
November 26, 2014, our board of directors approved our 2014 Equity
Incentive Plan (the 2014 Option Plan), which was approved by our
stockholders on February 17, 2015. The 2014 Option Plan was amended
by our board of directors on October 26, 2017 and approved by our
stockholders on July 23, 2018. The 2014 Option Plan offers selected
employees, directors, and consultants the opportunity to acquire
our common stock, and serves to encourage such persons to remain
employed by us and to attract new employees. The 2014 Option Plan
allows for the award of stock and options, up to 1,000,000 shares
of our common stock
On
October 26, 2017, we granted 188,000 incentive stock options (ISO)
of the Company’s common stock, with an estimated grant-date
fair value of $769,000, to 20 Company employees. The ISOs vest 25%
on the grant date and then 6% per quarter for the following twelve
quarters with all options expiring ten years from the date of
grant. In addition, the Company issued 9,000 non-qualified stock
options (NQSO) of the Company’s common stock, with an
estimated grant-date fair value of $37,000, to three members of its
Board of Directors. The NQSOs vest 12.5% per quarter over a
two-year period and expire ten years from the date of
grant.
Between
March 15, 2019 and March 18, 2019, we granted 197,500 incentive
stock options (ISO) of the Company’s common stock, with an
estimated grant-date fair value of $2,225,000, to 34 Company
employees. The ISOs vest 25% on the grant date and then 6% per
quarter for the following twelve quarters with all options expiring
ten years from the date of grant. In addition, the Company issued
9,000 non-qualified stock options (NQSO) of the Company’s
common stock, with an estimated grant-date fair value of $101,000,
to three members of its Board of Directors. The NQSOs vest 25% on
the grant date and then 6% per quarter for the following twelve
quarters with all options expiring ten years from the date of
grant.
As of
June 30, 2019, we have 265,150 options and 38,482 options
exercisable and outstanding which were granted from the 2014 Option
Plan and 2010 Option Plan, respectively.
The
following table sets forth certain information concerning
unexercised options, stock that has not vested, and equity
compensation plan awards outstanding as of June 30, 2019 for the
named executive officers below:
|
|
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options
Exercisable
|
Number
of Securities Underlying Unexercised Options
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
Option
Exercise Price
($)
|
|
Number
of Shares or Units of Stock That Have Not
Vested
|
Market
Value of Shares or Units of Stock That Have Not
Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights That Have Not Vested
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or Other Rights That Have Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald
Dutt
|
3/15/2019
|
15,625
|
34,375
|
34,375
|
13.60
|
6/29/2028
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
7/25/2017
|
12,573
|
20,354
|
20,354
|
19.80
|
10/26/2027
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
6/29/2018
|
25,000
|
25,000
|
25,000
|
14.40
|
12/22/2025
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
10/26/2017
|
31,250
|
18,750
|
18,750
|
4.60
|
7/29/2023
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
12/22/2015
|
19,000
|
-
|
-
|
5.00
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
7/30/2013
|
17,500
|
-
|
-
|
10.00
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Scheiwe
|
3/15/2019
|
9,375
|
20,625
|
20,625
|
13.60
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Berry
|
3/15/2019
|
9,375
|
20,625
|
20,625
|
13.60
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
6/29/2018
|
22,756
|
22,755
|
22,755
|
14.40
|
6/29/2028
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
10/26/2017
|
14,063
|
8,437
|
8,063
|
4.60
|
10/26/2027
|
-
|
-
|
-
|
-
|
(1)
The
fair value of each option grant is estimated at the date of grant
using the Black-Scholes option pricing model. Expected volatility
is calculated based on the historical volatility of the
Company’s stock. The risk free interest rate is based on the
U.S. Treasury yield for a term equal to the expected life of the
options at the time of grant.
Aggregated Option/Stock Appreciation Right (SAR) exercised and
Fiscal year-end Option/SAR value table
Neither
our executive officers nor the other individuals listed in the
tables above, exercised options or SARs during the last fiscal
year.
Long-term incentive plans
No long
term incentive awards were granted by us in the last fiscal
year.
Employment Agreements with Executive Officers
We
entered into an Employment Agreement with our chief executive
officer, Ronald F. Dutt, effective December 11, 2012. Mr. Dutt is
an “at-will” employee. The Employment Agreement
provided for an annual salary of $170,000. On February 15, 2019,
Flux Power Holdings, Inc. entered into an amendment to the
Employment Agreement (Amendment) with the Company’s president
and chief executive officer, Ronald F. Dutt, dated December 7,
2012. The Amendment confirmed Mr. Dutt’s continued services
as the president and chief executive officer of the Company and its
wholly-owned subsidiary, Flux Power, Inc., and setting Mr.
Dutt’s new annual base salary to $195,000.
On December 17, 2018, the Board of Directors of
the Company appointed Charles A. Scheiwe to serve as our chief
financial officer and secretary. In connection with his appointment
as the Company’s chief financial officer and secretary, Mr.
Scheiwe received an annual base salary of $145,000. Mr. Scheiwe
currently receives an annual base salary of $155,000. Mr. Scheiwe
is an “at-will” employee.
On June
29, 2018, the Board of Directors of the Company appointed Jonathan
Berry to serve as our chief operating officer. In connection with
his appointment as the Company’s chief operating officer, Mr.
Berry received an annual base salary of $145,000. Mr. Berry
currently receives an annual base salary of $160,000. Mr. Berry is
an “at-will” employee.
There
were no performance based bonuses paid for fiscal years ended June
30, 2019 and 2018.
Compensation
of Non-Executive Directors
Below
is summary of compensation accrued or paid to our non-executive
directors during fiscal years ended June 30, 2019 and June 30,
2018.
|
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
All Other
Compensation
($)
|
|
|
|
|
|
|
|
|
|
|
Christopher
Anthony(1)
|
2019
|
-
|
-
|
$33,802
|
-
|
$33,802
|
|
|
2018
|
-
|
-
|
$12,270
|
-
|
$12,270
|
|
|
|
|
|
|
|
|
James
Gevarges
|
2019
|
-
|
-
|
$33,802
|
-
|
$33,802
|
|
|
2018
|
-
|
-
|
$12,270
|
-
|
$12,270
|
|
|
|
|
|
|
|
|
Michael
Johnson
|
2019
|
-
|
-
|
$33,802
|
-
|
$33,802
|
|
|
2018
|
-
|
-
|
$12,270
|
-
|
$12,270
|
_____________________
(1)
Mr. Anthony
resigned as our director on June 28, 2019.
(2)
The amounts shown
in this column represent the full grant date fair value of the
award granted, excluding any as computed in accordance with
Financial Accounting Standards Board (FASB).The following table
shows the aggregate number of stock options held by non-employee
directors as of June 30, 2019 and June 30, 2018:
|
Name
|
Year
|
Vested Stock Options
|
|
|
|
|
|
Christopher
Anthony(1)
|
2019
|
938
|
|
|
2018
|
2,250
|
|
|
|
|
|
James
Gevarges
|
2019
|
938
|
|
|
2018
|
2,250
|
|
|
|
|
|
Michael
Johnson
|
2019
|
938
|
|
|
2018
|
2,250
|
(1)
Mr. Anthony
resigned as our director on June 28, 2019.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As used
in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act
of 1934, as amended, as consisting of sole or shared voting power
(including the power to vote or direct the vote) and/or sole or
shared investment power (including the power to dispose of or
direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable. As of
September 12, 2019, we had a total of 5,104,474 shares of common
stock issued outstanding.
The
following table sets forth, as of September 12, 2019, information
concerning the beneficial ownership of shares of our common stock
held by our directors, our named executive officers, our directors
and executive officers as a group, and each person known by us to
be a beneficial owner of more than 5% of our outstanding common
stock. Unless otherwise indicated, the business address of each of
our directors, executive officers and beneficial owners of more
than 5% of our outstanding common stock is c/o Flux Power Holdings,
Inc. 2685 S. Melrose Drive, Vista, California 92081. Each person
has sole voting and investment power with respect to the shares of
our common stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common
stock, except as otherwise indicated. The amount of beneficial
ownership set forth below has been adjusted to reflect the 2019
Reverse Split.
Name and Address of Beneficial Owner
(1)
|
Shares
Beneficially
Owned
|
|
|
|
|
|
|
Officers and Directors
|
|
|
|
Michael Johnson,
Director
|
3,138,837(2)
|
61.40%
|
|
Ron Dutt, Chief
Executive Officer, President, and Director
|
145,364(3)
|
2.80%
|
|
Charles A. Scheiwe,
Chief Financial Officer and Secretary
|
11,250(4)
|
*
|
|
Jonathan A. Berry,
Chief Operating Officer
|
56,569(5)
|
1.10%
|
|
James Gevarges,
Director
|
69,175(6)
|
1.40%
|
|
Lisa
Walters-Hoffert, Director
|
-
|
-
|
|
Dale Robinette,
Director
|
-
|
-
|
|
|
|
|
|
All Officers and Directors as a group (7 people)
|
3,421,195
|
66.70%
|
|
|
|
|
|
5% Stockholders
|
|
|
|
Cleveland Capital,
L.P.
1250 Linda Street,
Suite 304
Rocky River, OH
44116
|
565,620(7)
|
11.1%
|
*
Represents less than 1% of shares outstanding.
(1)
All addresses above
are 2685 S. Melrose Drive, Vista, California 92081, unless
otherwise stated.
(2)
The 3,138,837
shares beneficially owned include shares held by Esenjay
Investments, LLC, of which Mr. Johnson is the sole director and
beneficial owner. Includes 3,128,757 shares of Common Stock and
10,080 stock options.
(3)
The 145,364
beneficially owned include 410 shares of Common Stock and 144,954
stock options.
(4)
The 11,250 shares
beneficially owned include 11,250 stock options.
(5)
The 56,569 shares
beneficially owned include 56,569 stock options.
(6)
The 69,175 shares
beneficially owned include 59,095 shares of Common Stock and 10,080
stock options.
(7)
The beneficial
ownership of Cleveland Capital, L.P. (Cleveland) is derived from
the Schedule 13G filed by Cleveland Capital Management, L.L.C.
filed on February 13, 2019.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
None.
