UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 December 31, 2018September 30, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | 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, | | |
| 2685 S. Melrose Drive, Vista, California | | 92081 |
| (Address of principal executive offices) | | (Zip Code) |
877-505-3589
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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 February 13,November 12, 2019 |
| Common Stock, $0.001 par value | | 50,962,9005,107,595 |
FLUX POWER HOLDINGS, INC.
FORM 10-Q
For the Quarterly Period Ended December 31, 2018September 30, 2019
Table of Contents
| PART I - Financial Information | |
| | | |
| | 4 |
| | 2019 | 4 |
| | | 5 |
| | | 6 |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - SIX-THREE MONTHS ENDED DECEMBER 31,SEPTEMBER 30, 2019 AND 2018 AND 2017 | 67 |
| | | 78 |
| | 1416 |
| | 1920 |
| | 1920 |
| | | |
| PART II - Other Information | |
| | | |
| | 2021 |
| | 2021 |
| | 2021 |
| | 2021 |
| | 2021 |
| | 2021 |
| | 2122 |
| | | |
| 2223 |
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 equity funding andor alternative sourcesources 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 grow net revenue and increase our gross profit margin;
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our ability to keep up with rapidly changing technologies and evolving industry standards, including our ability to achieve technological advances;
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our dependence on the growth in demand for our products;
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our ability to compete with larger companies with far greater resources than we have;
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our continued ability to obtain raw materials and other supplies for our products at competitive prices;
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our ability to diversify our product offerings and capture new market opportunities;
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our ability to source our needs for skilled labor, machinery, parts, and raw materials economically; and
●
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,” “Flux,” “we,” “us,” and “our” refer to the combined business of Flux Power Holdings, Inc., a Nevada corporation and its wholly-owned subsidiary, Flux Power, Inc. (“Flux Power”), a California corporation;corporation (Flux Power).
●
“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
●
“Securities Act” refers to the Securities Act of 1933, as amended.
PART I - Financial Information
Item 1. Financial Statements
FLUXFLUX 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 |
| | September 30, 2019 (Unaudited) | |
| | | |
| ASSETS | | |
| | | |
| Current assets: | | |
| Cash | $163,000 | $102,000 |
| Accounts receivable | 1,026,000 | 2,416,000 |
| Inventories | 4,124,000 | 3,813,000 |
| Other current assets | 519,000 | 371,000 |
| Total current assets | 5,832,000 | 6,702,000 |
| Right of use asset | 2,618,000 | - |
| Other assets | 142,000 | 158,000 |
| Property, plant and equipment, net | 417,000 | 346,000 |
| | | |
| Total assets | $9,009,000 | $7,206,000 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| | | |
| Current liabilities: | | |
| Accounts payable | $2,792,000 | $2,483,000 |
| Accrued expenses | 755,000 | 858,000 |
| Due to Factor | 382,000 | - |
| Line of credit - related party | 8,000,000 | 6,405,000 |
| Financing lease payable, current portion | 29,000 | 29,000 |
| Office lease payable, current portion | 162,000 | - |
| Accrued interest | 853,000 | 571,000 |
| Total current liabilities | 12,973,000 | 10,346,000 |
| | | |
| Long term liabilities: | | |
| Financing lease payable, less current portion | 22,000 | 29,000 |
| Office lease payable, less current portion | 2,546,000 | - |
| | | |
| Total liabilities | 15,541,000 | 10,375,000 |
| | | |
| Stockholders’ deficit: | | |
| | | |
| Preferred stock, $0.001 par value; 500,000 shares authorized; none issued and outstanding | - | - |
| Common stock, $0.001 par value; 30,000,000 shares authorized; 5,104,474 and 5,101,580 shares issued and outstanding at September 30, 2019 and June 30, 2019, respectively | 5,000 | 5,000 |
| Additional paid-in capital | 36,353,000 | 35,902,000 |
| Accumulated deficit | (42,890,000) | (39,076,000) |
| | | |
| Total stockholders’ deficit | (6,532,000) | (3,169,000) |
| | | |
| Total liabilities and stockholders’ deficit | $9,009,000 | $7,206,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUXFLUX POWER HOLDINGS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three Months Ended September 30, |
| | | |
| Net revenue | $1,919,000 | $1,835,000 |
| Cost of sales | 1,802,000 | 1,817,000 |
| | | |
| Gross profit | 117,000 | 18,000 |
| | | |
| Operating expenses: | | |
| Selling and administrative expenses | 2,206,000 | 1,483,000 |
| Research and development | 1,397,000 | 662,000 |
| Total operating expenses | 3,603,000 | 2,145,000 |
| | | |
| Operating loss | (3,486,000) | (2,127,000) |
| | | |
| Interest expense | (328,000) | (274,000) |
| | | |
| Net loss | $(3,814,000) | $(2,401,000) |
| | | |
| Net loss per share - basic and diluted | $(0.75) | $(0.77) |
| | | |
| Weighted average number of common shares outstanding - basic and diluted | 5,103,342 | 3,106,841 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUX POWER HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(unaudited)
| | | | | |
| | | | Additional Paid-in Capital | | |
| Balance at June 30, 2019 | 5,101,580 | $5,000 | $35,902,000 | $(39,076,000) | $(3,169,000) |
| | | | | | |
| Issuance of common stock – exercised options | 2,894 | - | - | - | - |
| Stock based compensation | - | - | 451,000 | - | 451,000 |
| Net loss | - | - | - | (3,814,000) | (3,814,000) |
| Balance at September 30, 2019 | 5,104,474 | $5,000 | $36,353,000 | $(42,890,000) | $(6,532,000) |
| | | | | |
| | | | Additional Paid-in Capital | | |
| Balance at June 30, 2018 | 3,106,003 | $3,000 | $19,224,000 | $(26,662,000) | $(7,435,000) |
| | | | | | |
| Issuance of common stock - services | 3,797 | - | 152,000 | - | 152,000 |
| Warrant exchange for common stock | 1,278 | - | - | - | - |
| Stock based compensation | - | - | 164,000 | - | 164,000 |
| Net loss | - | | - | (2,401,000) | (2,401,000) |
| Balance at September 30, 2018 | 3,111,078 | $3,000 | $19,540,000 | $(29,063,000) | $(9,520,000) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUX POWER HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months Ended September 30, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(3,814,000) | $(2,401,000) |
| Adjustments to reconcile net loss to net cash used in operating activities | | |
| Depreciation | 33,000 | 11,000 |
| Stock-based compensation | 451,000 | 164,000 |
| Stock issuance for services | - | 152,000 |
| Noncash lease expense | 88,000 | - |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 1,390,000 | 395,000 |
| Inventories | (311,000) | (1,057,000) |
| Other current assets | (132,000) | 15,000 |
| Accounts payable | 309,000 | 313,000 |
| Accrued expenses | (103,000) | (20,000) |
| Due to Factor | 382,000 | - |
| Accrued interest | 282,000 | 274,000 |
| Office lease payable | 2,000 | - |
| Customer deposits | - | (4,000) |
| Net cash used in operating activities | (1,423,000) | (2,158,000) |
| | | |
| Cash flows from investing activities | | |
| Purchases of equipment | (104,000) | (44,000) |
| Net cash used in investing activities | (104,000) | (44,000) |
| | | |
| Cash flows from financing activities: | | |
| Borrowings from line of credit - related party debt | 1,595,000 | - |
| Principal payments on financing lease payable | (7,000) | - |
| Net cash provided by financing activities | 1,588,000 | - |
| | | |
| Net change in cash | 61,000 | (2,202,000) |
| Cash, beginning of period | 102,000 | 2,706,000 |
| | | |
| Cash, end of period | $163,000 | $504,000 |
| | | |
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | | |
| Initial recognition of right-of-use asset | $2,706,000 | - |
| Stock issuance for services | $- | $152,000 |
| Interest paid | $46,000 | - |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLUX POWER HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018SEPTEMBER 30, 2019
(Unaudited)
NOTE 1 - NATURE OF BUSINESS AND REVERSE STOCK SPLIT
Basis of Presentation
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-K for the fiscal year ended June 30, 20182019 filed with the SEC on September 26, 2018.12, 2019. 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-K have been omitted. The accompanying condensed consolidated balance sheet at June 30, 20182019 has been derived from the audited balance sheet at June 30, 20182019 contained in such Form 10-K.
