SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
☑
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March December 31, 2018☐
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
2018
☐
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)
Nevada | | 86-0931332 |
(State or other jurisdiction of | | (I.R.S. Employer
|
incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
985 Poinsettia Avenue, Suite A, Vista, California | | 92081 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
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”filer���, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☑ |
(Do not check if a smaller reporting company) | | | |
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 ☑
Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class | | Outstanding as of May 14, 2018 February 13, 2019 |
Common Stock, $0.001 par value | | 26,356,033
50,962,900 |
FLUX POWER HOLDINGS, INC.
For the Quarterly Period Ended
March December 31, 20182018
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. The forward-looking statements are contained principally in the section entitled “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 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 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.
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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 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 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:
•
| the “Company,” “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. (“Flux Power”), a California corporation;
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| “Exchange Act” refers to 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.
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“Exchange Act” refers to 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.
PARTPART I - Financial InformationItem 1. Financial Statements
FLUX POWER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| | | March 31, 2018 (Unaudited) | | | June 30, 2017 | |
| | | | | | | | | |
ASSETS | | | | | | | | |
| | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 128,000 | | | $ | 121,000 | |
Accounts receivable | | | 972,000 | | | | 80,000 | |
Inventories | | | 1,431,000 | | | | 1,566,000 | |
Other current assets | | | 22,000 | | | | 69,000 | |
Total current assets | | | 2,553,000 | | | | 1,836,000 | |
| | | | | | | | | |
Other assets | | | 26,000 | | | | 26,000 | |
Property, plant and equipment, net | | | 77,000 | | | | 59,000 | |
| | | | | | | | | |
Total assets | | $ | 2,656,000 | | | $ | 1,921,000 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | |
| | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 628,000 | | | $ | 367,000 | |
Accrued expenses | | | 262,000 | | | | 259,000 | |
Accrued interest | | | 774,000 | | | | 239,000 | |
Line of credit - related party | | | 9,730,000 | | | | - | |
Convertible promissory note - related party | | | 500,000 | | | | - | |
Total current liabilities | | | 11,894,000 | | | | 865,000 | |
| | | | | | | | | |
Long term liabilities: | | | | | | | | |
Line of credit - related party | | | - | | | | 5,185,000 | |
Convertible promissory note - related party | | | - | | | | 500,000 | |
Customer deposits from related party | | | 106,000 | | | | 120,000 | |
| | | | | | | | | |
Total liabilities | | | 12,000,000 | | | | 6,670,000 | |
| | | | | | | | | |
Commitments and contingencies (Note 8) | | | | | | | | |
| | | | | | | | | |
Stockholders’ deficit: | | | | | | | | |
| | | | | | | | | |
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value; 300,000,000 shares authorized; 25,441,248 and 25,085,526 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively | | | 25,000 | | | | 25,000 | |
Additional paid-in capital | | | 15,367,000 | | | | 14,923,000 | |
Accumulated deficit | | | (24,736,000 | ) | | | (19,697,000 | ) |
| | | | | | | | | |
Total stockholders’ deficit | | | (9,344,000 | ) | | | (4,749,000 | ) |
| | | | | | | | | |
Total liabilities and stockholders’ deficit | | $ | 2,656,000 | | | $ | 1,921,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
FLUX POWER HOLDINGS, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
| | | Three months ended March 31, | | | Nine months ended March 31, | |
| | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Net revenue | | $ | 1,666,000 | | | $ | 306,000 | | | $ | 3,020,000 | | | $ | 781,000 | |
Cost of sales | | | 1,816,000 | | | | 508,000 | | | | 3,728,000 | | | | 1,384,000 | |
| | | | | | | | | | | | | | | | | |
Gross loss | | | (150,000 | ) | | | (202,000 | ) | | | (708,000 | ) | | | (603,000 | ) |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 909,000 | | | | 664,000 | | | | 2,378,000 | | | | 1,842,000 | |
Research and development | | | 483,000 | | | | 245,000 | | | | 1,441,000 | | | | 772,000 | |
Total operating expenses | | | 1,392,000 | | | | 909,000 | | | | 3,819,000 | | | | 2,614,000 | |
| | | | | | | | | | | | | | | | | |
Operating loss | | | (1,542,000 | ) | | | (1,111,000 | ) | | | (4,527,000 | ) | | | (3,217,000 | ) |
| | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Change in fair value of derivative liabilities | | | - | | | | 1,000 | | | | - | | | | 14,000 | |
Interest expense | | | (211,000 | ) | | | (52,000 | ) | | | (512,000 | ) | | | (174,000 | ) |
| | | | | | | | | | | | | | | | | |
Net loss | | $ | (1,753,000 | ) | | $ | (1,162,000 | ) | | $ | (5,039,000 | ) | | $ | (3,377,000 | ) |
| | | | | | | | | | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.07 | ) | | $ | (0.05 | ) | | $ | (0.20 | ) | | $ | (0.14 | ) |
| | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic and diluted | | | 25,112,349 | | | | 25,038,256 | | | | 25,142,039 | | | | 24,372,419 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FLUX POWER HOLDING, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
| | | Nine Months Ended March 31, | |
| | | 2018 | | | 2017 | |
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (5,039,000 | ) | | $ | (3,377,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
Depreciation | | | 41,000 | | | | 32,000 | |
Change in fair value of warrant liability | | | - | | | | (14,000 | ) |
Stock-based compensation | | | 209,000 | | | | 30,000 | |
Stock issuance for services | | | 35,000 | | | | 9,000 | |
Amortization of deferred financing costs | | | - | | | | 44,000 | |
Amortization of debt discount | | | - | | | | 19,000 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (892,000 | ) | | | (2,000 | ) |
Inventories | | | 135,000 | | | | (748,000 | ) |
Other current assets | | | 47,000 | | | | (7,000 | ) |
Accounts payable | | | 261,000 | | | | 148,000 | |
Accrued expenses | | | 3,000 | | | | (77,000 | ) |
Accrued interest | | | 535,000 | | | | 58,000 | |
Customer deposits | | | (14,000 | ) | | | (12,000 | ) |
Net cash used in operating activities | | | (4,679,000 | ) | | | (3,897,000 | ) |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Purchases of equipment | | | (59,000 | ) | | | (45,000 | ) |
Net cash used in investing activities | | | (59,000 | ) | | | (45,000 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Repayment of line of credit | | | - | | | | (215,000 | ) |
Proceeds from the sale of common stock | | | 200,000 | | | | 1,075,000 | |
Borrowings from line of credit - related party debt | | | 4,545,000 | | | | 3,025,000 | |
Net cash provided by financing activities | | | 4,745,000 | | | | 3,885,000 | |
| | | | | | | | | |
Net change in cash | | | 7,000 | | | | (57,000 | ) |
Cash, beginning of period | | | 121,000 | | | | 127,000 | |
| | | | | | | | | |
Cash, end of period | | $ | 128,000 | | | $ | 70,000 | |
| | | | | | | | | |
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | | | | | |
Conversion of debt to equity | | $ | - | | | $ | 400,000 | |
Fair value of warrants exchanged for common stock | | $ | - | | | $ | 10,000 | |
Stock issuance for services | | $ | 35,000 | | | $ | - | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
FLUXLUX POWER HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | December 31, 2018 (Unaudited) | |
| | | |
| ASSETS |
|
|
| | | |
| Current assets: | | |
| Cash | $1,044,000 | $2,706,000 |
| Accounts receivable | 2,035,000 | 946,000 |
| Inventories | 2,848,000 | 1,512,000 |
| Other current assets | 56,000 | 92,000 |
| Total current assets | 5,983,000 | 5,256,000 |
| | | |
| Other assets | 26,000 | 26,000 |
| Property, plant and equipment, net | 157,000 | 87,000 |
| | | |
| Total assets | $6,166,000 | $5,369,000 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | |
| | | |
| Current liabilities: | | |
| Accounts payable | $1,104,000 | $417,000 |
| Accrued expenses | 595,000 | 391,000 |
| Deferred revenue | 40,000 | - |
| Line of credit - related party | 2,405,000 | 10,380,000 |
| Convertible promissory note - related party | - | 500,000 |
| Accrued interest | 294,000 | 1,014,000 |
| Total current liabilities | 4,438,000 | 12,702,000 |
| | | |
| Long term liabilities: | | |
| Customer deposits from related party | 93,000 | 102,000 |
| | | |
| Total liabilities | 4,531,000 | 12,804,000 |
| | | |
| Commitments and contingencies (Note 8) | | |
| | | |
| Stockholders’ equity (deficit): | | |
| | | |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding | | |
| Common stock, $0.001 par value; 300,000,000 shares authorized; 50,329,436 and 31,061,028 shares issued and outstanding at December 31, 2018 and June 30, 2018, respectively | 50,000 | 31,000 |
| Additional paid-in capital | 33,572,000 | 19,196,000 |
| Accumulated deficit | (31,987,000) | (26,662,000) |
| Total stockholders’ equity (deficit) | 1,635,000 | (7,435,000) |
| | | |
| Total liabilities and stockholders’ equity (deficit) | $6,166,000 | $5,369,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUX POWER HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three months ended December 31, | Six months ended December 31, |
| | | | | |
| Net revenue | $2,711,000 | $1,201,000 | $4,547,000 | $1,354,000 |
| Cost of sales | 2,456,000 | 1,589,000 | 4,275,000 | 1,898,000 |
| | | | | |
| Gross income (loss) | 255,000 | (388,000) | 272,000 | (544,000) |
| | | | | |
| Operating expenses: | | | | |
| Selling and administrative expenses | 1,604,000 | 807,000 | 3,097,000 | 1,483,000 |
| Research and development | 882,000 | 479,000 | 1,533,000 | 957,000 |
| Total operating expenses | 2,486,000 | 1,286,000 | 4,630,000 | 2,440,000 |