Credit Facility Agreement
On
March 28, 2019, our subsidiary, Flux Power, entered into an Amended
and Restated Credit Facility Agreement (LOC) with Esenjay and
Cleveland (Cleveland and Esenjay, together with additional parties
that may join as a additional lenders, collectively the Lenders) to
amend and restate the terms of the Credit Facility Agreement dated
March 22, 2018 between Flux Power and Esenjay (the Original Credit
Facility Agreement) in its entirety. Mr. Michael Johnson, a member
of our board of directors and a major stockholder of our company,
is the beneficial owner and director of Esenjay.
The
Original Credit Facility Agreement was amended, among other things,
to (i) increase the maximum principal amount available under line
of credit from $5,000,000 to $7,000,000, (ii) add Cleveland as an
additional lender to the LOC pursuant to which each lender has a
right to advance a pro rata amount of the principal amount
available under the LOC, (iii) extend the maturity date from March
31, 2019 to December 31, 2019,and (iv) to provide for additional
parties to become a Lender under the LOC. In connection with the
LOC, on March 28, 2019, the Company issued a secured promissory
note to Cleveland (the Cleveland Note), and an amended and restated
secured promissory note to Esenjay, which amended and superseded
the secured promissory note dated March 22, 2018 (Esenjay Note and
together with the Cleveland Note, the Notes). The Notes were issued
for the aggregate principal amount of $7,000,000 or such lesser
principal amount advanced by the respective Lender under the LOC.
The Notes bear an interest of 15% per annum and a maturity date of
December 31, 2019. From March 28, 2019 through June 30, 2019 the
Company borrowed an additional $4,000,000 on the LOC from Cleveland
and other parties. As
of June 30, 2019, $595,000 was available for future draws with all
parties combined, subject to the lenders' approval. As of September
12, 2019, $6,405,000 was outstanding and $595,000 was available for
future draws with all parties combined, subject to the
Lenders’ approval. The outstanding principal consists
of amounts provided by the following individuals: $2,405,000 by
Esenjay, $2,000,000 by Cleveland Capital, LP., minority stockholder
and creditor (Cleveland), $1,000,000 by Winn Exploration Co.,
$500,000 by Otto Candies Jr., $250,000 by Paul Candies and $250,000
by Brett Candies.
To
secure the obligations under the Notes, Flux Power entered into an
Amended and Restated Security Agreement dated March 28, 2019 with
the Lenders (the Amended Security Agreement). The Amended Security
Agreement amends and restates the Guaranty and Security Agreement
dated March 22, 2018, by and between Flux Power and the Esenjay, by
among other things, adding Cleveland as additional secured parties
to the agreement and appointing Esenjay as collateral
agent.
Loans from Stockholder and Conversion into Common
Stock
Between
October 2011 and September 2012, the Company entered into three
debt agreement with Esenjay. Esenjay is deemed to be a related
party as Mr. Michael Johnson, the beneficial owner and director of
Esenjay is a current member of our board of directors and a major
stockholder of the Company (owning approximately 61.4% of our
outstanding common shares as of June 30, 2019). The three debt
agreements consisted of a Bridge Loan Promissory Note, a Secondary
Revolving Promissory Note and an Unrestricted Line of Credit
(collectively, the Loan Agreements). On December 31, 2015, the
Bridge Loan Promissory Note and the Secondary Revolving Promissory
Note expired leaving the Unrestricted Line of Credit, available for
future draws.
The
Unrestricted Line of Credit had a maximum borrowing amount of
$10,000,000, was convertible at a rate of $6.00 per share, bore
interest at 8% per annum and was converted to the Company’s
common stock on October 31, 2018 prior to maturity on January 31,
2019.
On
March 22, 2018, Flux Power entered into a credit facility agreement
with Esenjay with a maximum borrowing amount of $5,000,000.
Proceeds from the credit facility are to be used to purchase
inventory and related operational expenses and accrue interest at a
rate of 15% per annum (the Inventory Line of Credit). The
outstanding balance of the Inventory Line of Credit and all accrued
interest was due and payable on March 31, 2019. Funds received from
Esenjay since December 5, 2017 were transferred to the Inventory
Line of Credit resulting in $2,405,000 outstanding as of June 30,
2018 and $2,595,000 available for future draws.
On
October 31, 2018, the Company entered into an Early Note Conversion
Agreement (the Early Note Conversion Agreement) with Esenjay,
pursuant to which Esenjay agreed to immediately exercise its
conversion rights under the Unrestricted and Open Line of Credit,
dated September 24, 2012 to convert the outstanding principal
amount of $7,975,000 plus accrued and unpaid interest of $1,041,280
for 1,502,714 shares of the Company’s common stock. The
Company followed FASB ASC Topic No.470, Debt to record the early conversion of
debt to equity. The Early Note Conversion Agreement had an induced
conversion which included issuance of 26,802 additional shares of
common stock and recorded as interest expense at the stock’s
fair value of $466,351 at October 31, 2018.
As of
June 30, 2019 and 2018, the Company had approximately $571,000 and
$1,014,000, respectively of accrued interest associated with such
credit facilities.
Cleveland Loan
On July
3, 2019, the Company entered into a certain loan agreement with
Cleveland Capital, L.P., pursuant to which Cleveland agreed to loan
the Company $1,000,000 (the Loan). In connection with the Loan, on
July 3, 2019, the Company issued Cleveland an unsecured short-term
promissory in the amount of $1,000,000 (the Unsecured Promissory
Note). The promissory note bears an interest rate of 15.0% per
annum and was originally due on September 1, 2019, unless repaid
earlier from a percentage of proceeds from certain identified
accounts receivable. In connection with the Loan, the Company
issued Cleveland a three-year warrant (the Cleveland Warrant) to
purchase the Company’s common stock in a number equal to
one-half percent (0.5%) of the number of shares of common stock
outstanding after giving effect to the total number of shares of
common stock sold in a public offering. The Cleveland Warrant had
an exercise price equal to the per share public offering price.
Effective September 1, 2019, the Company entered into that certain
Amendment No. 1 to the Unsecured Promissory Note pursuant to which
the maturity date was modified from September 1, 2019 to December
1, 2019 (the Amendment). In
connection with the Amendment, the Company replaced the Cleveland
Warrant with a certain Amended and Restated Warrant Certificate
(the Amended Warrant). The Amended Warrant increased the warrant
coverage from 0.5% to 1% of the number of shares of common stock
outstanding after giving effect to the total number of shares of
common stock sold in the next private or public offering
(Offering). In addition, the exercise price was also changed to
equal the per share price of common stock sold in the Offering. As
of September 12, 2019, $1,000,000 remains outstanding under the
Loan.
Lease Agreements
In June
2019, we relocated to our headquarters and production facility to
2685 South Melrose Drive, Vista, California, where we are leasing
approximately 45,600 square feet with an option for an additional
15,300 square-feet of warehouse space, which we believe is
sufficient for our projected future growth. Monthly rent for the
new space is $42,400 and escalates 3% per year through the end of
the lease term in January 2024. The new facility is ISO 9001
certified.
Total
rent expense was approximately $168,000 and $160,000 for the years
ended June 30, 2019 and 2018, respectively, net of sublease
income.
Transactions with Epic Boats
The
Company subleased office and manufacturing space to Epic Boats (an
entity founded and controlled by Chris Anthony, our board member
and former Chief Executive Officer) in our facility in Vista,
California pursuant to a month-to-month sublease agreement.
Pursuant to this agreement, Epic Boats paid Flux Power 10% of
facility costs through the end of our lease agreement which was
June 30, 2019.
The
Company received $18,000 for each of the years ended June 30, 2019
and 2018 from Epic Boats under the sublease rental agreement which
is recorded as a reduction to rent expense and the customer
deposits discussed below.
As of
June 30, 2019 the customer deposit totaling approximately $84,000
was recognized as Other Income since Epic Boats has released that
deposit liability. As of June 30, 2019 and June 30, 2018, customer
deposits totaling approximately $0 and $102,000, respectively,
related to such products were recorded in the accompanying
consolidated balance sheets. There were no receivables outstanding
from Epic Boats as of June 30, 2019 and June 30, 2018.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Independent
Auditor
For the
years ended June 30, 2019 and 2018, the Company’s independent
public accounting firm was Squar Milner LLP.
Fees
Paid to Principal Independent Registered Public Accounting
Firm
The
aggregate fees billed by our Independent Registered Public
Accounting Firm, for the years ended June 30, 2019 and 2018 are as
follows:
|
|
|
|
|
Audit fees(1)
|
$175,300
|
$96,900
|
|
Audit related fees(2)
|
-
|
-
|
|
Tax fees(3)
|
-
|
-
|
|
All other fees(4)
|
-
|
-
|
|
Total
|
$175,300
|
$96,900
|
(1)
Audit
fees represent fees for professional services provided in
connection with the audit of our annual financial statements and
the review of our quarterly financial statements and those services
normally provided in connection with statutory or regulatory
filings or engagements including comfort letters, consents and
other services related to SEC matters. This information is
presented as of the latest practicable date for this annual
report.
(2)
Audit-related
fees represent fees for assurance and related services that are
reasonably related to the performance of the audit or review of our
financial statements and not reported above under “Audit
Fees.” No such fees were incurred during the fiscal years
ended June 30, 2019 or 2018.
(3)
Squar
Milner LLP does not provide us with tax compliance, tax advice or
tax planning services.
(4)
All
other fees include fees billed by our independent auditors for
products or services other than as described in the immediately
preceding three categories. No such fees were incurred during the
fiscal years ended June 30, 2019 or 2018.
PART
IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
Financial Statements and Financial Statement
Schedules.
The
following financial statements of Flux Power Holdings, Inc., and
Report of Squar Milner LLP, independent registered public
accounting firm, are included in this report:
Financial Statement
Schedules: All schedules have been omitted because the required
information is included in the financial statements or notes
thereto or because they are not required.