Nature of Business
Flux Power Holdings, Inc. designs, develops and sells rechargeable advanced lithium-ion batteries for industrial equipment. As used herein,was incorporated in 1998 in the terms “we”, “us”, “our”, “Flux” and “Company” referState of Nevada. On June 14, 2012, we changed our name to Flux Power Holdings, Inc. and ourFlux's operations are conducted through its wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), a California corporation (collectively, the "Company").
We design, develop, manufacture, and sell advanced rechargeable lithium-ion energy storage solutions for lift trucks, airport ground support equipment (GSE) and other industrial motive applications. Our “LiFT” battery packs, including our proprietary battery management system (BMS), provide our customers with a better performing, cheaper and more environmentally friendly alternative, in many instances, to traditional lead-acid and propane-based solutions.
We have received Underwriters Laboratory (UL) Listing on our Class 3 Walkie Pallet Jack (Class 3 Walkie) LiFT pack product line in 2016 and expect to receive UL Listing during calendar 2019 for our other product lines, which include Class 1 Counterbalance/Sit down/Ride-on (Class 1 Ride-on) LiFT packs, Class 2 Narrow Aisle LiFT packs, and Class 3 End Rider LiFT packs. We believe that a UL Listing demonstrates the safety, reliability and durability of our products and gives us an important competitive advantage over other lithium-ion energy suppliers. Our Class 3 Walkie LiFT packs have been approved for use by leading industrial motive manufacturers, including Toyota Material Handling USA, Inc., Crown Equipment Corporation, and Raymond Corporation.
As used herein, the terms “we,” “us,” “our,” “Flux,” and “Company” mean Flux Power Holdings, Inc., unless otherwise indicated. We have structured our business around our core technology,All dollar amounts herein are in U.S. dollars unless otherwise stated.
Reverse Stock Split
The Company effected a 1-for-10 reverse split of its common stock and preferred stock on July 11, 2019 (2019 Reverse Split). No fractional shares were issued in connection with the “Battery Management System” (“BMS”). Our BMS provides three critical functions to our battery systems: cell balancing, monitoring and error reporting. Using our proprietary management technology, we are able to offer complete integrated energy storage solutions or custom modular standalone systems to our customers. We have also developed2019 Reverse Split. If, as a suiteresult of complementary technologies and products that accompany our core products. Salesthe 2019 Reverse Split, a stockholder would otherwise have been primarilyentitled to customers located throughouta fractional share, each fractional share was rounded up. The 2019 Reverse Split resulted in a reduction of the United States.
outstanding shares of common stock from 51,000,868 to 5,101,580. In addition, it resulted in a reduction of the authorized shares of common stock from 300,000,000 to 30,000,000, and a reduction of the authorized shares of preferred stock from 5,000,000 to 500,000. The par value of the Company’s stock remained unchanged at $0.001. In addition, by reducing the number of the Company’s outstanding shares, the Company’s loss per share in all periods presented was increased by a factor of ten.
As the par value per share of the Company’s common stock remained unchanged at $0.001 per share, a total of $46,000 was reclassified from common stock to additional paid-in capital. In connection with the 2019 Reverse 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 unaudited consolidated financial statements and notes thereto have been adjusted to reflect the 2019 Reverse Split on a retroactive basis.
NOTE 2 – LIQUIDITY AND GOING CONCERN
The accompanying condensedunaudited 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 $31,987,000$42,890,000 through December 31, 2018September 30, 2019 and had a net loss of $2,924,000 and $5,325,000$3,814,000 for the three and six monthmonths ended December 31, 2018, respectively.September 30, 2019. To date, ourthe Company’s revenues and operating cash flows have not been sufficient to sustain ourits operations, and we havethe Company has relied on debt and equity financing to fund ourits operations. These factors raise substantial doubt about ourthe Company’s ability to continue as a going concern for the twelve months following the filing date of ourthis Quarterly Report on Form 10-Q, February 13,November 12, 2019. OurAs of September 30, 2019, the Company had a cash balance of $163,000 and will need to raise additional capital in the near future. The Company’s ability to continue as a going concern is dependent upon ourits ability to raise additional capital on a timely basis until such time as revenues and related cash flows are sufficient to fund ourits operations.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining ourits operations. These steps include (a) developing additional products to servecater to the Class 1 and Class 2 industrial equipment markets; and (b) expand ourexpanding its sales efforts; and (c) improve gross margins.force throughout the United States to increase revenues. In that regard, we havethe Company has increased ourits research and development efforts to focus on completing the development of energy storage solutions that can be used on larger forkliftsfork lifts and have implemented additional marketing efforts. Those efforts have resultedhas also doubled its sales force since December 2016 with personnel having significant experience in ongoing evaluations of battery packs on larger forklifts and ground supportthe industrial equipment (“GSE”) along with commercial sales of GSE packs, End Rider packs, Class 2 packs and Class 1 packs.handling industry.
We have evaluated our expected cash requirements over the next twelve months, which include, but are not limitedManagement also plans to investments inraise additional sales, 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 expenditure, we estimate that total financing proceeds of approximately $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.
We intend to continue to seek capital through the sale of equity securities through private or publicplacements, convertible debt placements and debt placements.the utilization of its existing related-party credit facility.