| | | | | |
| Operating loss | (2,231,000) | (1,674,000) | (4,358,000) | (2,984,000) |
| | | | | |
| Other income (expense): | | | | |
| | | | | |
| Interest expense | (693,000) | (166,000) | (967,000) | (302,000) |
| | | | | |
| Net loss | $(2,924,000) | $(1,840,000) | $(5,325,000) | $(3,286,000) |
| | | | | |
| Net loss per share - basic and diluted | $(0.07) | $(0.07) | $(0.15) | $(0.13) |
| | | | | |
| Weighted average number of common shares outstanding - basic and diluted | 41,966,786 | 25,097,827 | 36,517,598 | 25,108,859 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Six months ended December 31, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(5,325,000) | $(3,286,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation | 31,000 | 26,000 |
| Stock-based compensation | 407,000 | 164,000 |
| Stock issuance for services | 208,000 | 12,000 |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | (1,089,000) | (1,049,000) |
| Inventories | (1,336,000) | 403,000 |
| Other current assets | 36,000 | 15,000 |
| Accounts payable | 687,000 | 113,000 |
| Accrued expenses | 204,000 | 24,000 |
| Deferred revenue | 40,000 | - |
| Accrued interest | 890,000 | 325,000 |
| Customer deposits | (9,000) | (9,000) |
| Net cash used in operating activities | (5,256,000) | (3,262,000) |
| | | |
| Cash flows from investing activities | | |
| Purchases of equipment | (101,000) | (43,000) |
| Net cash used in investing activities | (101,000) | (43,000) |
| | | |
| Cash flows from financing activities: | | |
| Proceeds from the sale of common stock | 3,695,000 | - |
| Repayment of line of credit - related party debt | (2,500,000) | - |
| Borrowings from line of credit - related party debt | 2,500,000 | 3,215,000 |
| Net cash provided by financing activities | 3,695,000 | 3,215,000 |
| | | |
| Net change in cash | (1,661,000) | (90,000) |
| Cash, beginning of period | 2,706,000 | 121,000 |
| | | |
| Cash, end of period | $1,044,000 | $31,000 |
| | | |
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | |
| Common stock issued for conversion of related party debt | $8,475,000 | $- |
| Common stock issued for conversion of accrued interest | $1,610,000 | $- |
| Stock issuance for services | $208,000 | $12,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUX POWER HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
DECEMBER 31,
2018(Unaudited)
2018
NOTE 1 - NATURE OF BUSINESS
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form
10-K10-K for the fiscal year ended
June 30, 2017 2018 filed with the SEC on
September 22, 2017. 26, 2018. In the opinion of management, the accompanying condensed consolidated interim financial statements include all adjustments necessary in order to make the financial statements
not misleading. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the full year or any other future period. Certain notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Company’s Annual Report on Form
10-K10-K have been omitted. The accompanying condensed consolidated balance sheet at
June 30, 2017 2018 has been derived from the audited balance sheet at
June 30, 2017 2018 contained in such Form
10-K.10-K.
Flux Power Holdings, Inc. designs, develops and sells rechargeable advanced lithium-ion batteries for industrial equipment. As used herein, the terms “we”, “us”, “our”, “Flux” and “Company” refer to Flux Power Holdings, Inc. and our wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), unless otherwise indicated. We have structured our business around our core technology,
“The Batterythe “Battery Management System” (“BMS”)
and the development of a scalable product line that can accommodate a variety of applications.. Our BMS provides
fourthree critical functions to our battery systems: cell balancing, monitoring
and error
reporting and over discharge prevention. The modular and scalable nature of our flagship battery pack, the LiFT Pack, utilized in Class 3 walkie pallet jacks, has provided for a natural transition into the production of battery packs used in other types of forklifts such as the Class 1 ride-on trucks, Class 2 narrow aisle trucks and order pickers and Class 3 end riders, as well as, ground support equipment (“GSE”).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. Sales have been primarily to customers located throughout the United States.
Reverse Stock Split
On August 10, 2017, we filed a certificate of amendment to our articles of incorporation with the State of Nevada effectuating a reverse split of the Company’s common stock at a ratio of 1 for 10, whereby every ten pre-reverse stock split shares of common stock automatically converted into one-post reverse stock split share of common stock, without changing the $0.001 par value or authorized number of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the State of Nevada on August 18, 2017. Mr. Michael Johnson, a current member of our board of directors and a holder of a majority of our issued and outstanding common stock approved the Reverse Stock Split on July 7, 2017. On that date, every 10 issued and outstanding shares of the Company’s common stock automatically converted into one outstanding share. No fractional shares were issued in connection with the Reverse Stock Split. If, as a result of the Reverse Split, a stockholder would otherwise have been entitled to a fractional share, each fractional share was rounded up. As a result of the Reverse Stock Split, the number of the Company’s outstanding shares of common stock decreased from 250,842,418 (pre-split) shares to 25,085,526 (post-split) shares. The Reverse Stock Split affected all stockholders of the Company’s common stock uniformly and did not affect any stockholder’s percentage of ownership interest, except for that which may have been affected by the rounding up of fractional shares. Because of the reduction in the number of the Company’s outstanding shares, the Company’s loss per share in all periods 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 $226,000 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 condensed consolidated financial statements and notes thereto have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
NOTE
2 – LIQUIDITY AND GOING CONCERN
The accompanying condensed 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
$24,736,000$31,987,000 through
MarchDecember 31, 2018 and had a net loss of
$1,753,000$2,924,000 and
$5,039,000$5,325,000 for the
three and
ninesix month ended
MarchDecember 31, 2018, respectively. To date, our revenues and operating cash flows have
not been sufficient to sustain our operations and we have relied on debt and equity financing to fund our operations. These factors raise substantial doubt about our ability to continue as a going concern for the
twelve months following the filing date of our Quarterly Report on Form
10-Q, May 14, 2018. 10-Q, February 13, 2019. 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 has undertaken steps to improve
our financial positionoperations with the goal of sustaining our operations. These steps include (a) developing
a full product line of lithium battery packs for forklifts;additional products to serve the Class 1 and
Class 2 industrial equipment markets; (b)
expandingexpand our sales
force throughout the United States.efforts; and (c) improve gross margins. In that regard, we have increased our research and development efforts to focus on completing the development of energy storage solutions that can be used on larger
forklifts. During December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluationforklifts and have
continued the improvementimplemented additional marketing efforts. Those efforts have resulted in ongoing evaluations of battery packs on larger forklifts and
developmentground support equipment (“GSE”) along with commercial sales of
theGSE packs, End Rider packs, Class
1 LiFT Pack, as well as, the development of the Class 2 packs and Class
31 packs.
Our Class 3 End Rider LiFT pack was presented at a major Food & Beverage tradeshow during March 2018 and we anticipate sending additional evaluation packs out beginning in May 2018. Additionally, our GSE LiFT Pack has been under evaluation for the past year and we received our first major production order for 17 GSE LiFT packs that are scheduled to be shipped by the end of May 2018. We have also doubled our sales force since December 2016 with personnel having significant experience in the industrial equipment handling industry. Combined with the development of relationships with two of the nation’s largest industrial equipment manufacturers we have generated revenues in excess of fiscal 2017 revenues during each of the past two quarters. The impact of these efforts is expected to continue to be seen throughout the remainder of fiscal 2018.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, and product development resources, 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
expenditures,expenditure, we estimate that total financing proceeds of approximately
$5,000,000$10,300,000 will be required to fund current and planned operations for the
twelve months following the filing date of this Quarterly Report on Form
10-Q.10-Q. 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.
Management plans
We intend to
raise additional requiredcontinue to seek capital through
private placementsthe sale of equity securities
through private or public placements and
through draws on our existing related-party credit facilities. We initiated a private placement of equity securities in March 2018 under which we are authorized by the Board of Directors to raise up to $4,000,000 (See Note 5). As of May 11, 2018, a total of $800,000 was raised pursuant to this private placement, of which, $200,000 was raised prior to March 31, 2018. Subsequent to the closing on May 11, 2018, the offering was terminated. Additionally, as more fully discussed in Note 4, we have two credit facilities with Esenjay Investments, LLC (“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 shareholder of the Company. The Unrestricted Line of Credit has a maximum borrowing amount of $10,000,000 of which $2,025,000 was available for future draw as of May 14, 2018 and the Inventory Line of Credit has a maximum borrowing amount of $5,000,000 of which $3,245,000 was available for future draws as of May 14, 2018.debt placements.