See
Subsection (b) below:
(b)
Exhibits:
The
following exhibits are filed as part of this Report
|
Exhibit No.
|
|
Description
|
|
|
|
Securities Exchange
Agreement dated May 18, 2012. Incorporated by reference
to Exhibit 2.1 on Form 8-K filed with the SEC on May 24,
2012.
|
|
|
|
Amendment No. 1 to
the Securities Exchange Agreement dated June 13, 2012. Incorporated
by reference to Exhibit 2.2 on Form 8-K filed with the SEC on June
18, 2012.
|
|
|
|
Restated Articles
of Incorporation. Incorporated by reference to Exhibit 3.1 on Form
8-K filed with the SEC on February 19, 2015.
|
|
|
|
Amended
and Restated Bylaws of Flux Power Holdings,
Inc. Incorporated by reference to Exhibit 3.1 on Form
8-K filed with the SEC on May 31, 2012.
|
|
|
|
Certificate of
Amendment to Articles of Incorporation. Incorporated by reference
to Exhibit 3.1 on Form 8-K filed with the SEC on August 18,
2017.
|
|
|
|
Certificate of
Change. Incorporated by reference to Exhibit 3.1 on Form 8-K filed
with the SEC on July 12, 2019.
|
|
|
|
Description of
Securities*
|
|
|
|
Flux
Power Holdings, Inc. 2010 Stock Plan. Incorporated by reference to
Exhibit 10.5 on Form 8-K filed with the SEC on June 18,
2012.
|
|
|
|
Flux
Power Holdings, Inc. 2010 Stock Plan: Form of Stock Option
Agreement. Incorporated by reference to Exhibit 10.6 on Form 8-K
filed with the SEC on June 18, 2012.
|
|
|
|
Form of
Indemnification Agreement. Incorporated by reference to Exhibit
10.1 on Form 8-K filed with the SEC on April 9, 2019.
|
|
|
|
Terms
of Employment with Ronald F. Dutt. Incorporated by reference to
Exhibit 10.16 on Form 8-K filed with the SEC on December 13,
2012.
|
|
|
|
Amendment to the
Employment Agreement, dated February 15, 2019 by and between Flux
Power Holdings, Inc. and Ronald F. Dutt. Incorporated by reference
to Exhibit 10.1 on Form 8-K filed with the SEC on February 19,
2019.
|
|
|
|
Warrant
issued to Leon Frenkel on October 2, 2014.
|
|
|
|
2014
Equity Incentive Plan. Incorporated by reference to Exhibit 10.23
on Form 10-Q filed with the SEC on May 15, 2015.
|
|
|
|
Amendment to the
Flux Power Holdings Inc. 2014 Equity Incentive Plan. Incorporated
by reference to Exhibit 10.20 on Form 10-K filed with the SEC on
September 27, 2018.
|
|
|
|
Amended
and Restated Credit Facility Agreement dated March 28, 2019.
Incorporated by reference to Exhibit 10.1 on Form 8-K filed with
the SEC on April 2, 2019.
|
|
|
|
Amended
and Restated Security Agreement dated March 28, 2019. Incorporated
by reference to Exhibit 10.2 on Form 8-K filed with the SEC on
April 2, 2019.
|
|
|
|
Amended
and Restated Secured Promissory Note dated March 28, 2019
(Esenjay). Incorporated by reference to Exhibit 10.4 on Form 8-K
filed with the SEC on April 2, 2019.
|
|
|
|
Secured
Promissory Note dated March 28, 2019 (Cleveland). Incorporated by
reference to Exhibit 10.5 on Form 8-K filed with the SEC on April
2, 2019.
|
|
|
|
Lease
Agreement dated April 25, 2019. Incorporated by reference to
Exhibit 10.1 on Form 8-K filed with the SEC on April 30,
2019.
|
|
|
|
Loan
Agreement dated July 3, 2019 (Cleveland). Incorporated by reference
to Exhibit 10.1 on Form 8-K filed with the SEC on July 9,
2019
|
|
|
|
Unsecured
Promissory Note (Cleveland) dated July 3, 2019. Incorporated by
reference to Exhibit 10.2 on Form 8-K filed with the SEC on July 9,
2019.
|
|
|
|
Amended
and Restated Warrant Certificate (Cleveland). Incorporated by
reference to Exhibit 10.6 on Form 8-K filed with the SEC on
September 5, 2019.
|
|
|
|
Factoring Agreement
dated August 23 2019. Incorporated by reference to Exhibit 10.1 on
Form 8-K filed with the SEC on August 26, 2019.
|
|
|
|
Amendment No. 1 to
Unsecured Promissory Note (Cleveland) dated September 1, 2019.
Incorporated by reference to Exhibit 10.1 on Form 8-K filed with
the SEC on September 6, 2019.
|
|
|
|
Code of
Business Conduct and Ethics. Incorporated by reference to Exhibit
99.4 on Form 8-K filed with the SEC on July 2, 2019.
|
|
|
|
Subsidiaries.
Incorporated by reference to Exhibit 21.1 on Form 8-K filed with
the SEC on June 18, 2012
|
|
|
|
Consent
of Independent Registered Public Accounting
Firm
|
|
|
|
Certifications of
the Chief Executive Officer under Section 302 of the Sarbanes-Oxley
Act.*
|
|
|
|
Certifications of
the Chief Financial Officer under Section 302 of the Sarbanes-Oxley
Act.*
|
|
|
|
Certifications of
the Chief Executive Officer under Section 906 of the Sarbanes-Oxley
Act.*
|
|
|
|
Certifications of
the Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act.*
|
|
101.INS
|
|
XBRL
Instance Document *
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema *
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation
Linkbase *
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
*
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
*
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
Document *
|
* Filed
herewith.
ITEM 16 – FORM 10-K SUMMARY
None.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
Flux
Power Holdings, Inc.
|
|
|
|
|
Dated:
September 12, 2019
|
By:
|
/s/
Ronald F. Dutt
|
|
|
|
Ronald
F. Dutt
|
|
|
|
Chief
Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/
Charles A. Scheiwe
|
|
|
|
Charles
A. Scheiwe
|
|
|
|
Chief
Financial Officer
(Principal Financial
Officer)
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Ronald F. Dutt
|
|
Director,
Chief Executive Officer,
|
|
September
12, 2019
|
|
Ronald
F. Dutt
|
|
President
and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Charles A.
Scheiwe
|
|
Chief
Financial Officer
|
|
September 12, 2019
|
|
Charles
A. Scheiwe
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Michael Johnson
|
|
Director
|
|
September
12, 2019
|
|
Michael
Johnson
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James Gevarges
|
|
Director
|
|
September
12, 2019
|
|
James
Gevarges
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Lisa
Walters-Hoffert
|
|
Director
|
|
September
12, 2019
|
|
Lisa
Walters-Hoffert
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dale
Robinette
|
|
Director
|
|
September
12, 2019
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Dale
Robinette
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders.
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Flux Power
Holdings, Inc. and its subsidiary (the Company) as of June 30, 2019
and 2018, the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for the years then
ended, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2019
and 2018, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Uncertainty
to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring
losses from operations and its total liabilities exceed its total
assets. Additionally, the Company has incurred a significant
accumulated deficit through June 30, 2019 and requires immediate
additional financing to sustain its operations. This raises
substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans in regard to these
matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
SQUAR MILNER LLP
We have
served as the Company's auditor since 2012.
San
Diego, California
September 12,
2019
FLUX POWER HOLDINGS, INC.
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CONSOLIDATED BALANCE SHEETS
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ASSETS
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Current
assets:
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Cash
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$102,000
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$2,706,000
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Accounts
receivable
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2,416,000
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946,000
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Inventories,
net
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3,813,000
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1,512,000
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371,000
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92,000
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Total
current assets
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6,702,000
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5,256,000
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158,000
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26,000
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Property,
plant and equipment, net
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346,000
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87,000
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Total
assets
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$7,206,000
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$5,369,000
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current
liabilities:
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Accounts
payable
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$2,483,000
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$417,000
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Accrued
expenses
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858,000
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391,000
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Line
of credit - related party
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6,405,000
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10,380,000
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Convertible
promissory note - related party
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-
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500,000
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Capital
lease payable
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29,000
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-
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Accrued
interest
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571,000
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1,014,000
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Total
current liabilities
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10,346,000
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12,702,000
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Long
term liabilities:
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29,000
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-
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Customer
deposits from related party
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-
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102,000
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Total
liabilities
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10,375,000
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12,804,000
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Commitments and
contingencies (Note 13)
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Stockholders’
deficit:
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Preferred
stock, $0.001 par value; 500,000 shares authorized; none issued and
outstanding
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-
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-
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Common
stock, $0.001 par value; 30,000,000 shares authorized; 5,101,580
and 3,106,103 shares issued and outstanding at June 30, 2019 and
2018, respectively
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5,000
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3,000
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Additional
paid-in capital
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35,902,000
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19,224,000
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Accumulated
deficit
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(39,076,000)
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(26,662,000)
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Total
stockholders’ deficit
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(3,169,000)
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(7,435,000)
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Total
liabilities and stockholders’ deficit
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$7,206,000
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$5,369,000
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The accompanying notes are an integral part of these consolidated
financial statements.
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FLUX POWER HOLDINGS,
INC.
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CONSOLIDATED STATEMENTS OF
OPERATIONS
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Net
revenue
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$9,317,000
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$4,118,000
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Cost
of sales
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8,768,000
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4,913,000
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Gross
profit (loss)
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549,000
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(795,000)
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Operating
expenses:
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Selling
and administrative expenses
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7,712,000
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3,462,000
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Research
and development
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4,088,000
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1,956,000
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Total
operating expenses
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11,800,000
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5,418,000
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Operating
loss
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(11,251,000)
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(6,213,000)
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Other
income (expense):
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Other
Income
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84,000
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-
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Interest
expense
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(1,247,000)
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(752,000)
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Net
loss
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$(12,414,000)
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$(6,965,000)
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Net
loss per share - basic and diluted
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$(2.84)
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$(2.74)
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Weighted
average number of common shares outstanding - basic and
diluted
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4,364,271
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2,539,427
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The accompanying notes are an integral part of these consolidated
financial statements.
