NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
NOTE 1 - NATURE OF BUSINESS
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, 2016 filed with the SEC on September 26, 2016. 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, 2016 has been derived from the audited balance sheet at June 30, 2016 contained in such Form 10-K.
Nature of Business
Flux Power Holdings, Inc. ("Flux") was incorporated as Olerama, Inc. in Nevada in 1998. Following the completion of a reverse merger on June 14, 2012, as described below, Flux's operations have been conducted through its wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), a California corporation (collectively, the "Company").
Flux Power develops and sells rechargeable advanced energy storage systems
for industrial applications, such as, electric fork lifts and airport ground support equipment. The Company has structured its business around its core technology, “The Battery Management System” (“BMS”). The Company’s BMS provides three critical functions to their battery systems: cell balancing, monitoring and error reporting. Using its proprietary management technology, the Company is able to offer complete integrated energy storage solutions or custom modular standalone systems to their clients. The Company has also developed a suite of complementary technologies and products that accompany their core products. Sales during the nine months ended March 31, 2017 and 2016 were primarily to customers located throughout the United States.
As used herein, the terms “we,” “us,” “our,” “Flux” and “Company” mean Flux Power Holdings, Inc., unless otherwise indicated. All dollar amounts herein are in U.S. dollars unless otherwise stated.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred an accumulated deficit of $
18,639,000 through March 31, 2017, and as of March 31, 2017, had a working capital deficit of $3,161,000. To date, our revenues and operating cash flows have not been sufficient to sustain our operations and we have relied on debt and equity financing to fund our operations. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital on a timely basis until such time as revenues and related cash flows are sufficient to fund our operations.
Management plans to raise additional required capital through private placements of equity securities and through draws on our existing related-party credit facility. For the period from April 4, 2016 through August 31, 2016, a total of $3,900,000 was raised pursuant to this private placement. Of this total, $2,125,000 was received in cash and $1,775,000 resulted from the settlement of outstanding debt.
We currently have a line of credit facility with our largest shareholder with a maximum principal amount available of $
5,000,000. As of May 15, 2017, an aggregate of $845,000 was available for future draws at the lender’s discretion. The related party credit facility matures on January 31, 2018, but may be further extended by the lender (see Notes 5 and 13). In addition, we are pursuing other investment structures that management believes may generate the necessary funding for the Company.
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 on a timely basis or that funds will be available on terms acceptable to us. If such funds are not available when required, management will be required to curtail its investments in additional sales and marketing and product development resources, and capital expenditures, which may have a material adverse effect on our future cash flows and results of operations, and our ability to continue operating as a going concern. The accompanying financial statements do not include any adjustments that would be necessary should we be unable to continue as a going concern and, therefore, be required to liquidate its assets and discharge its liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying consolidated financial statements.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2016. There have been no material changes in these policies or their application.
Principles of Consolidation
The condensed consolidated financial statements include Flux Power Holdings, Inc. and its wholly-owned subsidiary Flux Power, Inc. after elimination of all intercompany accounts and transactions.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation for comparative purposes.
Net Loss Per Common Share
The Company calculates basic loss per common share by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted loss per common share includes the impact from all dilutive potential common shares relating to outstanding convertible securities.
For the three months ended
March 3, 2017 and 2016, basic and diluted weighted-average common shares outstanding were 250,382,557 and 150,901,345, respectively. For the nine months ended March 31, 2017 and 2016, basic and diluted weighted-average common shares outstanding were 243,724,189 and 138,710,894, respectively. The Company incurred a net loss for the three and nine months ended March 31, 2017 and 2016, 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 March 31, 2017 and 2016, excluded from diluted weighted-average common shares outstanding, which include common shares underlying outstanding convertible debt, stock options and warrants, were 93,174,228 and 77,549,763, respectively.
Recent Accounting Pronouncements
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 consolidated financial statements.