Although management believes
we will be able to obtainthat the additional required funding
will be obtained, there is
no guarantee we will be able to obtain
such fundingthe 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 our future cash flows and results of operations, and our ability to continue operating as a going concern. The accompanying 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 that
may differ from those reflected in the accompanying condensed consolidated financial statements.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note
3, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form
10-K10-K for the fiscal year ended
June 30, 2017. 2018. There have been
no material changes in these policies or their application.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation for comparative purposes.
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
three months ended
MarchDecember 31, 2018 and
2017, basic and diluted weighted-average common shares outstanding were
25,112,34941,966,786 and
25,038,256,25,097,827, respectively. For the
ninesix months ended
MarchDecember 31, 2018 and
2017, basic and diluted weighted-average common shares outstanding were
25,142,03936,517,598 and
24,372,419,25,108,859, respectively. The Company incurred a net loss for the
three and
ninesix months ended
MarchDecember 31, 2018 and
2017, and therefore, basic and diluted loss per share for the periods 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
MarchDecember 31, 2018 and
2017, excluded from diluted weighted-average common shares outstanding, which include common shares underlying outstanding convertible debt, stock options and warrants, were
17,987,6325,441,481 and
9,317,423,18,848,448, respectively.
We follow the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements and (ii) operating loss and tax credit carry-forwards for tax purposes. Deferred tax assets are reduced by a valuation allowance when, based upon management’s estimates, it is more likely than
not that a portion of the deferred tax assets will
not be realized in a future period. We recognized a full valuation allowance as of
MarchDecember 31, 2018 and
June 30, 2017 2018 and have
not recognized any tax provision or benefit for any of the periods presented. We review our tax positions quarterly for tax uncertainties. We did
not have any uncertain tax positions as of
MarchDecember 31, 2018 or
June 30, 2017. In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect companies. Among other things, the 2017 Act reduces the top U.S. corporate income tax rate from 35.0% to 21.0%, and makes changes to certain other business-related exclusions, deductions and credits. The Company is in the process of assessing the impact of the tax bill on the financial statements as of June 30, 2018. Due
Recent Accounting Pronouncements Not Yet Adopted
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 Company's full valuation allowance,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.
Management has considered all recent accounting pronouncements issued since the
tax effectslast audit of
any changes are the Company’s consolidated financial statements and believes that these recent pronouncements will not expected to have a material
impacteffect on
ourthe Company’s condensed consolidated financial statements.
NOTE 4 - RELATED PARTY DEBT AGREEMENTS
Esenjay
Credit Facilities Between October 2011 and September 2012, the Company entered into three debt agreements with Esenjay Investments, LLC (“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 shareholder of the Company (owning approximately 62% of our outstanding common shares as of December 31, 2018). 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 $0.60 per share, bore interest at 8% per annum and was to mature 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.$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 is 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
$1,755,000$2,405,000 outstanding as of
MarchDecember 31, 2018 and
$3,245,000$2,595,000 available for future
draws.We have an unrestricted credit facility with Esenjay which has a maximum borrowing amount of $10,000,000, is convertible at a rate of $0.60 per share, bears interest at 8% per annum and matures on January 31, 2019 (draws, subject to the “Unrestricted Line of Credit”). The outstanding principal balance oflender’s approval. During the Unrestricted Line of Credit as of Marchthree months ended December 31, 2018, was $7,975,000, resulting in $2,025,000 available for future draws.
During the three and nine months ended March 31, 2018, the Company recorded approximately $195,000 and $467,000, respectively$91,000 of interest expense in the accompanying condensed consolidated statements of operations related to the Inventory Line of Credit.
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 Inventory Lineunpaid interest of Credit. Advances under both$1,041,280 for 15,027,134 shares of the Unrestricted LineCompany’s common stock. The Company followed FASB ASC Topic No.470, Debt to record the early conversion of Creditdebt to equity. The Early Note Conversion Agreement had an induced conversion which included issuance of 268,018 additional shares of common stock and Inventory Line of Credit are made solelyrecorded as interest expense at the discretionstock’s fair value of Esenjay and are secured by substantially all of Flux’s tangible and intangible assets.$466,351 at October 31, 2018.
Shareholder Convertible Promissory Note
On April 27, 2017, we formalized an oral agreement for advances totaling $500,000,$500,000, received from a shareholder (“Shareholder”) 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 any time commencing on or after the date that is six (6) months from the issue date, at the election of Shareholder, 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 $1.20$1.20 per share; provided, however, the Shareholder shall not have the right to convert any portion of the Convertible Note to the extent that the Shareholder 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. During
On October 25, 2018, the
threeCompany and
nine months ended March 31, 2018, we recorded $15,000 and $45,000 of interest expense in the
accompanying condensed consolidated statements of operations relatedShareholder entered into an amendment to the Convertible
Promissory Note.
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 conversion of the Esenjay Loan on October 31, 2018, the Shareholder Convertible Note of $500,000 plus accrued interest of $102,510 automatically converted into 502,091 shares of common stock.
Shareholder 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 shareholder, pursuant to which Cleveland agreed to make available to Flux a line of credit (“Cleveland LOC”) in a maximum principal amount at any time outstanding of up to Two Million Dollars ($2,000,000) with a maturity date of December 31, 2018. The Cleveland LOC has an origination fee in the amount of Twenty Thousand Dollars ($20,000), which represents one percent (1%) of the Cleveland 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 Cleveland LOC. The Cleveland LOC was paid back December 27, 2018.
On October 31, 2018, Flux entered into a credit facility agreement with a shareholder, (“Investor”), pursuant to which Investor agreed to make available to Flux 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 has 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 paid back December 28, 2018.
NOTE
5 - STOCKHOLDERS’
DEFICITEQUITY (DEFICIT)
Private Placement
–2018of Common Stock
In MarchDecember 2018, our Board of Directors approved athe private placement of up to 5,714,2864,545,455 shares of our common stock to select accredited investors for a total amount of $4,000,000,$5,000,000, or $0.70$1.10 per share of common stock (“Offering”with the right of the Board to increase the offering amount to $7,000,000 (the “Offering”). AsOn December 26, 2018, we completed an initial closing of March 31, 2018, 285,714the Offering, pursuant to which we sold an aggregate of 3,359,100 shares of our common stock, were sold to an accredited investor at $0.70$1.10 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 total of $200,000.shareholder. The securitiesshares 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)(24(a)(2) under the Securities Act.
Advisory Agreement
Catalyst Global LLC. Effective April 1, 2018, we 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 34,840 shares of restricted common stock per quarter. The initial tranche of 8,710 shares was valued at $1.70 or $14,807 when issued on June 21, 2018, the second tranche of 8,710 shares was valued at $2.01 or $17,507 when issued September 28, 2018, and the third tranche of 8,710 shares was valued at $1.75 per share or $15,243 when issued on December 31, 2018. The 2018 Renewal is cancelable upon 60 days written notice.
Shenzhen Reach Investment Development Co. (“SRID”). On March 14, 2018, we 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 174,672 shares of restricted common stock valued at approximately $80,000 over the course of the Securities Act and Rule 506 promulgated thereunder. See Note 9.12-month term. As of December 31, 2018, 145,416 shares have been issued.
Warrant detail for the
ninesix months ended
MarchDecember 31, 2018 is reflected below:
| | Number of Warrants | | | Weighted Average Exercise Price Per Warrant | | | Remaining Contract Term (# years) | |
Warrants outstanding and exercisable at June 30, 2017 | | | 2,342,590 | | | $ | 1.97 | | | 0.12 | - | 1.55 | |
Warrants issued | | | - | | | $ | - | | | | - | | |
Warrants forfeited | | | (460,157 | ) | | $ | 2.15 | | | | - | | |
Warrants outstanding and exercisable at March 31, 2018 | | | 1,882,433 | | | $ | 1.92 | | | | 1.28 | | |
| | | Weighted Average Exercise Price Per Warrant | Remaining Contract Term (# years) |
| Warrants outstanding and exercisable at June 30, 2018 | 1,740,790 | $2.03 | 0.74 |
| Warrants issued | - | - | - |
| Warrants exercised | (79,957) | $1.48 | - |
| Warrants forfeited | - | $- | - |
| Warrants outstanding and exercisable at December 31, 2018 | 1,660,833 | $2.06 | 0.19 |
On
November 26, 2014, our board of directors approved our
2014 Equity Incentive Plan (the
“2014“2014 Plan”), which was approved by our shareholders 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
10,000,000 shares of our common stock.
On October 26, 2017, we granted 1,880,000 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 90,000 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.