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FLUX POWER HOLDING, INC.
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CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT
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For the Years Ended June 30, 2019 and 2018
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Additional Paid-in Capital
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Balance at June 30, 2017
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2,508,424
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$2,000
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$14,946,000
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$(19,697,000)
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$(4,749,000)
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Issuance
of common stock – conversion of related party debt to
equity
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Issuance
of common stock - services
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17,361
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-
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49,000
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-
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49,000
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Issuance
of common stock - private placement transactions, net of offering
costs
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571,529
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1,000
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3,974,000
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-
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3,975,000
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Warrants
exchanged for common stock
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8,789
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-
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-
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-
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-
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Stock
based compensation
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-
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-
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255,000
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-
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255,000
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Net
loss
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-
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-
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(6,965,000)
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(6,965,000)
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3,106,103
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3,000
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19,224,000
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(26,662,000)
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(7,435,000)
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Issuance
of common stock - services
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11,390
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-
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261,000
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-
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261,000
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Issuance
of common stock - private placement transactions, net of offering
costs
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399,256
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-
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4,390,000
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-
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4,390,000
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Issuance
of common stock – loan conversion
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1,581,118
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2,000
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10,083,000
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-
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10,085,000
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Warrants
exchanged for common stock
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3,713
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-
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-
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-
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-
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Stock
based compensation
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-
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-
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1,944,000
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-
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1,944,000
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Net
loss
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-
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(12,414,000)
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(12,414,000)
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Balance at June 30, 2019
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5,101,580
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$5,000
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$35,902,000
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$(39,076,000)
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$(3,169,000)
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The
accompanying notes are an integral part of these consolidated
financial statements.
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FLUX POWER HOLDING, INC.
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CONSOLIDATED STATEMENTS OF CASH
FLOWS
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Cash
flows from operating activities:
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Net
loss
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$(12,414,000)
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$(6,965,000)
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Adjustments
to reconcile net loss to net cash used in operating
activities
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Depreciation
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81,000
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57,000
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Stock-based
compensation
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1,944,000
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255,000
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Stock
issuance for services
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261,000
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49,000
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Interest
expense on conversion
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699,000
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(1,470,000)
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(866,000)
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Inventories
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(2,301,000)
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54,000
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Other
current assets
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(411,000)
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(23,000)
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Accounts
payable
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2,065,000
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51,000
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Accrued
expenses
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385,000
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131,000
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Accrued
interest
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551,000
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775,000
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Customer
deposits
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(102,000)
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(18,000)
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Net
cash used in operating activities
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(10,712,000)
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(6,500,000)
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Cash
flows from investing activities
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Purchases
of equipment
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(275,000)
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(85,000)
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Net
cash used in investing activities
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(275,000)
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(85,000)
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Cash
flows from financing activities:
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Repayment
of line of credit
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(2,500,000)
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-
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Proceeds
from the sale of common stock, net of offering
costs
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4,390,000
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3,975,000
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Borrowings
from line of credit - related party
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6,500,000
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5,195,000
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Payment
on lease payable
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(7,000)
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-
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Net
cash provided by financing activities
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8,383,000
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9,170,000
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Net
change in cash
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(2,604,000)
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2,585,000
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Cash,
beginning of period
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2,706,000
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121,000
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Cash,
end of period
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$102,000
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$2,706,000
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Supplemental Disclosures of Non-Cash Investing and Financing
Activities:
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Conversion
of related party debt to equity
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$8,475,000
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$-
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Common
stock issued for interest
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$1,610,000
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$-
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Equipment
purchase through capital lease
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$65,000
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$-
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The accompanying notes are an integral part of these consolidated
financial statements.
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FLUX
POWER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
JUNE
30, 2019 and 2018
NOTE
1 - NATURE OF BUSINESS AND REVERSE STOCK SPLIT
Nature
of Business
Flux
Power Holdings, Inc. (Flux) was incorporated in 1998 in the State
of Nevada. On June 14, 2012, we changed our name to Flux
Power Holdings, Inc. Flux's operations are conducted through its
wholly owned subsidiary, Flux Power, Inc. (“Flux
Power”), a California corporation (collectively, the
"Company").
The
Company designs, develops and sells rechargeable lithium-ion energy
storage systems for industrial applications, such as, electric fork
lifts and airport ground support equipment. The Company has
structured its business around its core technology, “The
Battery Management System” (“BMS”). The
Company’s BMS provides three critical functions to their
battery systems: cell balancing, monitoring and error reporting.
Using its proprietary management technology, the Company is able to
offer complete integrated energy storage solutions or custom
modular standalone systems to their customers. The Company has also
developed a suite of complementary technologies and products that
accompany their core products. Sales during the years ended June
30, 2019 and 2018 were primarily to customers located throughout
the United States.
As used
herein, the terms “we,” “us,”
“our,”, “Flux” and “Company”
mean Flux Power Holdings, Inc., unless otherwise indicated. All
dollar amounts herein are in U.S. dollars unless otherwise
stated.
Reverse Stock Split
The
Company effected a 1-for-10 reverse split of its common stock and
preferred stock on July 11, 2019 (2019 Reverse Split). No
fractional shares were issued in connection with the 2019 Reverse
Split. If, as a result of the 2019 Reverse Split, a stockholder
would otherwise have been entitled to a fractional share, each
fractional share was rounded up. The 2019 Reverse Split resulted in
a reduction of our outstanding shares of common stock from
51,000,868 to 5,101,580. In addition, it resulted in a reduction of
our authorized shares of common stock from 300,000,000 to
30,000,000, and a reduction of our authorized shares of preferred
stock from 5,000,000 to 500,000. The par value of the
Company’s stock remained unchanged at $0.001. In addition, by
reducing the number of the Company’s outstanding shares, the
Company’s loss per share in all periods presented was
increased by a factor of ten.
As the
par value per share of the Company’s common stock remained
unchanged at $0.001 per share, a total of $46,000 was reclassified
from common stock to additional paid-in capital. In connection with
the Reverse Stock Split, proportionate adjustments have been made
to the per share exercise price and the number of shares issuable
upon the exercise or conversion of all outstanding options,
warrants, convertible or exchangeable securities entitling the
holders to purchase, exchange for, or convert into, shares of
common stock. All references to shares of common stock and per
share data for all periods presented in the accompanying
consolidated financial statements and notes thereto have been
adjusted to reflect the Reverse Stock Split on a retroactive
basis.
NOTE
2 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred an accumulated deficit of
$39,076,000 through June 30, 2019 and a net loss of $12,414,000 for
the year ended June 30, 2019. To date, the Company’s revenues
and operating cash flows have not been sufficient to sustain its
operations and we have relied on debt and equity financing to fund
its operations. These factors raise substantial doubt about the
Company’s ability to continue as a going concern for the
twelve months following the date of our Annual Report on Form 10-K,
September 12, 2019. The Company’s ability to continue as a
going concern is dependent upon its ability to raise additional
capital on a timely basis until such time as revenues and related
cash flows are sufficient to fund its operations.
Management has
undertaken steps as part of a plan to improve operations with the
goal of sustaining its operations. These steps include (a)
developing additional products to cater to the Class 1 and Class 2
industrial equipment markets; and (b) expand its sales force
throughout the United States. In that regard, the Company has
increased its research and development efforts to focus on
completing the development of energy storage solutions that can be
used on larger fork lifts and has also doubled its sales force
since December 2016 with personnel having significant experience in
the industrial equipment handling industry.
Management also
plans to raise additional capital through the sale of equity
securities through private placements, convertible debt placements
and the utilization of its existing related-party credit
facility.
On
March 31, 2019, the Company amended its line of credit with
Esenjay, a related party, to: (i) increase the maximum principal
amount available under line of credit from $5,000,000 to $7,000,000
(LOC), (ii) add Cleveland, our minority stockholder, as an
additional lender to the LOC pursuant to which each lender has a
right to advance a pro rata amount of the principal amount
available under the LOC, (iii) extend the maturity date from March
31, 2019 to December 31, 2019, and (iv) to provide for additional
parties to become a lender under the LOC. $6,405,000
remains outstanding under the LOC as of June 30, 2019, and $595,000
is available for future draws with all parties combined. Esenjay
has contributed $2,405,000, Cleveland $2,000,0000, Winn Exploration
Co. $1,000,000, Otto Candies Jr. $500,000, Paul Candies $250,000
and Brett Candies $250,000.
Although management
believes that the additional required funding will be obtained,
there is no guarantee the Company will be able to obtain the
additional required funds on a timely basis or that funds will be
available on terms acceptable to us. If such funds are not
available when required, management will be required to curtail its
investments in additional sales and marketing and product
development resources, and capital expenditures, which may have a
material adverse effect on its future cash flows and results of
operations, and its ability to continue operating as a going
concern. The accompanying financial statements do not include any
adjustments that would be necessary should the Company be unable to
continue as a going concern and, therefore, be required to
liquidate its assets and discharge its liabilities in other than
the normal course of business and at amounts that may differ from
those reflected in the accompanying consolidated financial
statements.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the Company’s significant accounting policies
which have been consistently applied in the preparation of the
accompanying consolidated financial statements
follows:
Principles of Consolidation
The
consolidated financial statements include Flux Power Holdings, Inc.
and its wholly-owned subsidiary Flux Power, Inc. after elimination
of all intercompany accounts and transactions.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
year presentation for comparative purposes.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
(“GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses, as well as certain financial
statement disclosures. Significant estimates include valuation
allowances relating to inventory and deferred tax assets. While
management believes that the estimates and assumptions used in the
preparation of the financial statements are appropriate, actual
results could differ from these estimates.
Cash and Cash
Equivalents
As of
June 30, 2019, cash totaled approximately $102,000 and consists of
funds held in a non-interest bearing bank deposit account. The
Company considers all liquid short-term investments with maturities
of less than three months when acquired to be cash equivalents. The
Company had no cash equivalents at June 30, 2019 and
2018.
Fair Values of Financial
Instruments
The
carrying amount of our cash, accounts payable, accounts receivable,
and accrued liabilities approximates their estimated fair values
due to the short-term maturities of those financial instruments.