NOTE 4 -
INVENTORIE
S
Inventories consist of the following
:
|
|
March 31, 201
7
|
|
June 30, 201
6
|
Raw material
s
|
$
|
233,000
|
|
$
|
189,000
|
Work in proces
s
|
|
405,000
|
|
|
-
|
Finished good
s
|
|
312,000
|
|
|
13,000
|
Total Inventorie
s
|
$
|
950,000
|
|
$
|
202,000
|
Inventories consist primarily of our energy storage systems and the related subcomponents, and are stated at the lower of cost (first-in, first-out) or market. Inventory held at consignment locations is
included in our finished goods inventory and totaled $33,000 and $10,000 as of March 31, 2017 and June 30, 2016, respectively
.
NOTE 5 - RELATED PARTY DEBT AGREEMENTS
Between October 2011 and September 2012, the Company entered into three debt agreement with Esenjay Investments, LLC (“Esenjay”). Esenjay is deemed to be a related party as Mr. Michael Johnson, the beneficial owner and director of Esenjay is a current member of our board of directors and a major shareholder of the Company (owning approximately 64% of our outstanding common shares as of
March 31, 2017). The three debt agreements consisted of a Bridge Loan Promissory Note, a Secondary Revolving Promissory Note and an Unrestricted Line of Credit (collectively, the “Loan Agreements”). On December 31, 2015, the Bridge Loan Promissory Note and the Secondary Revolving Promissory Note expired leaving the Unrestricted Line of Credit.
The Unrestricted Line of Credit, bearing an interest rate of 6% per annum, has since been amended resulting in an increase in the maximum borrowing amount from $2,000,000 to $3,500,000, a reduction in the conversion rate of $0.30 to $0.06 per share, and an extension of the maturity date from December 31, 2015 to January 31, 2018.
The change in the conversion rate took place on December 29, 2015 and resulted in an estimated change in fair value of the conversion price of $310,000. This change in fair value was recorded as a deferred financing cost on December 29, 2015 and was amortized over the then remaining seven-month term of the Unrestricted Line of Credit. The deferred financing cost was fully amortized as of July 31, 2016. During the nine months ended March 31, 2017, we recorded $44,000 of deferred financing amortization costs, which is included in interest expense in the accompanying condensed consolidated statements of operations.
Between July 1, 2014 and
March 31, 2017, we borrowed an aggregate of $7,075,000 pursuant to these various debt agreements with Esenjay. On September 3, 2015, we entered into a Loan Conversion Agreement with Esenjay, as amended on October 6, 2015 and November 13, 2015, pursuant to which we issued 51,171,025 shares of our common stock (based on $0.04 per share) in exchange for the cancellation of $2,000,000 outstanding under the Loan Agreements, plus $46,841 in accrued interest. In conjunction with our then outstanding private placement (see Note 7) between April 1, 2016 and August 31, 2016, $1,750,000 of the outstanding debt under the Unrestricted Line of Credit was settled via the issuance of 43,750,000 shares of our common stock.
As of
March 31, 2017, the outstanding principal balance of the Unrestricted Line of Credit was $3,325,000. Borrowings under the Unrestricted Line of Credit are subject to pre-approval by Esenjay which has no obligation to loan additional funds. During the three and nine months ended March 31, 2017, the Company recorded approximately $42,000 and $80,000 of interest expense related to the Unrestricted Line of Credit, respectively. During the three and nine months ended March 31, 2016, the Company recorded approximately $30,000 and $80,000 of interest expense related to the Unrestricted Line of Credit, respectively.
On April 11, 2017, the Unrestricted Line of Credit was amended for a fifth time resulting in an increase in the maximum borrowing amount from $3,500,000 to $5,000,000 and an increase in the interest rate, effective April 1, 2017, from 6% per annum to 8% per annum on the outstanding balance and future drawdowns.
See Note 13.
During the three months ended March 31, 2017
, we received cash advances totaling $500,000 (the “Advances”) from a shareholder (“Shareholder”). The Advances were received pursuant to an oral agreement, whereby we agreed to accrue interest on the Advances at 12% per annum. During the three ended March 31, 2017, the Company recorded approximately $7,000 of interest expense related to the Advances.
See Note 13.