Activity in stock options during the
ninesix months ended
MarchDecember 31, 2018, and related balances outstanding as of that date are reflected below:
| | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contract Term (# years) | |
Outstanding at June 30, 2017 | | | 716,277 | | | $ | 1.10 | | | | | |
Granted | | | 1,970,000 | | | | 0.46 | | | | | |
Exercised | | | - | | | | | | | | | |
Forfeited and cancelled | | | (66,910 | ) | | | 0.62 | | | | | |
Outstanding at March 31, 2018 | | | 2,619,367 | | | $ | 0.61 | | | | 8.60 | |
Exercisable at March 31, 2018 | | | 1,228,654 | | | $ | 0.77 | | | | 7.75 | |
Table of Contents| | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) |
| Outstanding at June 30, 2018 | 3,544,473 | $0.83 | |
| Granted | 401,174 | 1.75 | |
| Exercised | - | - | |
| Forfeited and cancelled | 180,000 | 0.46 | |
| Outstanding at December 31, 2018 | 3,765,647 | $0.95 | 8.48 |
| Exercisable at December 31, 2018 | 1,884,940 | $0.83 | 7.69 |
Activity in stock options during the
ninesix months ended
MarchDecember 31, 2017, and related balances outstanding as of that date are reflected below:
| | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contract Term (# years) | |
Outstanding at June 30, 2016 | | | 900,402 | | | $ | 1.13 | | | | | |
Granted | | | - | | | | | | | | | |
Exercised | | | - | | | | | | | | | |
Forfeited and cancelled | | | (184,125 | ) | | $ | 1.63 | | | | | |
Outstanding at March 31, 2017 | | | 716,277 | | | $ | 1.01 | | | | 7.17 | |
Exercisable at March 31, 2017 | | | 562,435 | | | $ | 1.14 | | | | 6.55 | |
| | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) |
| Outstanding at June 30, 2017 | 716,277 | $1.01 | |
| Granted | 1,970,000 | 0.46 | |
| Exercised | - | | |
| Forfeited and cancelled | (1,000) | 0.50 | |
| Outstanding at December 31, 2017 | 2,685,277 | $0.61 | 8.96 |
| Exercisable at December 31, 2017 | 1,626,613 | $0.81 | 7.86 |
Stock-based compensation expense recognized in our condensed consolidated statements of operations for the
three and
ninesix months ended
MarchDecember 31, 2018 and
2017, 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 condensed 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.
Our average stock price during the
ninesix months ended
MarchDecember 31, 2018 was
$0.48,$2.05, and as a result the intrinsic value of the exercisable options at
MarchDecember 31, 2018 was
$4,000.approximately $2,410,000.
We allocated stock-based compensation expense included in the condensed consolidated statements of operations for employee option grants and non-employee option grants as follows:
| | | For the Three Months Ended March 31 | | | For the Nine Months Ended March 31, | |
| | | | | | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Research and development | | $ | 16,000 | | | $ | 3,000 | | | $ | 80,000 | | | $ | 10,000 | |
General and administration | | | 29,000 | | | | 7,000 | | | | 129,000 | | | | 20,000 | |
Total stock-based compensation expense | | $ | 45,000 | | | $ | 10,000 | | | $ | 209,000 | | | $ | 30,000 | |
| | For the Three Months Ended December 31 | For the Six Months Ended December 31, |
| | | | | |
| Research and development | $17,000 | $61,000 | $32,000 | $64,000 |
| General and administration | 226,000 | 92,000 | 375,000 | 100,000 |
| Total stock-based compensation expense | $243,000 | $153,000 | $407,000 | $164,000 |
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:
Nine months ended March 31,
| | 2018
| | | 2017
| |
Expected volatility
| | | 100% | | | | 100% | |
Risk free interest rate
| | | 1.76% | | | | 1.31% | |
Forfeiture rate
| | | 23.0% | | | | 23.0% | |
Dividend yield
| | | 0% | | | | 0% | |
Expected term (years)
| | | 5 | | | | 3 | |
| Six months ended December 31, | | 2018 | | | 2017 |
| Expected volatility | | 142 %-143% | | | 100 % |
| Risk free interest rate | | 2.73 % - 2.82% | | | 1.76 % |
| Forfeiture rate | | 20.0 % | | | 23.0 % |
| Dividend yield | | 0 % | | | 0 % |
| Expected term (years) | | 5 | | | 5 |
The remaining amount of unrecognized stock-based compensation expense at
MarchDecember 31, 2018 relating to outstanding stock options, is approximately
$441,000,$1,717,000, which is expected to be recognized over the weighted average period of
2.601.59 years.
Advisory Agreement
Catalyst Global LLC. Effective April 1, 2017, we entered into a renewal contract (the “2017 Renewal”) with Catalyst Global LLC to provide investor relations services for 12 months in exchange for monthly fees of $3,500 per month and 23,333 shares of restricted common stock per quarter. The initial tranche of 23,333 shares was valued at $0.45 per share or $10,500 when issued on June 7, 2017, the second tranche of 23,333 shares was valued at $0.50 per share or $11,667 when issued on September 25, 2017, the third tranche of 23,333 shares was valued at $0.475 per share or $11,083 when issued on January 16, 2018, the fourth tranche of 23,333 shares was valued at $0.50 per share or $11,667 when issued on March 27, 2018. The 2017 Renewal is cancelable upon 60 days written notice.
Shenzhen Reach Investment Development Co. (“SRID”). On March 14, 2018, we 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 174,672 shares of restricted common stock valued at approximately $80,000 over the course of the 12-month term. See Note 9.
NOTE 6 - OTHER RELATED PARTY TRANSACTIONS
Transactions with Epic Boats
The Company subleases office and manufacturing space to Epic Boats (an entity founded and controlled by Chris Anthony, our
founderboard member and
board member,former Chief Executive Officer) in our facility in Vista, California pursuant to a month-to-month sublease agreement. Pursuant to this agreement, Epic Boats pays Flux Power
10% of facility costs through the end of our lease agreement.
The Company received
$4,000$5,000 and
$9,000,$10,000, respectively during the
three months and
ninesix months ended
MarchDecember 31, 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
MarchDecember 31, 2018 and
June 30, 2017, 2018, customer deposits totaling approximately
$106,000$93,000 and
$120,000,$102,000, respectively, were recorded in the accompanying condensed consolidated balance sheets. There were
no receivables outstanding from Epic Boats as of
MarchDecember 31, 2018 and
June 30, 2017. Consulting Agreement
On February 15, 2018, we entered into an oral agreement with Chris Anthony, as an independent contractor, to assist us with evaluating potential suppliers of parts and/or sub-assembly manufacturers of our LiFT Packs. For his services, we agreed to pay him $5,000 per month plus expenses. Either party may terminate this arrangement with or without cause upon notice to the other party. We believe that the fees for such services are reasonable and comparable to those charged by other firms for services rendered.
2018.
NOTE 7 - CONCENTRATIONS
NOTE 7 - 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.$250,000. As of December 31, 2018, the Company had approximately $794,000 of cash not insured. 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
We
During the three months ended December 31, 2018, we had
certainfive major customers
whose revenue individuallythat each represented
more than 10% or more of our
total revenue,revenues on an individual basis, or
whose accounts receivable balances individuallyapproximately 95% in the aggregate. During the six months ended December 31, 2018, we had four major customers that each represented
more than 10% or more of our
total accounts receivable, as follows:revenues on an individual basis, or approximately 86% in the aggregate.
During the
three and nine months ended
MarchDecember 31, 2018, two2017, we had three major customers
accounted for 92% and 85%that each represented more than 10% of
revenue, respectively. As of March 31, 2018 and June 30, 2017, two customer accounted for 91% and five customers accounted for 91% of accounts receivable, respectively.our revenues on an individual basis, or approximately 94% in the aggregate. During the threesix months ended MarchDecember 31, 2017, fourwe had three major customers accounted for 69% and three customers accounted for 58%that each represented more than 10% of revenue, respectively.
our revenues on an individual basis, or approximately 89% in the aggregate.
Suppliers/Vendor Concentrations
We obtain
manya limited number of
the components and supplies included in our products from a small group of suppliers. During the
three and nine months ended
MarchDecember 31, 2018, we had
fourthree suppliers who accounted for more than
10% of our total inventory purchases on an individual basis or approximately
65% and 57%, respectively,59% in the aggregate.
During the threesix months ended MarchDecember 31, 2017 2018 we had two suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 54%52% in the aggregate.
During the
ninethree and six months ended
MarchDecember 31, 2017, we had
three suppliers who accounted for more than
10% of our total inventory purchases on an individual basis or approximately
60%55% and 48%, respectively, in the aggregate.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
From time to time, we
may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate)
may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable,
may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that contingencies of a legal nature or contingencies having legal aspects will
not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events. As of
MarchDecember 31, 2018, we are
not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.
NOTE 9 - SUBSEQUENT EVENTS
On April 25,In connection with the Offering, subsequent to December 31, 2018, we issued 57,672have sold an additional 633,464 shares of common stock valued at $0.49 per sharefor a total purchase price of $696,810 in cash. The shares of common stock offered and sold in the Offering have not been registered under the Securities Act and may not be offered or $28,000, to SRID as payment for consulting service renderedsold in accordance with their consulting agreement (see Note 5). Suchthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The shares were issuedoffered and sold to the accredited investors in reliance upon exemptions from registration pursuant to Rule 506(c) of Regulation S ofD promulgated under Section 4(a)(2) under the Securities Act.