The carrying amount of the line of credit agreement approximates
its fair values as interest approximates current market interest
rates for similar instruments. Management has concluded that it is
not practical to determine the estimated fair value of amounts due
to related parties because the transactions cannot be assumed to
have been consummated at arm’s length, the terms are not
deemed to be market terms, there are no quoted values available for
these instruments, and an independent valuation would not be
practical due to the lack of data regarding similar instruments, if
any, and the associated potential costs.
The
Company does not have any other assets or liabilities that are
measured at fair value on a recurring or non-recurring
basis.
Accounts Receivable
Accounts receivable
are carried at their estimated collectible amounts. The Company has
not experienced collection issues related to its accounts
receivable, and has not recorded an allowance for doubtful accounts
during the fiscal year ended June 30, 2019 and 2018.
Inventories
Inventories consist
primarily of battery management systems and the related
subcomponents, and are stated at the lower of cost (first-in,
first-out) or net realizable value. The Company evaluates
inventories to determine if write-downs are necessary due to
obsolescence or if the inventory levels are in excess of
anticipated demand at market value based on consideration of
historical sales and product development plans. The Company
recorded an adjustment related to obsolete inventory in the amount
of approximately $90,000 and $27,000 during the years ended June
30, 2019 and 2018, respectively.
We
reviewed our inventory valuation with regards to our gross loss for
the fiscal year ended June 30, 2018. The gross loss was due to
factors related to new product launch of the GSE packs, such as low
volume, early higher cost designs, and limited sourcing as we have
seen with the launch of the LiFT Packs. As sales volumes rise we
are seeing increased margins. As such, we do not believe the gross
loss would require any write-downs to inventory on hand.
Property, Plant and
Equipment
Property, plant and
equipment are stated at cost, net of accumulated depreciation.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives, of the related assets
ranging from three to ten years, or, in the case of leasehold
improvements, over the lesser of the useful life of the related
asset or the lease term.
Stock-based Compensation
Pursuant to the
provisions of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Topic No. 718-10, Compensation-Stock Compensation, which
establishes accounting for equity instruments exchanged for
employee service, we utilize the Black-Scholes option pricing model
to estimate the fair value of employee stock option awards at the
date of grant, which requires the input of highly subjective
assumptions, including expected volatility and expected life.
Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation.
These assumptions are subjective and generally require significant
analysis and judgment to develop. When estimating fair value, some
of the assumptions will be based on, or determined from, external
data and other assumptions may be derived from our historical
experience with stock-based payment arrangements. The appropriate
weight to place on historical experience is a matter of judgment,
based on relevant facts and circumstances.
Common
stock or equity instruments such as warrants issued for services to
non-employees are valued at their estimated fair value at the
measurement date (the date when a firm commitment for performance
of the services is reached, typically the date of issuance, or when
performance is complete). If the total value exceeds the par value
of the stock issued, the value in excess of the par value is added
to the additional paid-in-capital.
Revenue Recognition
On July
1, 2018, the Company adopted the new accounting standard FASB
Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers (“ASC 606”) for
all contracts using the modified retrospective method. Based on the
Company’s analysis of contracts with customers in prior
periods, there was no cumulative effect adjustment to the opening
balance of the Company’s accumulated deficit as a result of
the adoption of this new standard.
The
Company derives its revenue from the sale of products to customers.
The Company sells its products primarily through a distribution
network of equipment dealers, OEMs and battery distributors in
North America. The Company recognizes revenue for products when all
the significant risks and rewards have been transferred to the
customer, no continuing managerial involvement usually associated
with ownership of the goods is retained, no effective control over
the goods sold is retained, the amount of revenue can be measured
reliably, it is probable that the economic benefits associated with
the transactions will flow to the Company and the costs incurred or
to be incurred in respect of the transaction can be measured
reliably.
Product
revenue is recognized as a distinct single performance obligation
which represents the point in time that our customer receives
delivery of the products. Our customers do have a right to return
product but our returns have historically been
insignificant.
Product Warranties
The
Company evaluates its exposure to product warranty obligations
based on historical experience. Our products, primarily lift
equipment packs, are warrantied for five years unless modified by a
separate agreement. As of June 30, 2019 and 2018, the Company
carried warranty liability of approximately $361,000 and $158,000,
respectively, which is included in accrued expenses on the
Company’s consolidated balance sheets.
Impairment of Long-lived Assets
In
accordance with authoritative guidance for the impairment or
disposal of long-lived assets, if indicators of impairment exist,
the Company assesses the recoverability of the affected long-lived
assets by determining whether the carrying value of such assets can
be recovered through the undiscounted future operating cash
flows.
If
impairment is indicated, the Company measures the amount of such
impairment by comparing the carrying value of the asset to the
present value of the expected future cash flows associated with the
use of the asset. The Company believes that no impairment
indicators were present, and accordingly no impairment losses were
recognized during the fiscal years ended June 30, 2019 and
2018.
Research and Development
The
Company is actively engaged in new product development efforts.
Research and development cost relating to possible future products
are expensed as incurred.
Income Taxes
Pursuant to FASB
ASC Topic No. 740, Income
Taxes, deferred tax assets or liabilities are recorded to
reflect the future tax consequences of temporary differences
between the financial reporting basis of assets and liabilities and
their tax basis at each year-end. These amounts are adjusted, as
appropriate, to reflect enacted changes in tax rates expected to be
in effect when the temporary differences reverse. The Company has
analyzed filing positions in all of the federal and state
jurisdictions where the Company is required to file income tax
returns, as well as all open tax years in these jurisdictions. As a
result, no unrecognized tax benefits have been identified as of
June 30, 2019 or June 30, 2018, and accordingly, no additional tax
liabilities have been recorded.
The
Company records deferred tax assets and liabilities based on the
differences between the financial statement and tax bases of assets
and liabilities and on operating loss carry forwards using enacted
tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is provided when it is
more likely than not that some portion or all of a deferred tax
asset will not be realized.
Net Loss Per Common Share
The
Company calculates basic loss per common share by dividing net loss
by the weighted average number of common shares outstanding during
the periods. Diluted loss per common share includes the impact from
all dilutive potential common shares relating to outstanding
convertible securities.
For the
years ended June 30, 2019 and 2018, basic and diluted
weighted-average common shares outstanding were 4,364,271 and
2,539,427, respectively. The Company incurred a net loss for the
years ended June 30, 2019 and 2018, and therefore, basic and
diluted loss per share for each fiscal year are the same because
the inclusion of potential common equivalent shares were excluded
from diluted weighted-average common shares outstanding during the
period, as the inclusion of such shares would be anti-dilutive. The
total potentially dilutive common shares outstanding at June 30,
2019 and 2018, excluded from diluted weighted-average common shares
outstanding, which include common shares underlying outstanding
convertible debt, stock options and warrants, were 588,504 and
1,610,922, respectively.
New Accounting Standards
Recently
Adopted Accounting Pronouncements
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (“ASU 2014-09”), which requires an entity to
recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. ASU
2014-09 will replace most existing revenue recognition guidance in
U.S. generally accepted accounting principles when it becomes
effective. In July 2015, the FASB deferred the effective date of
the standard by an additional year; however, it provided companies
the option to adopt one year earlier, commensurate with the
original effective date. Accordingly, the standard was effective
for the Company in the fiscal year beginning July 1, 2018.
Subsequently, the FASB issued additional guidance (ASUs 2015-14;
2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this
guidance by the Company, effective July 1, 2018, did not have a
material impact on the Company’s consolidated financial
statements (see Revenue Recognition, for further
detail).
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments,
which provides guidance on reducing the diversity in how certain
cash receipts and cash payments are presented and classified in the
statement of cash flows. In addition to other specific cash flow
issues, ASU 2016-15 provides clarification on when an entity should
separate cash receipts and cash payments into more than one class
of cash flows and when an entity should classify those cash
receipts and payments into one class of cash flows on the basis of
predominance. The new guidance is effective for the fiscal years
beginning after December 31, 2017, and interim periods within those
fiscal years. Early adoption is permitted including an adoption in
an interim period. The adoption of this ASU is not expected to have
a material impact on our consolidated financial
statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU
2016-02 requires a lessee to recognize a lease asset representing
its right to use the underlying asset for the lease term, and a
lease liability for the payments to be made to lessor, on its
balance sheet for all operating leases greater than 12 months. ASU
2016-02 will be effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. The
new standard became effective for us on July 1, 2019, and will be
adopted using the modified retrospective method through a
cumulative-effect adjustment directly to retained earnings as of
that date. Based on our preliminary analysis, we expect the new
standard to increase right-of-use assets and the lease liability by
approximately $2.7 million and $2.7 million, respectively. The
cumulative-effect adjustment to retained earnings is expected to be
immaterial.
On June 20, 2018, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2018-07, Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. ASU 2018-07 is
intended to reduce the cost and complexity and to improve financial
reporting for share-based payments to nonemployees for goods and
services. The amendments in ASU 2018-07 are effective for fiscal
years beginning after December 15, 2018, including interim periods
therein.
NOTE
4 - INVENTORIES
Inventories consist
of the following:
|
|
|
|
|
Raw
materials
|
$2,118,000
|
$807,000
|
|
Work
in process
|
645,000
|
333,000
|
|
Finished
goods
|
1,050,000
|
372,000
|
|
Total
Inventories
|
$3,813,000
|
$1,512,000
|
Inventories consist
primarily of our energy storage systems and the related
subcomponents, and are stated at the lower of cost or net
realizable value. Inventory held at consignment locations is
included in our finished goods inventory and totaled $19,000 and
$14,000 as of June 30, 2019 and June 30, 2018,
respectively.