Although management believes thatOn March 31, 2019, the Company amended its line of credit with Esenjay Investments, LLS (“Esenjay”), a related party, to: (i) increase the maximum principal amount available under line of credit from $5,000,000 to $7,000,000 (“LOC”), (ii) add Cleveland Capital L.P., a Delaware limited partnership and our minority stockholder (“Cleveland”), as an additional required funding willlender to the LOC pursuant to which each lender has a right to advance a pro rata amount of the principal amount available under the LOC, (iii) extend the maturity date from March 31, 2019 to December 31, 2019, and (iv) to provide for additional parties to become a lender under the LOC. The outstanding principal balance as of September 30, 2019 was $7,000,000 of which Esenjay has $2,405,000 outstanding, Cleveland has $2,000,000 outstanding, and six (6) other lenders have an aggregate of $2,595,000 outstanding.Esenjay is deemed to be obtained, therea related party as Mr. Michael Johnson, the beneficial owner and director of Esenjay is a current member of our board of directors and a major stockholder of the Company (owning approximately 61.4% of our outstanding common shares as of September 30, 2019).
There is no guarantee wethe Company will be able to obtain the additional required funds on a timely basis or that funds will be available on terms acceptable to us. If such funds are not available when required, management will be required to curtail its investments in additional sales and marketing and product development, resources, and capital expenditures, which may have a material adverse effect on ourits future cash flows and results of operations, and ourits ability to continue operating as a going concern. The accompanying financial statements do not include any adjustments that would be necessary should wethe Company be unable to continue as a going concern and, therefore, be required to liquidate ourits assets and discharge ourits 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-K for the fiscal year ended June 30, 2018.2019. 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 averageweighted-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 December 31,September 30, 2019 and 2018, and 2017, basic and diluted weighted-average common shares outstanding were 41,966,7865,103,342 and 25,097,827, respectively. For the six months ended December 31, 2018 and 2017, basic and diluted weighted-average common shares outstanding were 36,517,598 and 25,108,859,3,106,841, respectively. The Company incurred a net loss for the three and six months ended December 31,September 30, 2019 and 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 December 31,September 30, 2019 and 2018, and 2017, excluded from diluted weighted-average common shares outstanding, which include common shares underlying outstanding convertible debt, stock options and warrants, were 5,441,481571,421 and 18,848,448,1,874,513 respectively.
Income TaxesRecently Adopted Accounting Pronouncements
We followIn 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be made to lessor, on its balance sheet for all operating leases greater than 12 months. ASU 2016-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new standard became effective for the Company on July 1, 2019, and it was adopted using the modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of accounting for income taxes under which deferred taxthat date. The new standard increased the Company’s right-of-use assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the tax basis of assetslease liability by approximately $2.7 million 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 December 31, 2018 and June 30, 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 December 31, 2018 or June 30, 2018. $2.7 million, respectively.
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.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. The adoption of this guidance by the Company, effective July 1, 2019, did not have a material impact on the Company’s consolidated financial statements.
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.
NOTE 4 - RELATED PARTY DEBT AGREEMENTS
Esenjay Credit FacilitiesShareholder Loan
Between October 2011 and September 2012,On July 3, 2019, the Company entered into three debt agreementsa loan agreement with Esenjay Investments, LLCCleveland (“Esenjay”Cleveland”). Esenjay is deemed, pursuant 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 ofwhich Cleveland agreed to loan the Company (owning approximately 62%$1,000,000 (the “Loan”). In connection with the Loan, on July 3, 2019, the Company issued Cleveland an unsecured short-term promissory in the amount of our outstanding common shares as of December 31, 2018)$1,000,000 (the “Unsecured Promissory Note”). The three debt agreements consisted of a Bridge LoanUnsecured Promissory Note a Secondary Revolving Promissory Note andbears 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 ainterest rate of $0.60 per share, bore interest at 8%15.0% per annum and was originally due on September 1, 2019, unless repaid earlier from a percentage of proceeds from certain identified accounts receivable. In connection with the Loan, the Company issued Cleveland a three-year warrant (the “Cleveland Warrant”) to mature on January 31, 2019.purchase the Company’s common stock in a number equal to one-half percent (0.5%) of the number of shares of common stock outstanding after giving effect to the total number of shares of common stock to be sold in a contemplated public offering and with an exercise price equal to the per share public offering price. Effective September 1, 2019, the Company entered into that certain Amendment No. 1 to the Unsecured Promissory Note pursuant to which the maturity date was modified from September 1, 2019 to December 1, 2019 (the “Amendment”). In connection with the Amendment, the Company replaced the Cleveland Warrant with a certain Amended and Restated Warrant Certificate (the “Amended Warrant”). The Amended Warrant increased the warrant coverage from 0.5% to 1% of the number of shares of common stock outstanding after giving effect to the total number of shares of common stock sold in the next private or public offering (the “Offering”). In addition, the exercise price was also changed to equal the per share price of common stock sold in the Offering.
Credit Facility
On March 22, 2018, Flux Power entered into a credit facility agreement with Esenjay with a maximum borrowing amount of $5,000,000. Proceeds from the credit facility arewere 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”“Original Agreement”). The outstanding balance of the Inventory Line of CreditOriginal Agreement and all accrued interest iswas due and payable on March 31, 2019. Funds received from Esenjay since December 5, 2017 were transferred to the Inventory Line of Credit resulting in $2,405,000 outstanding as of December 31, 2018 and $2,595,000 available for future draws, subject to the lender’s approval. During the three months ended December 31, 2018, the Company recorded approximately $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 CompanyMarch 28, 2019, Flux Power entered into an Early Note Conversion Agreement (the “Early Note Conversionamended and restated credit facility agreement (“Amended and Restated Credit Facility Agreement”) with Esenjay and Cleveland (Cleveland and Esenjay, together with additional parties that may join as a lender, the “Lenders”) to amend and restate the terms of the Original Agreement in its entirety.
The Original Agreement was amended, among other things, to (i) increase the maximum principal amount available under line of credit from $5,000,000 to $7,000,000 (“LOC”), (ii) add Cleveland as additional lender to the LOC pursuant to which Esenjay agreedeach lender has a right to immediately exercise its conversion rightsadvance a pro rata amount of the principal amount available under the UnrestrictedLOC, (iii) extend the maturity date from March 31, 2019 to December 31, 2019, and Open Line of(iv) to provide for additional parties to become a “Lender” under the Amended and Restated Credit Facility Agreement. In connection with the LOC, on March 28, 2019 the Company issued a secured promissory note to Cleveland (the “Cleveland Note”), and an amended and restated secured promissory note to Esenjay which amended and superseded the secured promissory note dated September 24, 2012March 22, 2018 (“Esenjay Note” and together with the Cleveland Note and other secured promissory notes to convertLenders, (the “Notes”). The Notes were issued for the outstanding principal amount of $7,975,000 plus accrued$7,000,000 or such lesser principal amount advanced by the respective Lender under the Amended and unpaidRestated Credit Facility Agreement (the “Principal Amount”). The Notes bear an interest of $1,041,280 for 15,027,134 shares of the Company’s common stock. The Company followed FASB ASC Topic No.470, Debt to record the early conversion of debt to equity. The Early Note Conversion Agreement had an induced conversion which included issuance of 268,018 additional shares of common stock and recorded as interest expense at the stock’s fair value of $466,351 at October 31, 2018.