During the period from April 1, 2018 through May 14, 2018 we sold 857,143 shares of our common stock to four accredited investors at $0.70 per share, totaling $600,000, as part of our March 2018 private placement (see Note 5). Such shares were issued upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act, and Rule 506 promulgated thereunder. The offering was terminated on May 11, 2018.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 30,
2017.2018.
We design, develop and sell rechargeable advanced lithium-ion batteries for industrial uses, including our first-ever UL 2271 Listed lithium-ion “LiFT Pack” forklift batteries. We have developed an innovative high-power battery cell management system (“BMS”) and have structured our business around this core technology. Our proprietary BMS provides
fourthree critical functions to our battery systems:
| ●
| Cell Balancing: This is performed by continuously adjusting the capacity of each cell in a storage system according to temperature, voltage, and internal impedance metrics. This management ensures longevity of the overall system.
|
| ●
| Monitoring: This is performed through temperature probes, physical connection to individual cells for voltage and calculations from basic metrics to determine remaining capacity and internal impedance. This monitoring uses accurate measurements to best manage the system and ensure longevity.
|
| ●
| Error reporting: This is performed by analyzing data from individual cell and to determine whether the system is operating within normal specifications. This error reporting is crucial to system management as it ensures ancillary devices are not damaging the battery; it will give the operator an opportunity to take corrective action to maintain long overall system life.
|
| ●
| Over Discharge Prevention: Battery systems are protected against excessively low cell voltage (over discharge) by means of continuous cell voltage measurement and predictive algorithms in the BMS. Preventing over discharge is critical to maximizing system lifetime.
|
■
Cell Balancing: This is performed by continuously adjusting the capacity of each cell in a storage system according to temperature, voltage, and internal impedance metrics. This management ensures longevity of the overall system.
■
Monitoring: This is performed through temperature probes, physical connection to individual cells for voltage and calculations from basic metrics to determine remaining capacity and internal impedance. This monitoring uses accurate measurements to best manage the system and ensure longevity.
■
Error reporting: This is performed by analyzing data from individual cell and to determine whether the system is operating within normal specifications. This error reporting is crucial to system management as it ensures ancillary devices are not damaging the battery; it will give the operator an opportunity to take corrective action to maintain long overall system life.
Using our proprietary battery management technology, we offer completely integrated energy storage solutions or custom modular standalone systems to our customers. In addition, we have developed a suite of complementary technologies and products that enhance the abilities of our BMS to meet the needs of the growing advanced energy storage market.
We currently focus our business on lift equipment. Lift equipment commonly called a forklift truck (also called a lift truck, a fork truck, or a forklift) is a powered industrial truck used to lift and transport materials. The modern forklift was developed in the 1960s by various companies including the transmission manufacturing company Clark and the hoist company Yale & Towne Manufacturing. The forklift has since become an indispensable piece of equipment in manufacturing and warehousing operations. Lift equipment is produced in a range of power capacities from smaller lift type equipment such as a Walkie (ie., pallet jack) to a ride-on forklift. A segment of forklifts, particularly larger forklifts, use propane with an internal combustion engine for power. This segment has been experiencing a secular decline, with a shift to electric powered forklifts. The larger fleets of forklifts more typically use battery powered forklifts. Lift equipment vehicles are not new technology and don’t require new testing, which can cause delays in product placement. The existing lift equipment market primarily uses lead-acid batteries, which is a legacy technology and can lead to customer dissatisfaction with life cycles, performance, and additional maintenance costs. We believe the replacement of lead-acid batteries with lithium cells dramatically extends run time and the battery system life, lowering the overall cost of ownership to a level which makes lithium very competitive with lead-acid in numerous applications.
In January 2016, we obtained certification from Underwriters
LaboratoryLaboratories (“UL”), a global safety science organization, on our LiFT Packs for forklift use. This UL 2271 Listing demonstrates the quality, safety and reliability of our LiFT Pack line for customers, distributors, dealers and
industrial equipment manufacturers.OEM partners. We believe we have emerged from this effort with a product of substantially enhanced design, durability, performance and value. Additionally, during September 2017, we completed our initial ISO 9001 audit and
have since been approved for certification. We received our ISO 9001 certificate in November 2017. Obtaining the ISO 9001 certification further demonstrates our strong customer focus, the motivation and involvement of top management and our commitment to consistently providing high quality products and services to our customers.
We are working with various forklift manufacturers, their dealers and battery distributors to bring our advanced energy storage systems to the lift equipment market. This provides a more direct market path to the consumer without the delays and issues that accompany dealing solely with battery distributors. These efforts have resulted in pilot programs and trials with national accounts, end users, and industrial equipment manufacturers. We have used the feedback from these pilot programs to substantially improve our battery packs. Because of our strong relationships with two leading forklift manufacturers, we were able to generate revenues during both the second and third quarters of fiscal 2018 in excess of our fiscal 2017 revenues and we are on track for a comparable fourth quarter. We are in continued discussions with these forklift manufacturers for similar orders anticipated to ship throughout the next six months.
During the latter part of fiscal 2017 we also began marketing directly to end-users of lift equipment, primarily in the food and beverage industry. By going directly to the customers with the many benefits of utilizing lithium-ion batteries in their walkie pallet jack forklifts, we anticipate seeing a more rapid transition from traditional lead acid batteries to our lithium-ion batteries. Such benefits include less maintenance, faster charge times, longer lasting and greater power. As a result of such marketing efforts, Flux was named as one of Food Logistics “Rock Stars of the Food & Beverage Supply Chain” in both 2018 and 2017. Food Logistics is the only publication dedicated to covering the movement of product through the global food supply chain. This recognition underscores the increasing acceptance of Flux LiFT Packs powering multi-shift operations at a growing base of food industry distribution centers across America.
Our strategy is to offer a full product lineup for forklifts during the following two quarters. We are leveraging our prior experience of developing and shipping over 15 megawatts of battery packs into a variety of applications including electrical vehicles, robotic mining vehicles, and various industry specific applications. By working with the forklift manufacturers, we have secured “technical approval” for compatibility with their equipment and in January 2018, we received Energy Storage System compatibility approval from Toyota Material Handling USA with respect to their 8HBW23 walkie pallet jackcommercially developed, field tested, and from Raymond Corporation with respect to their 8210 walkie pallet jack. Each of these models have been tested to be electrically compatible with our LiFT Packs. These approvals represent another step towards our achieving industry acceptancesold packs for use in Class 3 end riders, Class 2 forklifts, Class 1 counterbalance forklifts, and expanding awareness for a lithium-ion battery pack in lift equipment.
In addition to our forklift line, we have developed an 80-volt, 600 amp-hour lithium-ion battery pack to power large airportaviation ground support equipment (“GSE”). Our GSE Pack is designedWe now have a complete line of packs to provide a better performing and more cost-effective power source for electrical aviation GSE, with an initial focus on baggage/cargo tractors. Our GSE Packs were in an evaluation stage since April 2016 with unqualified success highlightingmeet the scalability of our design and engineering capabilities, as well as, our proprietary battery management technology for a broad array of motive power applications, and with a customer price point of roughly $20,000 to $34,000 per pack, it creates an excellent new leg of growth potential. During February 2018, we secured a 17-unit purchase order for our GSE Pack from the global aviation industry’s largest provider of cargo and aircraft ground handling services. These units are slated for shipping during the fourth quarter of fiscal 2018 and will generate an additional $300,000 of revenues.
Our primary source of revenues thus far has been from our entry-level LiFT Pack line to power Class 3 walkie pallet jack forklifts. We are currently in development of much larger lithium-ion battery solutions for Class 1 and Class 2 material handling equipment. The Class 1 and Class 2 equipment, comprised of counter balance forklifts, narrow aisle, and end riders are a natural progression for Flux as we leverage our scalable technology and design. These larger systems will satisfy customers seeking one lithium battery vendor to address all their material handling equipment needs. During December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation and have continued the improvement and developmentneeds of the Class 1 LiFT Pack, as well as, the development of the Class 2lift equipment industry and Class 3 packs. Our Class 3 end rider LiFT Pack was presented at a major Food & Beverage tradeshow during March 2018 and we anticipate sending additional evaluation packs out beginning in May 2018. With a focus on improvements to our LiFT Packs and overall production processes behind us, and the continued development of our product line, we are now positioned to accelerate our sales efforts in fiscal 2018.
significantly.
Segment and Related Information
We operate as a single reportable segment.