NOTE 6 - LINE OF CREDIT
Line of Credit
On October 2, 2014, the Company entered into a line of credit (“Line of Credit”) agreement in the maximum amount of $500,000 with a non-related lender (“Lender”). Borrowings under the Line of Credit bear interest at 8% per annum, with all unpaid principal and accrued interest due and payable in September 2016 pursuant to the terms of the Secured Convertible Promissory Note (the “Note”). In addition, at the election of Lender, all or any portion of the outstanding principal, accrued but unpaid interest and/or late charges under the Line of Credit may be converted into shares of the Company
’s common stock at any time at a conversion price of $0.12 per share. Borrowings under the Line of Credit are guaranteed by the Company, and are secured by all of the assets of the Company pursuant to the terms of a certain Security Agreement and Guaranty Agreement dated as of October 2, 2014. Upon maturity, there was $215,000 outstanding under the Note and accrued interest of $34,000. The Company did not pay the Lender upon maturity of the Line of Credit which subjected the Company to an increased interest rate of 18% and a penalty fee. The Lender did not declare the Line of Credit in default, and on December 23, 2016, the Company had repaid in full the $215,000 outstanding under the Note, accrued interest totaling approximately $42,000 and the penalty fee of approximately $5,000.
In connection with the Line of Credit, the Company granted a warrant to the Lender to purchase a certain number of shares of common stock of the Company equal to the outstanding advances under the Line of Credit divided by the conversion price of $0.12, for a term of five years, at an exercise price per share equal to $0.20. Accordingly, in connection with the advance of $215,000, Lender is entitled to purchase up to 1,791,667 shares of common stock upon exercise of the warrant at $0.20 per share. The Lender has no other material relationship with the Company or its affiliates. The estimated relative fair value of warrants issued in connection with advances under the Line of Credit was recorded as a debt discount and amortized as additional interest expense over the term of the underlying debt. The Company recorded debt discount of approximately $85,000 based on the relative fair value of these warrants. In addition, as the effective conversion price of the debt was less than the market price of the underlying common stock on the date of issuance, the Company recorded additional debt discount of approximately $80,000 related to the beneficial conversion feature. As of June 30, 2016, the $215,000 principal amount outstanding under this agreement is presented net of unamortized debt discount totaling $19,000. During the
nine months ended March 31, 2017 and 2016, the Company recorded debt discount amortization of approximately $19,000 and $65,000, respectively, which is included in interest expense in the accompanying condensed consolidated statements of operations.
NOTE 7 - STOCKHOLDERS
’ DEFICIT
Common Stock and Warrants
We issued the following shares of common stock during the
nine months ended March 31,2017:
|
|
Value of
Common Stock
|
|
|
Shares of
Common Stock
|
|
|
|
|
|
|
|
|
|
|
Shares issued in 2016 Private Placement as Loan Conversion
|
|
$
|
400,000
|
|
|
|
10,000,000
|
|
Shares issued in 2016 Private Placement for Cash
|
|
|
1,075,000
|
|
|
|
26,875,000
|
|
Shares issued in 2016 Private Placement for Private Placement Subscription
|
|
|
-
|
|
|
|
2,500,000
|
|
Shares issued for Services Rendered
|
|
|
9,375
|
|
|
|
225,000
|
|
Shares issued in Warrant Exchange
|
|
|
10,089
|
|
|
|
1,633,950
|
|
Total
|
|
$
|
1,494,464
|
|
|
|
41,233,950
|
|
Private Placement
–2016
In April 2016, our Board of Directors approved the private placement of up to 77,500,000 shares of our common stock to select accredited investors for a total amount of $3,100,000, or $0.04 per share of common stock. On July 28, 2016, our Board of Directors increased the aggregate amount offered up to $4,000,000 and extended the termination date to August 31, 2016 (the “Offering”). During the period from July 1, 2016 through August 31, 2016, $1,475,000 was raised of which $1,075,000 was received in cash and $400,000 was received via the settlement of outstanding debt. Esenjay, our controlling shareholder and primary credit line holder, participated in the Offering as an investor by purchasing 12,500,000 shares for cash proceeds of $500,000 and 10,000,000 shares in exchange for the settlement of $400,000 of debt owed to Esenjay by the Company. On April 15, 2016, we entered into an agreement with Esenjay, whereby Esenjay agreed to limit its right of conversion under the Unrestricted Line of Credit to such number of shares so that upon conversion, if any, it will not cause us to exceed our authorized number of shares of common stock. In addition, we sold 14,375,000 shares to unrelated accredited investors for $575,000 in cash and issued 2,500,000 shares to an unrelated accredited investor, for which we had received cash proceeds prior to June 30, 2016 of $100,000.