Shareholder Convertible Promissory Note
On April 27, 2017, we formalized an oral agreement for advances totaling $500,000, received from a shareholder (“Shareholder”fifteen percent (15%) 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 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.
On October 25, 2018, the Company and the Shareholder entered into an amendment to the Convertible Promissory Note. The amendment (i) extended the maturity date of the Convertible Note from October 27, 2018 to February 1, 2019 and (ii) allowed for the automatic conversion of the Convertible Note immediately following the full conversion of the line of credit granted by Esenjay to the Company under the Esenjay Loan into shares of Common Stock of the Company. As a result of the 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, 2018.2019. The outstanding principal balance as of September 30, 2019 was $7,000,000 of which Esenjay has $2,405,000 outstanding, Cleveland LOC has $2,000,000 outstanding, and other six (6) other lenders have an origination fee inaggregate of $2,595,000 outstanding.
To secure 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 outstandingobligations under the Notes, Flux Power entered into an Amended and Restated Security Agreement dated March 28, 2019 with the Lenders (the “Amended Security Agreement”). The Amended Security Agreement amends and restates the Guaranty and Security Agreement dated March 22, 2018 by and between Esenjay and the Company, and added Cleveland LOC. The Cleveland LOC was paid back December 27, 2018.and other Lenders as additional secured parties to the Amended Security Agreement and appointing Esenjay as collateral agent.
NOTE 5 – FACTORING ARRANGEMENT
On October 31, 2018, FluxAugust 23, 2019, the Company entered into a Factoring Agreement (Factoring Agreement) with CSNK Working Capital Finance Corp. d/b/a Bay View Funding (“CSNK”) for a factoring facility under which CSNK will, from time to time, buy approved receivables from the Company. The factoring facility provides for the Company to have access to the lesser of (i) $3 million (Maximum Credit) or (ii) the sum of all undisputed receivables purchased by CSNK multiplied by the 90% (which percentages may be adjusted by CSNK in its sole discretion). Upon receipt of any advance, Company will have sold and assigned all of its rights in such receivables and all proceeds thereof. The factoring facility is secured by the Company’s accounts, equipment, inventory, financial assets, chattel paper, electronic chattel paper, letters of credit, letters of credit rights, general intangibles, investment property, deposit accounts, documents, instruments, supporting obligations, commercial tort claims, the reserve, motor vehicles, all books, records, files and computer data relating to the foregoing, and all proceeds of the foregoing. The Company is required to pay CSNK a facility agreementfee of 1.0% of the Maximum Credit upon execution of the Factoring Agreement and a factoring fee of 0.75% of the face value of purchased receivables for 1st 30-days such receivables are outstanding after purchase and 0.35% for each 15-days thereafter until the receivables are repaid in full or otherwise repurchased by the Company or otherwise written off by CSNK. In addition, the Company is required to pay financing fees on the outstanding advances equal to a floating rate per annum equal to the Prime plus 2.0% (8.0% floor). In the event, the aggregate factoring fee and financing fee is less than 0.5% of the Maximum Credit in any one month, the Company will pay CSNK the difference for such month. CSNK has the right to demand repayment of any purchased receivables which remain unpaid for 90-days after purchase or with a shareholder, (“Investor”), pursuantrespect to which Investor agreedany account debtor asserts a dispute.
The factoring facility is for an initial term of twelve months and will renew on a year to make available to Flux a line of credit (“Investor LOC”)year basis thereafter, unless terminated in a maximum principal amountaccordance with the Factoring Agreement. The Company may terminate the Factoring Agreement 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’ EQUITY (DEFICIT)
Private Placement of Common Stock
In December 2018, our Board of Directors approved the private placement of up to 4,545,455 shares of our common stock to select accredited investors for a total amount of $5,000,000, or $1.10 per share of common stock with the right of the Board to increase the offering amount to $7,000,000 (the “Offering”). On December 26, 2018, we completed an initial closing of the Offering, pursuant to which we sold an aggregate of 3,359,100 shares of common stock, at $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 shareholder. The shares offered and sold in the Offering have not been registered under the Securities Act of 1933, as amended (“Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The shares were offered and sold to the accredited investors in reliance upon exemptions from registration pursuant to Rule 506(c) of Regulation D promulgated under Section 4(a)(2) under the Securities Act.
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 prior written notice.
Shenzhen Reach Investment Development Co. (“SRID”). On March 14, 2018, we entered into a consulting agreement with SRIDnotice and payment to assist us with identifying strategic partners, suppliers and manufacturers in China for a termCSNK of 12 months. Included with the services is a two-week tripan early termination fee equal 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 course0.5% of the 12-monthMaximum Credit multiplied by the number of months remaining in the current term. As of December 31, 2018, 145,416 shares have been issued.September 30, 2019, an outstanding balance of $382,000 was due to Factor.
NOTE 6 - STOCKHOLDERS’ DEFICIT
Warrant Activity
Warrant detail for the sixthree months ended December 31,September 30, 2019 is reflected below:
| | | Weighted Average Exercise Price Per Warrant | Remaining Contract Term (# years) |
| Warrants outstanding and exercisable at June 30, 2019 | 8,333 | $20.00 | 0.25 |
| Warrants issued | - | $- | - |
| Warrants exchanged | - | $- | - |
| Warrants forfeited | (8,333) | $20.00 | - |
| Warrants outstanding and exercisable at September 30, 2019 | - | $- | - |
Warrant detail for the three months ended September 30, 2018 is reflected below:
| | | Weighted Average Exercise Price Per Warrant | Remaining Contract Term (# years) | | 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 | 174,079 | $20.30 | 0.74 |
| Warrants issued | - | - | $- | - |
| Warrants exercised | (79,957) | $1.48 | - | |
| Warrants exchanged | | (4,000) | $20.00 | - |
| Warrants forfeited | - | $- | - | - | $- | - |
| Warrants outstanding and exercisable at December 31, 2018 | 1,660,833 | $2.06 | 0.19 | |
| Warrants outstanding and exercisable at September 30, 2018 | | 170,079 | $20.30 | 0.47 |
Stock-based Compensation
On November 26, 2014, ourthe board of directors approved ourthe 2014 Equity Incentive Plan (the “2014 Plan”), which was approved by our shareholdersthe Company’s stockholders on February 17, 2015. The 2014 Plan offers selected employees, directors, and consultants the opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees. The 2014 Plan allows for the award of stock and options, up to 10,000,0001,000,000 shares of our common stock.