Results of Operations and Financial Condition
The following table represents our unaudited condensed consolidated statement of operations for the three months ended
MarchDecember 31, 2018 (“
Q3 2018”Q2 2019”) and
MarchDecember 31, 2017 (“
Q3 2017”Q2 2018”).
| | | Three Months Ended March 31, | |
| | | 2018 | | | 2017 | |
| | | $ | | | % of Revenues | | | $ | | | % of Revenues | |
| | | | | | | | | | | | | | | | | |
Net revenue | | $ | 1,666,000 | | | | 100 | % | | $ | 306,000 | | | | 100 | % |
Cost of sales | | | 1,816,000 | | | | 109 | % | | | 508,000 | | | | 166 | % |
Gross loss | | | (150,000 | ) | | | -9 | % | | | (202,000 | ) | | | -66 | % |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 909,000 | | | | 55 | % | | | 664,000 | | | | 217 | % |
Research and development | | | 483,000 | | | | 29 | % | | | 245,000 | | | | 80 | % |
Total operating expenses | | | 1,392,000 | | | | 84 | % | | | 909,000 | | | | 297 | % |
| | | | | | | | | | | | | | | | | |
Operating loss | | | (1,542,000 | ) | | | -93 | % | | | (1,111,000 | ) | | | -363 | % |
| | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Change in fair value of derivative liabilities | | | - | | | | 0 | % | | | 1,000 | | | | 0 | % |
Interest expense, net | | | (211,000 | ) | | | -13 | % | | | (52,000 | ) | | | -17 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net loss | | $ | (1,753,000 | ) | | | -105 | % | | $ | (1,162,000 | ) | | | -380 | % |
| | Three Months Ended December 31, |
| | | |
| | | | | |
| | | | | |
| Net revenue | $2,711,000 | 100% | $1,201,000 | 100% |
| Cost of sales | 2,456,000 | 91% | 1,589,000 | 132% |
| Gross income (loss) | 255,000 | 9% | (388,000) | -32% |
| | | | | |
| Operating expenses: | | | | |
| Selling and administrative expenses | 1,604,000 | 59% | 807,000 | 67% |
| Research and development | 882,000 | 33% | 479,000 | 40% |
| Total operating expenses | 2,486,000 | 92% | 1,286,000 | 107% |
| | | | | |
| Operating loss | (2,231,000) | -82% | (1,674,000) | -139% |
| | | | | |
| Other income (expense): | | | | |
| Interest expense, net | (693,000) | -26% | (166,000) | -14% |
| | | | | |
| | | | | |
| Net loss | $(2,924,000) | -108% | $(1,840,000) | -153% |
Revenues for
Q3 2018,Q2 2019, increased by
$1,360,000$1,510,000 or
444%126%, compared to
Q3 2017.Q2 2018. During
Q3 2018Q2 2019 we sold approximately
530 LiFT Packs,327 packs from all classes including walkie, end rider, Class 2, Class 1, and GSE compared to approximately
90420 walkie LiFT
Packspacks in
Q3Q2 2018.
This substantial increase was directly attributable to our strong relationships with two leading forklift manufacturersThe completion of a full offering of batteries and the
related end users which resultedfocus of the sales and management team has driven the new orders. The battery packs for the classes other than the walkie class range in
price from approximately
92% of Q3 2018 revenues. Additionally, at March 31, 2018 we had sales orders which will generate approximately $1,000,000 in revenues from our walkie pallet jack$8,500 to $31,000 per pack and
GSE product lines, combined.drive higher revenue per pack.
Cost of sales for
Q3 2018,Q2 2019, increased
$1,308,000,$867,000, or
257%55%, compared to
Q3 2017.Q2 2018. The increase in cost of sales is directly related to our substantial increase in
LiFT Packpack sales as discussed above. The
primary reason for costCompany’s development efforts and improvements to all of
sales not increasing as much as our revenues during the
quarter is duebattery packs have resulted in reductions in inventory costs, improved workforce efficiencies, and reduced warranty expense which have all contributed to
efficiencies garneredan improvement in the
production of our LiFT Packs. It has always been imperativegross margin percentage by 41% in Q2 2019 compared to
us that we maintain a knowledgeable and well-trained workforceQ2 2018. We expect continued improvements to
produce our packs. Accordingly, production wage expense included in cost of sales has remained substantial, despite our low sales volume prior to September 2017. During Q2 2018 and Q3 2018, we have been able to increase production significantly while increasing our production wages only minimally. The impact of the
greater efficiency of our workforce resulted in an improved gross
loss percent from -72% during Q3 2017 to -9% in Q3 2018. Despite this improvement, we have continued to recognize a gross loss during Q3 2018 as we remain subject to low volume purchases, early higher cost designs and limited sourcing related to our inventory purchases, as wellmargin percentage as the
continued warranty expense from early generation products in the field. As demand for our LiFT Pack continues, we anticipate recognizing quantity discounts on inventory purchases,sales volumes increase, assembly productivity improves, and cost reductions
in warranty expense and continued efficiencies from our workforce, all contributing to improvements in our gross margin.are achieved.
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 expense for
Q3 2018Q2 2019 increased
$245,000$797,000 or
37%99%, compared to
Q3 2017. ThisQ2 2018. The increase is primarily
due to the addition of two Regional Sales Managers and a Director of Sales since Q3 2017, commissions related to
additional staff needed to support the
Q3 2018 sales
efforts and
back office operation as well as increased
shipping costs on delivery of our LiFT packs.stock-based compensation and additional professional fees.
Research and Development Expense
Research and development expenses for Q3 2018Q2 2019 increased $238,000$403,000 or 97%84%, compared to Q3 2017.Q2 2018. Such expenses consist primarily of materials, supplies, salaries and personnel related expenses, stock-based compensation expense, consulting costs, and other expenses associated with the continued development of our full product line of products for LiFT Pack and GSE.rollout. During Q3 2018,Q2 2019, we have continued to focus our efforts in developing lithium-ionrefining and improving the battery packs for Class 1 andforklifts, Class 2 forklifts. The scalable technology and design of our LiFT Packs makes for a natural progression to these larger packs. During December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation and have continued the improvement and development of the Class 1 LiFT Pack, as well as, the development of the Class 2forklifts, and Class 3 packs. The impact of these efforts is expected to continue to be seen throughoutend riders. We have also begun the remainder of fiscal 2018.UL listing process for our Class 3 end rider and Class 1 forklift batteries. We anticipate research and development expenses continuing to be a sizeablesignificant portion of our expenses as we continue to develop new and improved products to our product line.
Change in Fair Value of Warrant Derivative Liability
We follow FASB ASC Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The change in fair value of derivative liabilities for Q3 2018 decreased $1,000 or 100% compared to Q3 2017. During August 2016, we proposed to our warrant holders that the re-set provision included in the warrant (that creating the derivative liability) be eliminated. Upon receiving consents to eliminate the re-set provision from a majority of the warrant holders, the re-set provision and the related derivative liability were eliminated as of January 23, 2017, thus resulting in no change in fair value of derivative liabilities during Q3 2018.
Interest expense for
Q3 2018Q2 2019 increased
$159,000$527,000 or
306% and consists of interest expense related to our outstanding lines of credit and convertible promissory note (see Note 4 in the accompanying condensed consolidated financial statements).
Net Loss
Net loss for Q3 2018 increased $591,000 or 51%, as317% compared to net loss in Q3 2017. The increase is primarily attributable to increased staff and development expenses related to expanding our products line, our growing sales department, interest expense, and increased stock-based compensation costs. As we continue to increase sales of our walkie LiFT Packs, we anticipate being able to take advantage of greater quantity discounts thus improving our gross margin. Additionally, with the introduction of Class 1 and Class 2 packs to the market we expect to also strengthen our financial position.
The following table represents our unaudited condensed consolidated statement of operations for the nine months ended March 31,Q2 2018 and March 31, 2017.
| | | Nine months ended March 31, | |
| | | 2018 | | | 2017 | |
| | | $ | | | % of Revenues | | | $ | | | % of Revenues | |
| | | | | | | | | | | | | | | | | |
Net revenue | | $ | 3,020,000 | | | | 100 | % | | $ | 781,000 | | | | 100 | % |
Cost of sales | | | 3,728,000 | | | | 123 | % | | | 1,384,000 | | | | 177 | % |
Gross loss | | | (708,000 | ) | | | -23 | % | | | (603,000 | ) | | | -77 | % |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | | 2,378,000 | | | | 79 | % | | | 1,842,000 | | | | 236 | % |
Research and development | | | 1,441,000 | | | | 48 | % | | | 772,000 | | | | 99 | % |
Total operating expenses | | | 3,819,000 | | | | 126 | % | | | 2,614,000 | | | | 335 | % |
| | | | | | | | | | | | | | | | | |
Operating loss | | | (4,527,000 | ) | | | -150 | % | | | (3,217,000 | ) | | | -412 | % |
| | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Change in fair value of derivative liabilities | | | - | | | | 0 | % | | | 14,000 | | | | 2 | % |
Interest expense, net | | | (512,000 | ) | | | -17 | % | | | (174,000 | ) | | | -22 | % |
| | | | | | | | | | | | | | | | | |
Net loss | | $ | (5,039,000 | ) | | | -167 | % | | $ | (3,377,000 | ) | | | -432 | % |
Revenues
Revenues for the nine months ended March 31, 2018, increased by $2,239,000 or 287%, compared to the nine months ended March 31, 2017. This substantial increase in shipments was directly attributable the development of a strong relationships with two leading forklift manufacturers and the related end users which generated approximately 85% of revenues during the nine months ended March 31, 2018. Additionally, at March 31, 2018 we had sales orders which will generate approximately $1,000,000 in revenues from our walkie pallet jack and GSE product lines, combined. We are in continued discussions with these forklift manufacturers for similar orders anticipated to ship throughout the remainder of fiscal 2018 and into fiscal 2019.