Upon termination of the Offering on August 31, 2016, we had raised a total of $3,900,000 of which $2,125,000 was received in cash and $1,775,000 was received via the settlement of outstanding debt and liabilities. The securities offered and sold in the Offering have not been registered under the Securities Act. The securities were offered and sold to accredited investors in reliance upon exemptions from registration pursuant to Rule 506 promulgated thereunder.
Advisory Agreements
Boustead Securities.
On December 2, 2016, we renewed our agreement with Boustead Securities, formerly known as Monarch Bay Securities, (“Boustead”) to assist us in raising capital. The arrangement is on a non-exclusive basis and has an initial term of six months. Pursuant to the arrangement, we have paid to Boustead a non-refundable cash retainer of $10,000. In addition, upon a successful closing of financing during the six-month period ending June 2, 2017, we will pay Boustead a fee of 8% of gross proceeds raised in cash and warrants to purchase 8% of total number of shares issued and issuable by the Company to investors under each successful financing.
Catalyst Global LLC.
Effective April 1, 2016, we entered into a renewal contract with Catalyst Global LLC (“CGL”) to provide investor relations services for 12 months in exchange for monthly fees of $2,000 per month and 540,000 shares of restricted common stock issued as follows: 315,000 shares on June 30, 2016 for services provided during the three months ended June 30, 2016 and 75,000 shares issued upon each of the six-, nine-, and twelve-month anniversaries of the contract. The initial tranche was valued at $0.05 per share or approximately $14,500 when issued on June 30, 2016, the second tranche of 75,000 shares was issued on September 29, 2016 and was valued at $0.04 per share or $3,000, the third tranche of 75,000 shares was issued on January 23, 2017 and was valued at $0.04 per share or $3,000 and the fourth tranche of 75,000 shares was issued on March 20, 2017 and was valued at $0.045 per share or $3,375. During the three and nine months ended March 31, 2017, we recorded expense of $3,375 and $9,375, respectively.
Warrant Activity
Warrant detail for the
nine months ended March 31, 2017 is reflected below:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price Per
Warrant
|
|
|
Remaining
Contract
Term (#
years)
|
|
Warrants outstanding and exercisable at June 30, 2016
|
|
|
28,040,096
|
|
|
$
|
0.20
|
|
|
0.39
|
-
|
2.50
|
|
Warrants issued
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Warrants exchanged
|
|
|
(
2,714,197
|
)
|
|
$
|
0.14
|
|
|
|
-
|
|
|
Warrants outstanding and exercisable at
March 31, 2017
|
|
|
25,325,900
|
|
|
$
|
0.
21
|
|
|
0.36
|
-
|
1.
70
|
|
In 2012, we issued warrants to certain investors and a consultant (together, the "2012 Warrant Holders") to purchase a total of 2,
907,347 shares of our common stock at $0.41 per share (the "2012 Warrants"). On August 23, 2016, we offered our 2012 Warrant Holders the option to convert their 2012 Warrants for shares of our common stock at a conversion rate of 0.602 shares of common stock per warrant share (the "Warrant Exchange"). As of March 31, 2017, twenty (20) 2012 Warrant Holder had accepted this offer and accordingly, we have exchanged warrant to purchase 2,714,197 shares of common stock at an exercise price of $0.14 per share, valued at approximately $10,000, into 1,633,950 shares of common stock.
The Warrant Exchange was accounted for in accordance with the Financial Accounting Standards Board, Accounting Standards Codification Topic No.480-35
Distinguishing Liabilities From Equities, Subsequent Measurement.