Activity in stock options during the sixthree months ended December 31,September 30, 2019 and related balances outstanding as of that date are reflected below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) |
| Outstanding at June 30, 2019 | 580,171 | $11.05 | 8.59 |
| Granted | - | $- | - |
| Exercised | (4,437) | $4.69 | - |
| Forfeited and cancelled | (4,313) | $10.34 | - |
| Outstanding at September 30, 2019 | 571,421 | $11.10 | 8.31 |
| Exercisable at September 30, 2019 | 339,420 | $10.32 | 7.84 |
Activity in stock options during the three months ended September 30, 2018 and related balances outstanding as of that date are reflected below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) |
| Outstanding at June 30, 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 six months ended December 31, 2017, and related balances outstanding as of that date are reflected below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) | | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) |
| Outstanding at June 30, 2017 | 716,277 | $1.01 | | |
| Outstanding at June 30, 2018 | | 354,447 | $8.30 | 8.87 |
| Granted | 1,970,000 | 0.46 | | 33,526 | $- | - |
| Exercised | - | | | - | - |
| Forfeited and cancelled | (1,000) | 0.50 | | (10,312) | $- | - |
| Outstanding at December 31, 2017 | 2,685,277 | $0.61 | 8.96 | |
| Exercisable at December 31, 2017 | 1,626,613 | $0.81 | 7.86 | |
| Outstanding at September 30, 2018 | | 376,661 | $9.40 | 8.33 |
| Exercisable at September 30, 2018 | | 160,967 | $7.70 | 7.99 |
Stock-based compensation expense recognized in ourthe condensed consolidated statements of operations for the three and six months ended December 31,September 30, 2019 and 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 duringAt September 30, 2019, the six months ended December 31, 2018 was $2.05, and as a result theaggregate intrinsic value of the exercisable options at December 31, 2018 was approximately $2,410,000.$659,000.
WeThe Company 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 December 31 | For the Six Months Ended December 31, | |
| | | | | | |
| Three months ended September 30, | | | |
| Research and development | $17,000 | $61,000 | $32,000 | $64,000 | $54,000 | $15,000 |
| General and administration | 226,000 | 92,000 | 375,000 | 100,000 | |
| Selling and administrative | | 397,000 | 149,000 |
| Total stock-based compensation expense | $243,000 | $153,000 | $407,000 | $164,000 | $451,000 | $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:
| Six months ended December 31, | | 2018 | | 2017 | |
| Three months ended September 30, | | 2019 | | 2018 |
| Expected volatility | | 142 %-143% | | 100 % | 111.4% -112.2% | | 142% |
| Risk free interest rate | | 2.73 % - 2.82% | | 1.76 % | 2.43% - 2.45% | | 2.63% |
| Forfeiture rate | | 20.0 % | | 23.0 % | 20% | | 20% |
| Dividend yield | | 0 % | | 0 % | 0% | | 0% |
| Expected term (years) | | 5 | | 5 | 5.61 | | 5 |
The remaining amount of unrecognized stock-based compensation expense at December 31, 2018September 30, 2019 relating to outstanding stock options, is approximately $1,717,000,$1,163,000, which is expected to be recognized over the weighted averageweighted-average period of 1.591.71 years.
NOTE 67 - OTHER RELATED PARTY TRANSACTIONS
Transactions with Epic Boats
The Company subleasessubleased office and manufacturing space to Epic Boats (an entity founded and controlled by Chris Anthony, oura board member and former Chief Executive Officer) in ourthe facility in Vista, California pursuant to a month-to-month sublease agreement. Pursuant to this agreement, Epic Boats payspaid Flux Power 10% of facility costs through the end of ourthe Company’s lease agreement. agreement which was June 30, 2019.
The Company received $5,000$0 and $10,000, respectively during$4,000 for the three months and six months ended December 31,September 30, 2019 and 2018 from Epic Boats under the sublease rental agreement which is recorded as a reduction to rent expense and the customer deposits discussed below.deposits.
As of December 31, 2018 and June 30, 2018, customer deposits totaling approximately $93,000 and $102,000, respectively, were recorded in the accompanying condensed consolidated balance sheets. There were no receivables outstanding from Epic Boats as of December 31, 2018 and June 30, 2018.
NOTE 78 - 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. OurThe Company’s cash balance at this institution is secured by the Federal Deposit Insurance Corporation up to $250,000. As of December 31, 2018, the Company hadSeptember 30, 2019, cash totaled approximately $794,000$163,000, which consists of cash not insured.funds held in a non-interest bearing bank deposit account. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.
Customer Concentrations
During the three months ended December 31, 2018, we had five major customers that each represented more than 10% of our revenues on an individual basis, or approximately 95% inSeptember 30, 2019, the aggregate. During the six months ended December 31, 2018, we had four major customers that each represented more than 10% of our revenues on an individual basis, or approximately 86% in the aggregate.
During the three months ended December 31, 2017, weCompany had three major customers that each represented more than 10% of ourits revenues on an individual basis, or approximately 94% in the aggregate. $1,507,000 or 78% of its total revenues.
During the sixthree months ended December 31, 2017, weSept 30, 2018, the Company had three major customers that each represented more than 10% of ourits revenues on an individual basis, or approximately $1,641,000 or 89% in the aggregate.of its total revenues.
Suppliers/Vendor Concentrations
We obtainThe Company obtains a limited number of components and supplies included in ourits products from a small group of suppliers. During the three months ended December 31, 2018, we had three suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 59% inSeptember 30, 2019 the aggregate. During the six months ended December 31, 2018 weCompany had two suppliers who accounted for more than 10% of ourits total inventory purchases, on an individual basisbasis. Purchases for these two suppliers totaled $1,033,000 or approximately 52% in the aggregate.44% of its total purchases.
During the three and six months ended December 31, 2017, weSeptember 30, 2018 the Company had threetwo suppliers who accounted for more than 10% of ourits total inventory purchases, on an individual basisbasis. Purchases for these three suppliers totaled $1,552,000 or approximately 55% and 48%, respectively, in the aggregate.56% of our total purchases.
NOTE 89 - COMMITMENTS AND CONTINGENCIES
From time to time, wethe Company may bebecome involved in routinevarious lawsuits and legal proceedings as well as demands, claims and threatened litigation thatwhich arise in the normalordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. The ultimate amount of liability, if any, for any claims of any type (either alone or inTo 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, diversionbest knowledge of management, attentionthere are no material legal proceedings pending against the Company.