Cost of Sales
Cost of sales during the nine months ended March 31, 2018, increased $2,344,000, or 169%, compared to the nine months ended March 31, 2017. The increase in cost of sales is directly related to our increase in LiFT Pack sales. Consistent with the increase discussed regarding Q3 2018 above, cost of sales did not increase as much as our revenues during the period due to efficiencies garnered by our production workforce. We anticipate further reductions in our cost of sales in the future as we begin to take advantage of greater quantity discounts that will come along with our increased sales.
Selling and Administrative Expenses
Selling and administrative expenses for the nine months ended March 31, 2018 increased $536,000 or 29%, compared to the nine months ended March 31, 2017. As discussed above regarding Q3 2018, the increase is primarily attributable to the addition of two Regional Sales Managers and a Director of Sales since Q3 2017, sales commissions and increased shipping costs on delivery of our LiFT packs. Additionally, we issued 1.97 million stock options in October 2017 resulting in stock based compensation during the nine months ended March 31, 2018 of $129,000 compared to $19,000 during the nine months ended March 31, 2017.
Research and Development Expense
Research and development expenses for the nine months ended March 31, 2018 increased $669,000 or 87%, compared to the nine months ended March 31, 2017 due to our continued focus in developing lithium-ion battery packs for Class 1 and Class 2 forklifts. During December 2017, we shipped our first Class 1 LiFT Pack to a Fortune 100 heavy machinery conglomerate for evaluation and have continued the improvement and development of the Class 1 LiFT Pack, as well as, the development of the Class 2 and Class 3 packs. The impact of these efforts is expected to continue to be seen throughout the remainder of fiscal 2018. We anticipate research and development expenses continuing to be a sizeable portion of our expenses as we continue to develop new and improved products to our product line.
Change in Fair Value of Warrant Derivative Liability
We follow FASB ASC Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The change in fair value of derivative liabilities for the nine months ended March 31, 2018 decreased $14,000 or 100% compared to the nine months ended March 31, 2017. During August 2016, we proposed to our warrant holders that the re-set provision included in the warrant (that creating the derivative liability) be eliminated. Upon receiving consents to eliminate the re-set provision from a majority of the warrant holders, the re-set provision and the related derivative liability were eliminated as of January 23, 2017, thus resulting in no change in fair value of derivative liabilities during the nine months ended March 31, 2018.
Interest Expense
Interest expense during the nine months ended March 31, 2018 and 2017 increased $338,000, or 194%, , and consists primarily of interest expense related to our outstanding lines of credit and convertible promissory note. Also included in interest expense during the ninethree months ended MarchDecember 31, 20172018 is the amortization of deferred financing costs associated with our Unrestricted Line of Credit. On December 29, 2015, we entered into the Second Amendment of our Unrestricted Line of Credit which included, among other provisions, the reduction in the conversion price of the Unrestricted Line of Credit from $3.00 to $0.60 per share. The estimated change in fair value of the conversion priceadditional interest expense of approximately $310,000 was recorded$466,000 agreed to be paid under the Esenjay Early Conversion Agreement as a deferred financing cost atwell as origination fees of $25,000 for the dateshareholder lines of the Second Amendment and was amortized over the then remaining seven-month term of the amended Unrestricted Line of Credit agreement. During the nine months ended March 31, 2017, we amortized the remaining $44,000 of deferred financing costs.
credit (see Note 4).
Net loss for the nine months ended March 31, 2018Q2 2019 increased $1,662,000,$1,084,000 or 49%59%, as compared to net loss for the nine months ended March 31, 2017.in Q2 2018. The increase is primarily attributable to increased staff and development expenses related to expanding our product line,stock-based compensation costs of $90,000, our growing sales department, the development of Class 1 and Class 2 forklift battery packs and additional interest expense and increased stock-based compensation costsof $527,000. As we continue to increase sales of our walkie LiFT Packs,full line of packs, we anticipate being able to take advantage of greater quantity discounts thus improving our gross margin. Additionally, with
The following table represents our unaudited condensed consolidated statement of operations for the introductionsix months ended December 31, 2018 and December 31, 2017.
| | Six months ended December 31, |
| | | |
| | | | | |
| | | | | |
| Net revenues | $4,547,000 | 100% | $1,354,000 | 100% |
| Cost of sales | 4,275,000 | 94% | 1,898,000 | 140% |
| Gross income (loss) | 272,000 | 6% | (544,000) | -40% |
| | | | | |
| Operating expenses: | | | | |
| Selling and administrative expenses | 3,097,000 | 68% | 1,483,000 | 110% |
| Research and development | 1,533,000 | 34% | 957,000 | 71% |
| Total operating expenses | 4,630,000 | 102% | 2,440,000 | 180% |
| | | | | |
| Operating loss | (4,358,000) | -96% | (2,984,000) | -220% |
| | | | | |
| Other income (expense): | | | | |
| Interest expense, net | (967,000) | -21% | (302,000) | -22% |
| | | | | |
| Net loss | $(5,325,000) | -117% | (3,286,000) | -243% |
Revenues
Revenues for the six months ended December 31, 2018, increased by $3,193,000 or 236%, compared to the six months ended December 31, 2017. This substantial increase in revenue was directly attributable to the increase in battery pack sales across the full line of batteries during the six months ended December 31, 2018.
Cost of Sales
Cost of sales during the six months ended December 31, 2018, increased $2,377,000, or 125%, compared to the six months ended December 31, 2017. The increase in cost of sales is directly related to our substantial increase in pack sales as discussed above offset by decreased cost for inventory, lower direct labor touch time, and lower warranty expense as a percentage of revenue resulting in a gross margin percentage increase of 46% for the six months ended December 31, 2018 compared to the six months ended December 31, 2017.
Selling and Administrative Expenses
Selling and administrative expenses for the six months ended December 31, 2018 increased $1,614,000 or 109%, compared to the six months ended December 31, 2017. As discussed above regarding Q2 2019, the increase is primarily attributable to increases in staff, higher stock-based compensation, and additional professional fees.
Research and Development Expense
Research and development expenses for the six months ended December 31, 2018 increased $576,000 or 60%, compared to the six months ended December 31, 2017 due to our continued focus in developing lithium-ion battery packs for Class 1 andforklifts, Class 2 packsforklifts, Class 3 end rider, and GSE.
Interest Expense
Interest expense during the six months ended December 31, 2018 increased $665,000 or 220% compared to the
market we expectsix months ended December 31, 2017 and consists primarily of interest expense related to
also strengthen our
financial position.outstanding line of credit and convertible promissory note. Also included in interest expense during the six months ended December 31, 2018 is additional interest expense of approximately $466,000 agreed to be paid under the Esenjay Early Conversion Agreement as well as origination fees of $25,000 for the shareholder lines of credit (see Note 4).
Net Loss
Net loss for the six months ended December 31, 2018 increased $2,039,000 or 62%, as compared to net loss for the six months ended December 31, 2017 for the reasons stated above.
Liquidity and Capital Resources
As of
MarchDecember 31, 2018, we had a cash balance of
$128,000, a working capital deficit of $9,341,000,$1,044,000 and an accumulated deficit of
$24,736,000.$31,987,000. We do not have sufficient liquidity and capital resources to fund planned operations for the twelve months following the filing date of this Quarterly Report. The Company is exploring and working on securing additional capital in the form of convertible debt and private
or public placements from both current sources and new sources. See “Future Liquidity Needs” below.
Cash Flows
Cash Flows
Operating Activities
Our operating activities resulted in net cash used in operations of
$4,679,000$5,256,000 during the
ninesix months ended
MarchDecember 31, 2018, compared to net cash used in operations of
$3,897,000$3,262,000 during the
ninesix months ended
MarchDecember 31, 2017.
Net The primary reason for the increase in net cash used in operating activities during the nine months ended Marchoperations was a significant increase in net loss and an increase in inventory on hand and accounts receivable at December 31, 2018 reflects the net loss of $5,021,000 for the period offset primarily by non-cash items including stock-based compensation and depreciation, as well as, increases in accounts receivable, accounts payable and accrued interest and decreases in inventories.
Net cash used in operating activities during the nine months ended March 31, 2017, reflects the net loss of approximately $3,377,000 for the period offset primarily by non-cash items including depreciation, stock based compensation and the amortization of debt discounts and deferred financing costs, as well as, increases in inventories and accrued expenses offset by an increase in accounts payable.
expenses.
Net cash used in investing activities during the ninesix months ended MarchDecember 31, 2018 consists of the purchase of office equipment, primarily computer related, for $101,000.