NOTE
5 – OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
|
|
|
Prepaid
insurance
|
$28,000
|
$5,000
|
|
Prepaid
inventory
|
59,000
|
52,000
|
|
Prepaid
rent
|
42,000
|
-
|
|
Prepaid offering
costs
|
198,000
|
-
|
|
Other
assets
|
-
|
25,000
|
|
Prepaid
expenses
|
44,000
|
9,000
|
|
Security
deposits
|
-
|
1,000
|
|
Total
Other current assets
|
$371,000
|
$92,000
|
NOTE
6 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
|
|
|
Payroll
accrual
|
$294,000
|
$166,000
|
|
PTO
accrual
|
200,000
|
67,000
|
|
Warranty
liability
|
361,000
|
158,000
|
|
Sales tax
payable
|
2,000
|
-
|
|
Garnishments
|
1,000
|
-
|
|
Total
Accrued expenses
|
$858,000
|
$391,000
|
NOTE
7 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and
equipment, net consist of the following:
|
|
|
|
|
Vehicles
|
$20,000
|
$1,000
|
|
Machinery
and equipment
|
246,000
|
112,000
|
|
Office
equipment
|
233,000
|
162,000
|
|
Furniture
and Equipment
|
116,000
|
39,000
|
|
Leasehold
improvements
|
-
|
34,000
|
|
|
615,000
|
348,000
|
|
Less:
Accumulated depreciation
|
(269,000)
|
(261,000)
|
|
Property,
plant and equipment, net
|
$346,000
|
$87,000
|
Depreciation
expense was approximately $81,000 and $57,000, for the years ended
June 30, 2019 and 2018, respectively, and is included in selling
and administrative expenses in the accompanying consolidated
statements of operations.
NOTE
8 - RELATED PARTY DEBT AGREEMENTS
Esenjay Credit Facilities
Between
October 2011 and September 2012, the Company entered into three
debt agreement with Esenjay. Esenjay is deemed to be a related
party as Mr. Michael Johnson, the beneficial owner and director of
Esenjay is a current member of our board of directors and a major
stockholder of the Company (owning approximately 61.4% of our
outstanding common shares as of June 30, 2019). The three debt
agreements consisted of a Bridge Loan Promissory Note, a Secondary
Revolving Promissory Note and an Unrestricted Line of Credit
(collectively, the “Loan Agreements”). On December 31,
2015, the Bridge Loan Promissory Note and the Secondary Revolving
Promissory Note expired leaving the Unrestricted Line of Credit,
available for future draws.
The
Unrestricted Line of Credit had a maximum borrowing amount of
$10,000,000, was convertible at a rate of $6.00 per share, bore
interest at 8% per annum and was converted to the Company’s
common stock on October 31, 2018 prior to maturity on January 31,
2019.
On
March 22, 2018, Flux Power entered into a credit facility agreement
with Esenjay with a maximum borrowing amount of $5,000,000.
Proceeds from the credit facility were to be used to purchase
inventory and related operational expenses and accrue interest at a
rate of 15% per annum (the “Inventory Line of Credit”).
The outstanding balance of the Inventory Line of Credit and all
accrued interest was due and payable on March 31, 2019. Funds
received from Esenjay since December 5, 2017 were transferred to
the Inventory Line of Credit resulting in $2,405,000 outstanding as
of June 30, 2018. This credit facility was amended on March 28,
2019 (see Amended Credit Facility).
On
October 31, 2018, the Company entered into an Early Note Conversion
Agreement (the “Early Note Conversion Agreement”) with
Esenjay, pursuant to which Esenjay agreed to immediately exercise
its conversion rights under the Unrestricted and Open Line of
Credit, dated September 24, 2012 to convert the outstanding
principal amount of $7,975,000 plus accrued and unpaid interest of
$1,041,280 for 1,502,714 shares of the Company’s common
stock. The Early Note Conversion Agreement had an induced
conversion which included issuance of 26,802 additional shares of
common stock. The Company followed FASB ASC Topic
No.470, Debt to record the early conversion of debt to
equity and recorded as interest expense at the
stock’s fair value of $466,351 at October 31,
2018.
As of
June 30, 2019 and 2018, the Company had approximately $571,000 and
$1,014,000, respectively of accrued interest associated with such
credit facilities.
Stockholder Convertible Promissory Note
On
April 27, 2017, we formalized an oral agreement for advances
totaling $500,000, received from a stockholder
(“Stockholder”) into a written Convertible Promissory
Note (the “Convertible Note”). Borrowings under the
Convertible Note accrue interest at 12% per annum, with all unpaid
principal and accrued interest due and payable on October 27, 2018.
In addition, at the election of Stockholder, all or any portion of
the outstanding principal, accrued but unpaid interest and/or late
charges under the Convertible Note may be converted into shares of
the Company’s common stock at a conversion price of $12.00
per share; provided, however, the Stockholder shall not have the
right to convert any portion of the Convertible Note to the extent
that the Stockholder would beneficially own in excess of 5% of the
total number of shares of common stock outstanding immediately
after giving effect to the issuance of shares of common stock
issuable upon conversion of the Convertible
Note.
On
October 25, 2018, the Company and the Stockholder entered into an
amendment to the Convertible Promissory Note. The amendment (i)
extended the maturity date of the Convertible Note from October 27,
2018 to February 1, 2019 and (ii) allowed for the automatic
conversion of the Convertible Note immediately following the full
conversion of the line of credit granted by Esenjay to the Company
under the Esenjay Loan into shares of Common Stock of the Company.
As a result of the Early Note Conversion Agreement on October 31,
2018, the Shareholder Convertible Note of $500,000 plus accrued
interest of $102,510 automatically converted into 50,210 shares of
common stock.
Stockholder Short Term Lines of Credit
On
October 26, 2018, the Company entered into a credit facility
agreement with Cleveland Capital, L.P., a Delaware limited
partnership (“Cleveland”), our minority stockholder,
pursuant to which Cleveland agreed to make available to the Company
a line of credit (“Cleveland LOC”) in a maximum
principal amount at any time outstanding of up to $2,000,000 with a
maturity date of December 31, 2018. The Cleveland LOC had an
origination fee of $20,000, which represents 1% of the Cleveland
LOC, and carries a simple interest of 12% per annum. Interest is
calculated on the basis of the actual daily balances outstanding
under the Cleveland LOC. The Cleveland LOC was repaid on December
27, 2018.
On
October 31, 2018, the Company entered into a credit facility
agreement with a shareholder, (“Investor”), pursuant to
which Investor agreed to make available to the Company a line of
credit (“Investor LOC”) in a maximum principal amount
at any time outstanding of up to Five Hundred Thousand Dollars
($500,000) with a maturity date of December 31, 2018. The Investor
LOC had an origination fee in the amount of Five Thousand Dollars
($5,000), which represents one percent (1%) of the Investor LOC,
and carries a simple interest of twelve percent (12%) per annum.
Interest is calculated on the basis of the actual daily balances
outstanding under the Investor LOC. The Investor LOC was repaid on
December 28, 2018.
Amended Credit
Facility
On
March 28, 2019, the Company, entered into an amended and restated
credit facility agreement (“Amended and Restated Credit
Facility Agreement”) with Esenjay Investments, LLC,
("Esenjay") and, Cleveland
Capital, L.P., a Delaware limited partnership and a minority
stockholder of the Company (“Cleveland” and Esenjay,
together with additional parties that may join as a lender, the
“Lenders”) to amend and restate the terms of the
Credit Facility Agreement dated March 22, 2018 between the Company
and Esenjay (the “Original Agreement”) in its
entirety.
The
Original Agreement was amended, among other things, to (i) increase
the maximum principal amount available under line of credit from
$5,000,000 to $7,000,000 (“LOC”), (ii) add Cleveland as
additional lender to the LOC pursuant to which each lender has a
right to advance a pro rata amount of the principal amount
available under the LOC, (iii) extend the maturity date from March
31, 2019 to December 31, 2019, and (iv) to provide for additional
parties to become a “Lender” under the Amended and
Restated Credit Facility Agreement. In connection with the LOC, on
March 28, 2019 the Company issued a secured promissory note to
Cleveland (the “Cleveland Note”), and an amended and
restated secured promissory note to Esenjay which amended and
superseded the secured promissory note dated March 22, 2018
(“Esenjay Note” and together with the Cleveland Note,
the “Notes”). The Notes were issued for the principal
amount of $7,000,000 or such lesser principal amount advanced by
the respective Lender under the Amended and Restated Credit
Facility Agreement (the “Principal Amount”). The Notes
bear an interest of fifteen percent (15%) per annum and a maturity
date of December 31, 2019. The outstanding balance as of June 30,
2019 was $6,405,000. Esenjay
has contributed $2,405,000, Cleveland $2,000,0000, Winn Exploration
Co. $1,000,000, Otto Candies Jr. $500,000, Paul Candies $250,000
and Brett Candies $250,000. As of September 12, 2019, we had
$595,000 under the LOC available for future draws with all parties
combined.
To
secure the obligations under the Notes, the Company entered into an
amended and restated credit facility agreement dated March 28, 2019
with the Lenders (the “Amended Security Agreement”).
The Amended Security Agreement amends and restates the Guaranty and
Security Agreement dated March 22, 2018 by and between Cleveland as
a secured party to the agreement and appointing Esenjay as
collateral agent.
NOTE
9 - STOCKHOLDERS’ DEFICIT
Private Placements
In December 2018, our Board of Directors approved
the private placement of up to 454,546 shares of common stock to
select accredited investors for a total amount of $5,000,000, or
$11.00 per share of common stock with the right of the Board to
increase the offering amount to $7,000,000 (the
“Offering”). On December 26, 2018, the Company
completed an initial closing of the Offering, pursuant to which it
sold an aggregate of 335,910 shares of common stock, at $11.00 per
share, for an aggregate purchase price of $3,695,010 in cash. A
portion of the proceeds from the Offering was used to repay in full
approximately $2.6 million in borrowings and accrued interest under
two short-term credit facilities provided by Cleveland Capital,
L.P. and a stockholder.