Operating Leases
On April 25, 2019 the Company signed a lease with Accutek to rent approximately 45,600 square feet of industrial space at 2685 S. Melrose Drive, Vista, California. The lease has an initial term of seven years and other factors. Wefour months, commencing on or about June 28, 2019. The lease contains an option to extend the term for two periods of 24 months, and the right of first refusal to lease an additional approximate 15,300 square feet. The monthly rental rate is $42,400 for the first 12 months, escalating at 3% each year.
Total rent expense legal costswas approximately $170,000 and $41,000 for the three months ended September 30, 2019 and 2018, respectively, net of sublease income.
The Future Minimum Lease Payments for the new lease are:
| 2020 | $339,390 |
| 2021 | 393,269 |
| 2022 | 496,354 |
| 2023 | 512,518 |
| 2024 | 571,590 |
| Thereafter | 1,454,497 |
| Total Future Minimum Lease Payments | 3,767,618 |
| Less: discount | (1,059,150) |
| Total lease liability | $2,708,468 |
On July 1, 2019, the Company recorded a lease liability and right-of-use lease asset for the Accutek Lease based on present value of lease payments over the expected remaining lease term of 7.4 years, discounted using the Company’s estimated incremental borrow rate of 10%. For the three months ended September 30, 2019, reduction of the right-of-use lease asset was $87,784 and the increase to the lease liability was $2,510, which resulted in a net increase to the period incurred. We cannot assure you that contingenciesright-of-use lease asset of a legal nature or contingencies having legal aspects will not be asserted against us$90,294 during the period.
Financing Leases
The tables below show the initial measurement of the financing lease right-of-use assets and liabilities as of July 1, 2019 and the balances as of September 30, 2019, including the changes during the periods. The Company’s financing lease right-of-use assets are included in “Property, plant and equipment, net” on the future, and these matters could relate to prior, current or future transactions or events. accompanying consolidated balance sheet.
| Financing lease right-of-use assets |
| Initial measurement at July 1, 2019 | $57,000 |
| Less depreciation of financing lease right-of-use assets | (7,000) |
| Financing lease right-of-use assets at September 30, 2019 | $50,000 |
| Financing lease liabilities |
| Initial measurement at July 1, 2019 | $58,000 |
| Less principal payments on financing lease liabilities | (7,000) |
| Financing lease liabilities as of September 30, 2019 | 51,000 |
| Less non-current portion | (29,000) |
| Current portion at September 30, 2019 | $22,000 |
As of December 31, 2018, we are not a party to any legal proceedings that are expected, individually or inSeptember 30, 2019, the aggregate, toCompany’s financing leases have a material adverse effect on our business, financial condition or operating results.weighted-average remaining lease term of 1.8 years and a weighted-average discount rate of 30%. The maturities of the financing lease liabilities are as follows:
| | |
| 2020 | $39,000 |
| 2021 | 27,000 |
| Total financing lease payments | 66,000 |
| Less imputed interest | (15,000) |
| Present value of financing lease liabilities | 51,000 |
NOTE 910 - SUBSEQUENT EVENTS
On October 10, 2019, Flux Power entered into (i) that certain Second Amended and Restated Credit Facility Agreement (“Second Amended Credit Facility”) with Esenjay, Cleveland, Otto Candies, Jr., Paul Candies, Brett Candies, Winn Interest, Ltd., David A. Modesett, and Helen M. Tabone (the “Lenders” or the “Lender”) to amend and restate the terms of that certain Amended and Restated Credit Facility Agreement dated March 28, 2019 to increase the line of credit under such agreement from $7,000,000 to $10,000,000 (“LOC Increase”), and (ii) that certain Amendment No. 1 to the Amended and Restated Security Agreement to amend the Amended and Restated Security Agreement dated March 28, 2019 to reflect the Second Amended Credit Facility. In connection withtherewith, each Lender and Flux entered into an amendment to amend their respective secured promissory note to reflect the Offering, subsequent to December 31, 2018, we have sold an additional 633,464 sharesLOC Increase. As of common stockNovember 12, 2019, the Company had $3,000,000 available for a total purchase price of $696,810 in cash. The shares of common stock offered and sold in the Offering have not been registeredfuture draws under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The shares were offered and sold to the accredited investors in reliance upon exemptions from registration pursuant to Rule 506(c) of Regulation D promulgated under Section 4(a)(2) under the Securities Act.Second Amended Credit Facility.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ThisThe following discussion provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. The discussion should be read in conjunction with the unaudited interim condensed consolidated financial statementsFinancial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notesNotes thereto and Part II, Item 7, Management’s Discussion and Analysis of Financial Conditioncondition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 30, 2018.2019.
Overview
We design, develop, and sellmanufacture advanced rechargeable advanced lithium-ion batteriesenergy storage solutions for lift trucks, airport ground support equipment (GSE) and other industrial uses,motive applications. Our “LiFT” battery packs, 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 three 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.
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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 systemssystem (BMS), provide our customers with a better performing, cheaper and more environmentally friendly alternative, in many instances, to traditional lead-acid and propane-based solutions.
The Company effected a 1-for-10 reverse split of its common stock and preferred stock on July 11, 2019 (“2019 Reverse Split”). No fractional shares were issued in connection with the 2019 Reverse Split. If, as a result of the 2019 Reverse Split, a stockholder would otherwise have been entitled to a fractional share, each fractional share was rounded up. The 2019 Reverse Split resulted in a reduction of our customers.outstanding shares of common stock from 51,000,868 to 5,101,580. In addition, we have developedit resulted in a suite of complementary technologies and products that enhance the abilitiesreduction of our BMSauthorized shares of common stock from 300,000,000 to meet the needs30,000,000, and a reduction of our authorized shares of preferred stock from 5,000,000 to 500,000. The par value of the growing advanced energy storage market.Company's stock remained unchanged at $0.001. In addition, by reducing the number of the Company's outstanding shares, the Company's loss per share in all periods presented was increased by a factor of ten.
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.Recent Developments
In January 2016, we obtained certification from Underwriters Laboratories (“UL”), a global safety science organization, onExpanding Product Line with Larger, Higher Value Solutions. We are now expanding the shipment of our new larger, more powerful and higher cost 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 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.
During 2018, we commercially developed, field tested, and sold packs for use in Class 3 end riders, Class 2 forklifts, Class 1 counterbalance forklifts, and aviation ground support equipment (“GSE”).trucks. We now have a completeare also preparing for the December 2019 commercial launch of our new line of packs to meetFlux LiFT Pack batteries for Class 2 Narrow Aisle and Class 3 End Rider forklifts. Over the needs of the liftcoming several months, we anticipate achieving UL Listings on all major product lines, including equipment industry and are positioned to accelerate our sales significantly.manufacturer approvals.