Net cash used in investing activities during the six months ended December 31, 2017 consists primarily of the purchase of office and warehouse equipment and leasehold improvements, totaling
$59,000.Net cash used in investing activities during the nine months ended March 31, 2017 consists primarily of the purchase of computer software, leasehold improvements and warehouse equipment for $45,000.
$43,000.
Net cash provided by financing activities during the
ninesix months ended
MarchDecember 31, 2018 was
$4,745,000$3,695,000 and consisted
of $200,000 of proceeds from the sale of common
stock and $4,545,000 of borrowings from our lines of credit with Esenjay.stock.
Net cash provided by financing activities during the ninesix months ended MarchDecember 31, 2017 was $3,885,000$3,215,000 and consisted of $1,075,000 of proceedsresulted from the sale of common stock, $2,525,000 of borrowingsborrowing from our line of credit with Esenjay, $500,000 advanced from a shareholder andEsenjay.
Future Liquidity Needs
In December 2018, our Board of Directors approved the
repaymentprivate placement of up to 4,545,455 shares of our
Linecommon stock to select accredited investors for a total amount of
Credit$5,000,000, or $1.10 per share of
$215,000common stock with
the right of the Board to increase the offering amount to $7,000,000 (the “Offering”). We completed the Offering in January 2019 and sold an aggregate of 3,992,564 shares of common stock for a
non-related party.
Future Liquidity Needs
total purchase price of $4,391,820, or $1.10 per share 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 with two investors.
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 and product development resources, 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.
These factors raise substantial doubt about our ability to continue as a going concern for the twelve months following the filing date of our Quarterly Report on Form 10-Q. Based on our current and planned levels of expenditures, we estimate that total financing proceeds of approximately
$5,000,000$10,300,000 will be required to fund current and planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q. 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.
Management plans
We intend to
raise additional requiredcontinue to seek capital
through private placements of equity securities and through draws on our existing related-party credit facilities. We initiated a private placement of equity securities in March 2018 under which we are authorized by the Board of Directors to raise up to $4,000,000 through the sale of
our common stock at $0.70 per share to select accredited investors. As of May 11, 2018, a total of $800,000 was raised pursuant to thisequity securities through private
placement, of which $200,000 was raised prior to March 31, 2018. The private placement was terminated on May 11, 2018 following the closing. Additionally, as more fully discussed in Note 4 to our unaudited condensed consolidated financial statements, we have two credit facilities with Esenjay Investments, LLC (“Esenjay”). Esenjay is deemed to be a related party as Mr. Michael Johnson, the beneficial owneror public placements and
director of Esenjay, is a current member of our board of directors and a major shareholder of the Company. The Unrestricted Line of Credit with Esenjay has a maximum borrowing amount of $10,000,000, bears interest at 8% per annum, matures on January 31, 2019, and is convertible into shares of common stock at $0.60 per share. As of May 14, 2018, there was $2,025,000 available for future draw under the Unrestricted Line of Credit. Pursuant to a credit facility agreement dated March 22, 2018, Esenjay agreed to provide Flux Power with a line of credit which has a maximum borrowing amount of $5,000,000, bears interest at 15% per annum and matures on March 31, 2019. As of May 14, 2018, there was $3,245,000 available for future draws under the Inventory Line of Credit. Esenjay owns approximately 61% of our issued and outstanding common stock as of May 14, 2018. debt placements.
Although management believes wethat the additional required funding will be able to obtain additional required funding,obtained, there is no guarantee we will be able to obtain such funding on a timely basisthe 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 its 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 shareholders 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.
Off-Balance Sheet Arrangements
Critical Accounting Policies
The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended June 30,
2017.2018.
Recently Issued Accounting Pronouncements Not Yet Adopted
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.
Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.
IITEMTEM 3 - 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.
IITEMTEM 4 - CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with the SEC under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow for timely decisions regarding required disclosure. As required by SEC Rules 13a-15(e) and 15d-15(e) 15d-15(b), we carried out an evaluation as of the end of the fiscal quarter ended
MarchDecember 31, 2018, under the supervision and with the participation of our management, including our principal executive and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”) and concluded that our disclosure controls and procedures were effective to ensure the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PPARTART II - OTHER INFORMATION
IITEMTEM 1 - LEGAL PROCEEDINGS From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events. As of
MarchDecember 31, 2018, we are not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.
ITEMTEM 1A - RISK FACTORS
Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described in our Annual Report on Form 10-K as filed with the SEC on September
22, 201726, 2018 and all of the information contained in our public filings before deciding whether to purchase our common stock.
IITEMTEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Effective April 1,
2017,2018, we entered into a renewal contract (the
“2017“2018 Renewal”) with Catalyst Global LLC to provide investor relations services for 12 months in exchange for monthly fees of
$3,500$4,500 per month and
23,3338,710 shares of restricted common stock per quarter. The initial tranche of
23,3338,710 shares was valued at
$0.45$1.70 per share or
$10,500$14,807 when issued on June
7, 2017,21, 2018, the second tranche of
23,3338,710 shares was valued at
$0.50$2.01 per share or
$11,667$17,507 when issued on September
25, 2017,28, 2018, and the third tranche of
23,3338,710 shares was valued at
$0.475$1.75 per share or
$11,083$15,243 when issued on
January 16, 2018, the fourth tranche of 23,333 shares was valued at $0.50 per share or $11,667 when issued on March 27,December 31, 2018. The
20172018 Renewal is cancelable upon 60 days written notice. These shares have not been registered under the Securities Act. Such shares were issued upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On March 14, 2018, we entered into a consulting agreement with Shenzhen Reach Investment Development Co. (“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 174,672 shares of restricted common stock valued at approximately $80,000 over the course of the 12-month term.
On April 25,As of December 31, 2018,
we issued 57,672 shares of common stock valued at $0.49 per share or $28,000, to SRID as payment for consulting service rendered in accordance with their consulting agreement. These145,416 shares have
not been
registered under the Securities Act. Such shares were issued upon exemptions from registration pursuant to Regulation S of the Securities Act.In March 2018, our Board of Directors approved the private placement of up to 5,714,286 shares of our common stock to select accredited investors for a total amount of $4,000,000, or $0.70 per share of common stock. The private placement was terminated on May 11, 2018. During the period from March 1, 2018 through May 11, 2018 we sold an aggregate of 1,142,857 shares of our common stock at $0.70 per share, to five accredited investors, resulting in gross proceeds of $800,000.issued. These shares have not been registered under the Securities Act. Such shares were issued upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act,Act.
Other than the equity issuances disclosed in this Item 2 and
Rule 506 promulgated thereunder.the equity sold by us which have previously included in Current Reports of Form 8-K filed with the SEC, we have not issued any other equity during the quarter ended December 31, 2018.
IITEMTEM 3 - DEFAULTS UPON SENIOR SECURITIES IITEMTEM 4 - MINE SAFETY DISCLOSURES IITEMTEM 5 - OTHER INFORMATIONConsulting Agreement
On February 15, 2018, we entered into an oral agreement with Chris Anthony, our founder and board member, as an independent contractor to assist us with evaluating potential suppliers of parts and/or sub-assembly manufacturers of our LiFT Packs. For his services, we agreed to pay him $5,000 per month plus expenses. Either party may terminate this arrangement with or without cause upon notice to the other party. We believe that the fees for such services are reasonable and comparable to those charged by other firms for services rendered.
None.
ITEMTEM 6 - EXHIBITS
The following exhibits are filed as part of this Report
Exhibit
No.
ExhibitNo. | | Description |
10.1
| | |
| | Credit Facility Agreement, dated March 22,October 26, 2018, with Cleveland Capital L.P.(1) |
| | Credit Facility Agreement, dated October 31, 2018, with Private Investor (1) |
| | Early Note Conversion Agreement, dated October 31, 2018, with Esenjay Investments, LLC (1) |
| | Amendment to Convertible Promissory Note, dated March 22,October 25, 2018, (2)with Scott Kiewit (1) |
10.3
| | Guaranty and SecurityForm of Subscription Agreement dated March 22, 2018 (3)
(2) |
| | 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* |
(1)
| Incorporated by reference to Exhibit 10.1 contained in Form 8-K filed with the SEC on March 28, 2018.
|
(2)
| Incorporated by reference to Exhibit 10.2 contained in Form 8-K filed with the SEC on March 28, 2018.
|
(3)
| Incorporated by reference to Exhibit 10.3 contained in Form 8-K filed with the SEC on March 28, 2018.
|
(1)
Incorporated by reference to Current Report on Form 8-K filed with the SEC on November 1, 2018.
(2)
Incorporated by reference to Current Report on Form 8-K filed with the SEC on December 28, 2018.
Pursuant to the requirements of the Securities 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 Holding, Inc. | |
| | | |
Date: May 14, 2018February 13, 2019 | By: | |
/s/ Ronald F. Dutt | |
| | | Name: Ronald F. Dutt | |
| | | Title: Chief Executive Officer (Principal Executive Officer) | |
| | | (Principal Executive
|
| By: | /s/ Charles A. Scheiwe | |
| | Name: Charles A. Scheiwe | |
| | Title: Chief Financial Officer and (Principal Financial Officer) | |
| | | |
| | | |