On
January 29, 2019, the Company conducted its final closing (the
“Final Closing”) to its round of private placement to
accredited investors that initially closed on December 26, 2018
(“Initial Closing”). Following the Initial Closing to
the Final Closing, the Company sold an additional 63,347 shares of
its Common Stock (“Shares”), at $11.00 per share, for
an aggregate purchase price of $696,810 to two accredited
investors. The shares offered and sold in the Offering have
not been registered under the Securities Act of 1933, as amended
(“Securities Act”), and may not be offered or sold in
the United States absent registration or an applicable exemption
from the registration requirements of the Securities Act. The
shares were offered and sold to the accredited investors in
reliance upon exemptions from registration pursuant to Rule 506(c)
of Regulation D promulgated under Section 4(a)(2) under the
Securities Act.
In
the aggregate, the Company issued 339,257 for an aggregate gross
proceeds of approximately $4.39 million. The Shares were issued on
identical terms to those previously reported for the Initial
Closing on the Company’s Form 8-K filed with the Securities
and Exchange Commission (“SEC”) on December 28, 2018.
The Company relied on the exemption from registration pursuant to
Rule 506(c) of Regulation D promulgated under Section 4(a)(2) under
the Securities Act of 1933, as amended.
Advisory Agreements
Catalyst Global LLC.
Effective April 1, 2018, the Company entered into a renewal
contract (the “2018 Renewal”) with Catalyst Global LLC
to provide investor relations services for 12 months in exchange
for monthly fees of $4,500 per month and 3,484 shares of restricted
common stock to be issued over the course of the 12-month term. The
initial tranche of 871 shares was valued at $15.50 or $13,500 when
issued on June 21, 2018, the second tranche of 871 shares was
valued at $20.10 or $17,507 when issued September 28, 2018, the
third tranche of 871 shares was valued at $17.50 per share or
$15,243 when issued on December 31, 2018, and the fourth tranche of
871 shares was valued at $13.10 per share or $11,410 when issued on
March 27, 2019.
Shenzhen Reach Investment
Development Co. (“SRID”). On March 14, 2018, the
Company entered into a consulting agreement with SRID to assist us
with identifying strategic partners, suppliers and manufacturers in
China for a term of 12 months. Included with the services is a
two-week trip to China to meet with potential manufacturers, which
took place in April 2018. In consideration for the services, we
agreed to issue to SRID, up to 17,468 shares of restricted common
stock over the course of the 12-month term. As of June 30, 2019,
17,468 shares have been issued. The initial tranche of 5,765 shares
was valued at $5.20 or $29,978 when issued on April 26, 2018, the
second tranche of 2,926 shares was valued at $17.00 or $49,742 when
issued June 21, 2018, the third tranche of 2,926 shares was valued
at $20.10 or $58,813 when issued September 28, 2018, the fourth
tranche of 2,926 shares was valued at $13.90 per share or $40,671
when issued on January 4, 2019 and the fifth tranche of 2,926
shares was valued at $13.60 per share or $39,794 when issued on
March 22, 2019.
Warrant Activity
Warrant
detail for the year ended June 30, 2019 is reflected
below:
|
|
|
Weighted
Average
Exercise
Price
Per
Warrant
|
Remaining
Contract
Term (#
years)
|
|
Warrants
outstanding and exercisable at June 30, 2018
|
174,079
|
$20.30
|
0.74
|
|
Warrants
issued
|
-
|
$-
|
-
|
|
Warrants
exchanged
|
(7,996)
|
14.80
|
-
|
|
Warrants
forfeited
|
(157,750)
|
$19.93
|
-
|
|
Warrants
outstanding and exercisable at June 30, 2019
|
8,333
|
$20.00
|
0.25
|
Warrant
detail for year ended June 30, 2018 is reflected
below:
|
|
|
Weighted
Average
Exercise
Price
Per
Warrant
|
Remaining
Contract
Term (#
years)
|
|
Warrants
outstanding and exercisable at June 30, 2017
|
234,259
|
$19.70
|
0.12-1.55
|
|
Warrants
issued
|
-
|
$-
|
-
|
|
Warrants
exchanged
|
(14,165)
|
$6.00
|
-
|
|
Warrants
forfeited
|
(46,015)
|
$21.50
|
-
|
|
Warrants
outstanding and exercisable at June 30, 2018
|
174,079
|
$20.30
|
0.74
|
Stock-based
Compensation
On
November 26, 2014, the board of directors approved the 2014 Equity
Incentive Plan (the “2014 Plan”), which was approved by
the Company’s stockholders on February 17, 2015. The 2014
Plan offers selected employees, directors, and consultants the
opportunity to acquire our common stock, and serves to encourage
such persons to remain employed by us and to attract new employees.
The 2014 Plan allows for the award of stock and options, up to
1,000,000 shares of our common stock.
Activity in stock
options during the year ended June 30, 2019 and related balances
outstanding as of that date are reflected below:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contract
Term (#
years)
|
|
Outstanding
at June 30, 2018
|
350,726
|
$8.38
|
8.87
|
|
Granted
|
245,027
|
$14.45
|
9.71
|
|
Exercised
|
-
|
$-
|
-
|
|
Forfeited
and cancelled
|
(15,582)
|
$4.64
|
-
|
|
Outstanding
at June 30, 2019
|
580,171
|
$11.05
|
8.59
|
|
Exercisable
at June 30, 2019
|
303,611
|
$10.02
|
8.01
|
Activity in stock
options during the year ended June 30, 2018 and related balances
outstanding as of that date are reflected below:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contract
Term (# years)
|
|
Outstanding
at June 30, 2017
|
71,628
|
$11.00
|
7.09
|
|
Granted
|
292,511
|
$7.80
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeited
and cancelled
|
(13,413)
|
$4.60
|
-
|
|
Outstanding
at June 30, 2018
|
350,726
|
$8.38
|
8.87
|
|
Exercisable
at June 30, 2018
|
139,169
|
$7.30
|
7.70
|
Stock-based
compensation expense recognized in the consolidated statements of
operations for the year ended June 30, 2019 and 2018, includes
compensation expense for stock-based options and awards granted
based on the grant date fair value. For options and awards granted,
expenses are amortized under the straight-line method over the
expected vesting period. Stock-based compensation expense
recognized in the consolidated statements of operations has been
reduced for estimated forfeitures of options that are subject to
vesting. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
At June
30, 2019, the aggregate intrinsic value of exercisable options was
$1,377,000.
We
allocated stock-based compensation expense included in the
consolidated statements of operations for employee option grants
and non-employee option grants as follows:
|
Years ended June 30,
|
|
|
|
Research
and development
|
$314,000
|
$96,000
|
|
Selling
and administrative
|
1,630,000
|
159,000
|
|
Total
stock-based compensation expense
|
$1,944,000
|
$255,000
|
The
Company uses the Black-Scholes valuation model to calculate the
fair value of stock options. The fair value of stock options was
measured at the grant date using the assumptions (annualized
percentages) in the table below:
|
|
2019
|
|
2018
|
|
Expected
volatility
|
111.4%
-112.2%
|
|
138%
-143%
|
|
Risk
free interest rate
|
2.43% -
2.45%
|
|
1.76% -
2.63%
|
|
Forfeiture
rate
|
20%
|
|
20%
-23%
|
|
Dividend
yield
|
0%
|
|
0%
|
|
Expected
term (years)
|
5.61
|
|
5
|
The
remaining amount of unrecognized stock-based compensation expense
at June 30, 2019 relating to outstanding stock options, is
approximately $2,292,000, which is expected to be recognized over
the weighted average period of 1.08 years.
NOTE
10 - INCOME TAXES
Pursuant to the
provisions of FASB ASC Topic No. 740 Income Taxes (“ASC
740”), deferred
income taxes reflect the net effect of (a) temporary difference
between carrying amounts of assets and liabilities for financial
purposes and the amounts used for income tax reporting purposes,
and (b) net operating loss carryforwards. No net provision for
refundable Federal income taxes has been made in the accompanying
statement of operations because no recoverable taxes were paid
previously. Significant components of the Company’s net
deferred tax assets at June 30, 2019 and 2018 are shown below.
A valuation allowance of approximately $11,636,000 and $8,589,000
has been established to offset the net deferred tax assets as of
June 30, 2019 and 2018, respectively, due to uncertainties
surrounding the Company’s ability to generate future taxable
income to realize these assets.
The
Company is subject to taxation in the United States and California.
The Company’s tax years for 2010 and forward are subject to
examination by the United States and California tax authorities due
to the carry forward of unutilized net operating losses and
research and development credits (if any).
No
current income tax provision or benefit has been recorded as the
Company incurred a net loss for each of the two years ended June
30, 2019 and 2018. Significant components of net deferred tax
assets are shown in the table below.
|
|
|
|
|
|
|
|
Deferred Tax
Assets:
|
|
|
|
Net
operating loss carryforwards
|
$10,028,000
|
$7,333,000
|
|
Stock
compensation
|
1,407,000
|
1,160,000
|
|
Interest
expense Sec. 163
|
55.000
|
-
|
|
Other,
net
|
146,000
|
96,000
|
|
Net
deferred tax assets
|
11,636,000
|
8,589,000
|
|
Valuation
allowance for deferred tax assets
|
(11,636,000)
|
(8,589,000)
|
|
Net
deferred tax assets
|
$-
|
$-
|
At June
30, 2019, the Company had unused net operating loss carryovers of
approximately $35,846,000 and $35,802,000 that are available to
offset future federal and state taxable income, respectively. These
operating losses begin to expire in 2030.
The
provision for income taxes on earnings subject to income taxes
differs from the statutory federal rate at June 30, 2019 and 2018,
due to the following:
|
|
|
|
|
|
|
|
Federal income
taxes at 21% and 34%, respectively
|
$(2,607,000)
|
$(1,915,000)
|
|
State
income taxes, net
|
(867,000)
|
(446,000)
|
|
Permanent
differences and other
|
450,000
|
345,000
|
|
Other
true ups, if any
|
(23,000)
|
(206,000)
|
|
Change
in federal tax rate
|
-
|
3,560,000
|
|
Change
in valuation allowance
|
(3,047,000)
|
(1,338,000)
|
|
Provision
for income taxes
|
$-
|
$-
|
Internal Revenue
Code Sections 382 limits the use of our net operating loss
carryforwards if there has been a cumulative change in ownership of
more than 50% within a three-year period. The Company has not
yet completed a Section 382 net operating loss analysis. In the
event that such analysis determines there is a limitation on the
use on net operating loss carryforwards to offset future taxable
income, the recorded deferred tax asset relating to such net
operating loss carryforwards will be reduced. However, as the
Company has recorded a full valuation allowance against its net
deferred tax assets, there is no impact on the Company’s
consolidated financial statements as of June 30, 2019 and
2018.