Airport Ground Support Equipment (GSE) Battery Pipeline. In October, we received a $0.3 million order for additional airport GSE batteries from an existing global airline customer. That customer is expected to place significant additional orders in calendar 2019. Other major airlines, equipment manufacturers, and GSE providers continue to pilot and test our packs.
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 December 31,September 30, 2019 (“Q1 2020”) and September 30, 2018 (“Q2Q1 2019”) and December 31, 2017 (“Q2 2018”).
| | Three Months Ended December 31, | | |
| | | | | | | |
| | | | | | |
| | | |
| Net revenue | $2,711,000 | 100% | $1,201,000 | 100% | |
| Revenues | | $1,919,000 | 100% | $1,835,000 | 100% |
| Cost of sales | 2,456,000 | 91% | 1,589,000 | 132% | 1,802,000 | 94% | 1,817,000 | 99% |
| Gross income (loss) | 255,000 | 9% | (388,000) | -32% | |
| Gross profit | | 117,000 | 6% | 18,000 | 1% |
| | | |
| Operating expenses: | | |
| Selling and administrative expenses | 1,604,000 | 59% | 807,000 | 67% | 2,206,000 | 115% | 1,483,000 | 81% |
| Research and development | 882,000 | 33% | 479,000 | 40% | 1,397,000 | 73% | 662,000 | 36% |
| Total operating expenses | 2,486,000 | 92% | 1,286,000 | 107% | 3,603,000 | 188% | 2,145,000 | 117% |
| | | |
| Operating loss | (2,231,000) | -82% | (1,674,000) | -139% | (3,486,000) | -182% | (2,127,000) | -116% |
| | | |
| Other income (expense): | | |
| | | |
| Interest expense, net | (693,000) | -26% | (166,000) | -14% | (328,000) | -17% | (274,000) | -15% |
| | | |
| | | |
| Net loss | $(2,924,000) | -108% | $(1,840,000) | -153% | $(3,814,000) | -199% | $(2,401,000) | -131% |
Revenues
Our current focus is on the sale of products used in lift equipment, and our current products include walkie pallet jacks, and higher capacity packs for Class 1, 2, and 3 forklifts. We also leverage our modular battery pack designs to provide adjacent applications, including airport ground support equipment (GSE). We feel that we are well positioned to address these markets given the benefits and flexibility offered by our modular and scalable battery pack design and technology.
We currently sell most of our products through a distribution network of OEMs, equipment dealers, and battery distributors in North America. This distribution network mostly sells to large company, national accounts. However, we do sell certain battery packs directly to other accounts including industrial equipment manufacturers and the ultimate end-user.
Revenues for Q2 2019,Q1 2020 increased by $1,510,000$84,000 or 126%5%, compared to Q2 2018. During Q2 2019 we sold approximately 327 packs from all classesQ1 2019. This increase in revenues was primarily attributable to sales of our larger packs. Our quarter-to-quarter revenues are subject to timing variations including walkie, end rider, Class 2, Class 1, and GSE compared to approximately 420 walkie LiFT packs in Q2 2018. The completionstaging of a full offering of batteries and the focus 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 $8,500 to $31,000 per pack and drive higher revenue per pack.large forklift purchases by customers.
Cost of Sales
Cost of sales for Q2 2019, increased $867,000,Q1 2020 decreased $15,000 or 55%,1% compared to Q2 2018.Q1 2019, resulting in a gross profit percentage of 6% for the quarter compared to 1% in the prior quarter. The increasedecrease in cost of sales is directly related to our substantial increase in pack sales as discussed above. Thethe Company’s development efforts and improvements to all of the battery packs that have resulted in reductions in inventory costs, improved workforce efficiencies, and reduced warranty expense per pack which have all contributed to an improvement in the gross margin percentage by 41% in Q2 2019 compared to Q2 2018.margin. We expect continued improvements to the gross margin percentage as the sales volumes increase, assembly productivity improves, and cost reductions 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 Q2 2019Q1 2020 increased $797,000$723,000 or 99%,49% compared to Q2 2018.Q1 2019. The increase iswas primarily for stock-based compensation, additional payroll costs related to additional staff needed to support the sales effortsnew employees, and back office operation as well as increased stock-based compensation and additional professional fees.rent expenses associated with our new facility.
Research and Development Expense
Research and development expenses for Q2 2019Q1 2020 increased $403,000$735,000 or 84%,111% compared to Q2 2018.Q1 2019. Such expenses consist primarily of materials, supplies, salaries and personnel related expenses, stock-based compensation expense,testing costs, consulting costs, and other expenses associated with the continued development of our fullpacks, as well as, research into new product line rollout. During Q2 2019, we continued our effortsopportunities. The increase in refining and improving the battery packs for Class 1 forklifts, Class 2 forklifts, and Class 3 end riders. We have also begunexpenses was primarily due to the UL listing processlistings for our Class 3 end rider and Class 1 forklift batteries.those packs. We anticipate research and development expenses continuing to bewill remain a significant portion of our expenses as we continue to develop and add new and improved products to our product line.
line-up.
Interest Expense
Interest expense for Q2 2019Q1 2020 increased $527,000$54,000 or 317%20%, compared to Q2 2018Q1 2019 and consists ofwas primarily due to interest expense related to our outstanding lines of creditcredit. Interest expense for Q1 2020 and convertible promissory note. Also included in interest expense during the three months ended December 31, 2018 is additional interest expense ofQ1 2019 was approximately $466,000 agreed$328,000 and $274,000, respectively, related to be paid under the Esenjay Early Conversion Agreement as well as origination fees of $25,000 for the shareholderour outstanding lines of credit (see Note 4)4 to the condensed consolidated financial statements).
Net Loss
Net losslosses for Q2 2019Q1 2020 increased $1,084,000$1,413,000 or 59%, as compared to net loss in Q2 2018.Q1 2019. The increase is primarily attributable to increased stock-based compensationresearch and development costs of $90,000, our growing sales department, the development of Class 1 and Class 2 forklift battery packs and additional interest expense of $527,000. As we continue to increase sales of our full line of packs, we anticipate being able to take advantage of greater quantity discounts thus improving our gross margin.
The following table represents our unaudited condensed consolidated statement of operations for the six 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
Sellingselling 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.expenses.
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 forklifts, Class 2 forklifts, 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 six months ended December 31, 2017 and consists primarily of interest expense related to our 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
Overview
As of December 31, 2018,September 30, 2019, we had a cash balance of $1,044,000$163,000 and an accumulated deficit of $31,987,000.$42,890,000. 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 securingSee “Future Liquidity Needs” below.We will need to raise additional capital in the formnear future. These circumstances raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of convertible debtassets or the amounts and private or public placementsclassifications of liabilities that may result from both current sources and new sources.the outcome of the uncertainty of our ability to remain a going concern. See “Future Liquidity Needs” below.
“Note 2 - Going Concern” above.
Cash Flows
Operating Activities
Our operating activities resulted in net cash used in operations of $5,256,000$1,423,000 during the six months ended December 31, 2018,Q1 2020, compared to net cash used in operations of $3,262,000$2,158,000 during the six months ended December 31, 2017. Q1 2019.
The primary reason for the increase in net cash used in operations was a significant increase inoperating activities during Q1 2020 reflects the net loss of $3,814,000 for the period offset primarily by non-cash items including depreciation, stock-based compensation, as well as, the purchase of inventory, and an increasethe payment of accounts payable.
The net cash used in inventory on hand and accounts receivable at December 31, 2018operating activities during Q1 2019 reflects the net loss of $2,401,000 for the period offset primarily by a larger net loss offset by increases in accounts receivable, inventory, accounts payable, accrued interest, and accrued expenses.
Investing Activities
Net cash used in investing activities during the six months ended December 31, 2018Q1 2020 consists primarily of the purchase of officeleasehold improvements and warehouse equipment primarily computer related, for $101,000.$104,000.
Net cash used in investing activities during the six months ended December 31, 2017Q1 2019 consists primarily of the purchase of office and warehouse equipment and leasehold improvements totaling $43,000.and office equipment for $44,000.
Financing Activities
Net cash provided by financing activities during Q1 2020 was $1,588,000 as a result of borrowings under the six months ended December 31, 2018 was $3,695,000Company’s Amended and consisted of proceeds from the sale of common stock.Restated Credit Facility Agreement. See “Note 2 – Related Party Debt Agreements” above.
Net cash provided byThere were no financing activities during the six months ended December 31, 2017 was $3,215,000 and resulted from the borrowing from our line of credit with Esenjay.Q1 2019.
Future Liquidity Needs
In December 2018, our Board of Directors approved the private placement of up to 4,545,455 shares of our common stock to select accredited investors for a total amount of $5,000,000, or $1.10 per share of common 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 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. Based on our current and planned levels of expenditures,expenditure, we estimate that total financing proceeds of approximately $10,300,000 will be requiredneed to raise significant cash in the near future 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.
We intend to continue to seek capital through the sale of equity securities through private or public placements and through debt placements.facilities. As of September 30, 2019, the principal amount outstanding under the Amended and Restated Credit Facility Agreement was $7,000,000. The Amended and Restated Credit Facility Agreement was amended on October 10, 2019 to increase the line of credit from $7,000,000 to $10,000,000.
Although management believes that the additional required funding will be obtained, there is no guarantee we will be able to obtain the additional required funds in the future or that funds will be available on terms acceptable to us. If such funds are not available, management will be required to curtail 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
None.
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, 2018.2019.
Recently IssuedAdopted Accounting Pronouncements Not Yet Adopted
In 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires a lessee to recognize a lease asset representing its right to use the underlying asset for the lease term, and a lease liability for the payments to be made to lessor, on its balance sheet for all operating leases greater than 12 months. ASU 2016-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new standard became effective for us on July 1, 2019, and was adopted using the modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of that date. The new standard increased right-of-use assets and the lease liability by approximately $2.7 million and $2.7 million, respectively.
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. The adoption of this guidance by the Company, effective July 1, 2019, did not have a material impact on the Company’s consolidated financial statements.
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.
ITEM 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.
ITEMITEM 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 December 31, 2018, underUnder the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)1934. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to the Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared. Based on the management's assessment and review of our financial statements and results for the three months ended September 30, 2019, we have concluded that our disclosure controls and procedures were effective for purposes stated above.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to ensureprovide reasonable assurance regarding the information requiredreliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be disclosedeffective can provide only reasonable assurances with respect to financial statement preparation and presentation. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our reports filedconditions, or submitted underthat the Exchange Act is recorded, processed and reported withindegree of compliance with the time periods specified in the SEC’s rules and forms.policies or procedures may deteriorate.
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 quarterthree months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEMITEM 1 - LEGAL PROCEEDINGS
From time to time, we may bebecome involved in routinevarious lawsuits and legal proceedings as well as demands, claims and threatened litigation thatwhich arise in the normalordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. The ultimate amount of liability, if any, for any claims of any type (either alone or inTo 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, diversionbest knowledge 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 December 31, 2018, wethere are not a party to anyno material legal proceedings that are expected, individually or inpending against the aggregate, to have a material adverse effect on our business, financial condition or operating results.Company.
ITEMITEM 1A - RISK FACTORS
AnyAn investment in our common stock involves a high degree of risk. InvestorsYou should carefully consider the risks described in our Annual Report on Form 10-K as filedbelow, together with the SEC on September 26, 2018 and all of the other information containedincluded in this report, before making an investment decision. If any of the following risks actually occur, our public filings before deciding whether to purchasebusiness, financial condition or results of operations could suffer. In that case, the trading price of our common stock.stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.
ITEMITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective April 1, 2018, wethe Company entered into a renewal contract (the “2018 Renewal”) with Catalyst Global LLC to provide investor relations services for 12 months in exchange for monthly fees of $4,500 per month and 8,7103,484 shares of restricted common stock per quarter. The initial trancheto be issued over the course of 8,710 shares was valued at $1.70 per share or $14,807 when issued on June 21, 2018, the second tranche of 8,710 shares was valued at $2.01 per share or $17,507 when issued on 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, 2018.12-month term. The 2018 Renewal is cancelable upon 60 days written notice.expired on March 31, 2019 and was not renewed. Catalyst provided services to the Company on a month-to-month basis until terminated on October 24, 2019. On October 24, 2019, the Company issued 3,121 shares of its common stock to Catalyst Global, LLC valued at $9.75, or $30,429, to cover the services from May 2019 to October 2019. 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. As of December 31, 2018, 145,416 shares have been 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.
Other than the equity issuances disclosed in this Item 2 and 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.
ITEMITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEMITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
ITEMITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
The following exhibits are filed as part of this ReportReport.
ExhibitNo.
| | Description
|
| Exhibit No. | | |
| | Credit Facility Agreement, dated 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 October 25, 2018, with Scott Kiewit (1) |
| | Form of Subscription Agreement (2)Description |
| | 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* |
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.
SIGNATURES
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,Holdings, Inc. | |
| | | | |
Date: February 13,November 12, 2019
| By: | /s/ Ronald F. Dutt | |
| | | Name: Ronald F. Dutt
Chief Executive Officer | |
| | | Title: Chief(Principal Executive Officer (Principal Executive Officer)
| |
|
| |
| | | | |
| By: | /s/ Charles A. Scheiwe | |
| | | Name: Charles A. Scheiwe
| |
| | | Title: Chief Financial Officer
(Principal Financial Officer)Officer)
| |
| | | |
| | | |