Under
ASC 740, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
In
accordance with ASC 740, there are no unrecognized tax benefits as
of June 30, 2019 or June 30, 2018.
On December
22, 2017, the President of the United States signed into law
the Tax Cuts and Jobs Act (“Tax Act”). The legislation
significantly changes U.S. tax law by, among other things, reducing
the US federal corporate tax rate from 35% to 21%, repealing the
alternative minimum tax, implementing a territorial tax system and
imposing a repatriation tax on deemed repatriated earnings of
foreign subsidiaries.
Pursuant
to the SEC’s Staff Accounting Bulletin No. 118, Income Tax
Accounting Implications of the Tax Cuts and Jobs Act (“SAB
118”), given the amount and complexity of the changes in the
tax law resulting from the tax legislation, the Company has not
finalized the accounting for the income tax effects of the tax
legislation related to the remeasurement of deferred taxes and
provisional amounts recorded related to the transition tax. The
impact of the tax legislation may differ from the estimate, during
the one-year measurement period due to, among other things, further
refinement of the Company’s calculations, changes in
interpretations and assumptions the Company has made, guidance that
may be issued and actions the Company may take as a result of the
tax legislation.
We have
resmeasured deferred tax assets and liabilities based on the rates
at which they are expected to reverse in the future, which is
generally 21% plus state and local tax. The Company recorded a
decrease related to the deferred tax assets and liabilities of $3.6
million as a result of the tax rate decrease, with a corresponding
adjustment to the valuation allowance for the year ended June 30,
2018.
NOTE
11 - OTHER RELATED PARTY TRANSACTIONS
The
Company subleased office and manufacturing space to Epic Boats (an
entity founded and controlled by Chris Anthony, our board member
and former Chief Executive Officer) in our facility in Vista,
California pursuant to a month-to-month sublease agreement.
Pursuant to this agreement, Epic Boats paid Flux Power 10% of
facility costs through the end of our lease agreement which was
June 30, 2019.
The
Company received $18,000 for each of the years ended June 30, 2019
and 2018 from Epic Boats under the sublease rental agreement which
is recorded as a reduction to rent expense and the customer
deposits discussed below.
As of
June 30, 2019 the customer deposit totaling approximately $84,000
was recognized as Other Income since Epic Boats has released that
deposit liability. As of June 30, 2019 and June 30, 2018, customer
deposits totaling approximately $0 and $102,000, respectively,
related to such products were recorded in the accompanying
consolidated balance sheets. There were no receivables outstanding
from Epic Boats as of June 30, 2019 and June 30, 2018.
NOTE
12 - CONCENTRATIONS
Credit Risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments
and unsecured trade accounts receivable. The Company maintains cash
balances at a financial institution in San Diego, California. Our
cash balance at this institution is secured by the Federal Deposit
Insurance Corporation up to $250,000. As of June 30, 2019, cash
totaled approximately $102,000, which consists of funds held in a
non-interest bearing bank deposit account. The Company has not
experienced any losses in such accounts. Management believes that
the Company is not exposed to any significant credit risk with
respect to its cash.
Customer Concentrations
During
the year ended June 30, 2019, the Company had four major customers
that each represented more than 10% of its revenues on an
individual basis, or approximately $8,072,000 or 87% of its total
revenues.
During
the year ended June 30, 2018, the Company had two major customers
that each represented more than 10% of its revenues on an
individual basis, or approximately $3,181,000 or 77% of its total
revenues.
Suppliers/Vendor Concentrations
The
Company obtains a limited number of components and supplies
included in its products from a small group of suppliers. During
the year ended June 30, 2019 the Company had three suppliers who
accounted for more than 10% of its total purchases, on an
individual basis. Purchases for these three suppliers totaled
$6,855,000 or 62% of its total purchases.
During
the year ended June 30, 2018 the Company had three suppliers who
accounted for more than 10% of its total purchases, on an
individual basis. Purchases for these three suppliers totaled
$2,285,000 or 50% of our total purchases.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
From
time to time, the Company may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties
and an adverse result in these or other matters may arise from time
to time that may harm our business. To the best knowledge of
management, there are no material legal proceedings pending against
the Company.
Operating Leases
On
April 25, 2019 the Company signed a lease with Accutek to rent
approximately 45,600 square feet of industrial space at 2685 S.
Melrose Drive, Vista, California. The lease has an initial term of
seven years and four months, commencing on or about July 2019. The
lease contains an option to extend the term for two periods of
twenty-four months, and the right of first refusal to lease an
additional approximate 15,300 square feet. The monthly rental rate
is $42,400 for the first 12 months, escalating at 3% each year. We
moved in on June 28, 2019.
Total
rent expense was approximately $168,000 and $160,000 for the years
ended June 30, 2019 and 2018, respectively, net of sublease
income.
The
Future Minimum Lease Payments for the new lease are:
|
2020
|
$381,814
|
|
2021
|
393,269
|
|
2022
|
496,354
|
|
2023
|
512,518
|
|
2024
|
571,590
|
|
Thereafter
|
1,454,497
|
|
|
|
Total Future
Minimum Lease Payments
|
$3,810,042
|
NOTE
14 - SUBSEQUENT EVENTS
Reverse Split. The Company effected a
1-for-10 reverse split of its common stock and preferred stock on
July 11, 2019 (2019 Reverse Split). No fractional shares were
issued in connection with the 2019 Reverse Split. If, as a result
of the 2019 Reverse Split, a stockholder would otherwise have been
entitled to a fractional share, each fractional share was rounded
up. The 2019 Reverse Split resulted in a reduction of outstanding
shares of common stock from 51,000,868 to 5,101,580. In addition,
it resulted in a reduction of authorized shares of common stock
from 300,000,000 to 30,000,000, and a reduction of authorized
shares of preferred stock from 5,000,000 to 500,000.
On
July 3, 2019, the Company entered into a certain loan agreement
with Cleveland Capital, L.P. pursuant to which Cleveland agreed to
loan the Company $1,000,000 (the Loan). In connection with the
Loan, on July 3, 2019, the Company issued Cleveland an unsecured
short-term promissory in the amount of $1,000,000 (the Unsecured
Promissory Note). The promissory note bears an interest rate of
15.0% per annum and was originally due on September 1, 2019, unless
repaid earlier from a percentage of proceeds from certain
identified accounts receivable. In connection with the Loan, the
Company issued Cleveland a three-year warrant (the Cleveland
Warrant) to purchase the Company’s common stock in a number
equal to one-half percent (0.5%) of the number of shares of common
stock outstanding after giving effect to the total number of shares
of common stock sold in a public offering. The Cleveland Warrant
had an exercise price equal to the per share public offering price.
Effective September 1, 2019, the Company entered into that certain
Amendment No. 1 to the Unsecured Promissory Note pursuant to which
the maturity date was modified from September 1, 2019 to December
1, 2019 (the Amendment). In
connection with the Amendment, the Company replaced the Cleveland
Warrant with a certain Amended and Restated Warrant Certificate
(the Amended Warrant). The Amended Warrant increased the warrant
coverage from 0.5% to 1% of the number of shares of common stock
outstanding after giving effect to the total number of shares of
common stock sold in the next private or public offering
(Offering). In addition, the exercise price was also changed to
equal the per share price of common stock sold in the Offering. As
of September 12, 2019, $1,000,000 in principal remains outstanding
under the Loan.
On
August 23, 2019, the Company entered into a Factoring Agreement
(Factoring Agreement) with CSNK Working Capital Finance Corp. d/b/a
Bay View Funding (“CSNK”) for a factoring facility
under which CSNK will, from time to time, buy approved receivables
from the Company. The factoring facility provides for the Company
to have access to the lesser of (i) $3 million (Maximum Credit) or
(ii) the sum of all undisputed receivables purchased by CSNK
multiplied by the 90% (which percentages may be adjusted by CSNK in
its sole discretion). Upon receipt of any advance, Company will
have sold and assigned all of its rights in such receivables and
all proceeds thereof. The factoring facility is secured by the
Company’s accounts, equipment, inventory, financial assets,
chattel paper, electronic chattel paper, letters of credit, letters
of credit rights, general intangibles, investment property, deposit
accounts, documents, instruments, supporting obligations,
commercial tort claims, the reserve, motor vehicles, all books,
records, files and computer data relating to the foregoing, and all
proceeds of the foregoing. Company is required to pay CSNK a
facility fee of 1.0% of the Maximum Credit upon execution of the
Factoring Agreement and a factoring fee of 0.75% of the face value
of purchased receivables for 1st 30-days such receivables are
outstanding after purchase and 0.35% for each 15-days thereafter
until the receivables are repaid in full or otherwise repurchased
by Company or otherwise written off by CSNK. In addition, Company
is required to pay financing fees on the outstanding advances equal
to a floating rate per annum equal to the Prime + 2.0% (8.0%
floor). In the event, the aggregate factoring fee and financing fee
is less than 0.5% of the Maximum Credit in any one month, Company
will pay CSNK the difference for such month. CSNK has the right to
demand repayment of any purchased receivables which remain unpaid
for 90-days after purchase or with respect to which any account
debtor asserts a dispute.
The
factoring facility is for an initial term of twelve months and will
renew on a year to year basis thereafter, unless terminated in
accordance with the Factoring Agreement. Company may terminate the
Factoring Agreement at any time upon 60 days prior written notice
and payment to CSNK of an early termination fee equal to 0.5% of
the Maximum Credit multiplied by the number of months remaining in
the current term. As of September 11, 2019, the Company has
received $302,600 for the sale of receivables pursuant to Factoring
Agreement.
In
August 2019, we issued a total of 2,894 shares of common stock in
connection with a net exercise of 4,438 outstanding options by the
holder.