As such, the fair value of the warrants was calculated on the settlement date and recorded as a change in fair value of derivative liabilities. The common stock issued in exchange for the warrants was recorded at the fair value of the remaining warrant derivative liability.
Stock-based Compensation
On November 26, 2014, our board of directors approved our 2014 Equity Incentive Plan (the “2014 Plan”), which was approved by our shareholders on February 17, 2015. The 2014 Plan offers selected employees, directors, and consultants the opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees. The 2014 Plan allows for the award of stock and options, up to 10,000,000 shares of our common stock.
Activity in stock options during the
nine months ended March 31, 2017 and related balances outstanding as of that date are reflected below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term (# years)
|
|
Outstanding at June 30, 2016
|
|
|
9,004,020
|
|
|
$
|
0.11
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(
1,841,249
|
)
|
|
$
|
0.
16
|
|
|
|
|
|
Outstanding at
March 31, 2017
|
|
|
7,162,771
|
|
|
$
|
0.10
|
|
|
|
7.
34
|
|
Exercisable at
March 31, 2017
|
|
|
5,624,351
|
|
|
$
|
0.11
|
|
|
|
7.00
|
|
Activity in stock options during the
nine months ended March 31, 2016, and related balances outstanding as of that date are reflected below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term (# years)
|
|
Outstanding at June 30, 2015
|
|
|
6,101,357
|
|
|
$
|
0.15
|
|
|
|
|
|
Granted
|
|
|
4,385,000
|
|
|
|
0.05
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(
1,239,837
|
)
|
|
|
0.1
3
|
|
|
|
|
|
Outstanding at
March 31, 2016
|
|
|
9,246,520
|
|
|
$
|
0.11
|
|
|
|
6.70
|
|
Exercisable at
March 31, 2016
|
|
|
6,467,999
|
|
|
$
|
0.1
3
|
|
|
|
5.55
|
|
Stock-based compensation expense recognized in our
condensed consolidated statements of operations for the three and nine months ended March 31, 2017 and 2016, includes compensation expense for stock-based options and awards granted based on the grant date fair value. For options and awards granted, expenses are amortized under the straight-line method over the expected vesting period. Stock-based compensation expense recognized in the condensed consolidated statements of operations has been reduced for estimated forfeitures of options that are subject to vesting. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Our average stock price during the
nine months ended March 31, 2017, was $0.04, and as a result the intrinsic value of the exercisable options at March 31, 2017, was $2,000.
We allocated stock-based compensation expense included in the condensed consolidated statements of operations for employee option grants and non-employee option grants as follows:
|
|
For the Three Months Ended
|
|
|
For the
Nine
Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Research and development
|
|
$
|
3,000
|
|
|
$
|
4,000
|
|
|
$
|
10,000
|
|
|
$
|
18,000
|
|
General and administration
|
|
|
7,000
|
|
|
|
17,000
|
|
|
|
20,000
|
|
|
|
81,000
|
|
Total stock-based compensation expense
|
|
$
|
10,000
|
|
|
$
|
21,000
|
|
|
$
|
30,000
|
|
|
$
|
99,000
|
|
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of stock options was measured at the grant date using the assumptions (annualized percentages) in the table below:
Nine
months ended
March
31,
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
100%
|
|
|
|
100%
|
|
Risk free interest rate
|
|
|
1.31%
|
|
|
|
1.31%
|
|
Forfeiture rate
|
|
|
23.0%
|
|
|
|
17%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected term (years)
|
|
|
3
|
|
|
|
3
|
|
The remaining amount of unrecognized stock-based compensation expense at
March 31, 2017 relating to outstanding stock options, is approximately $50,000, which is expected to be recognized over the weighted average period of 1.45 years.
NOTE 8
– WARRANT DERIVATIVE LIABILITY
The 2012 Warrants discussed in Note 7 include an exercise price re-set provision should future equity offerings be offered at a price lower than the warrant exercise price (the "Re-set Provision").
In accordance with ASC No. 815, the Re-set Provision has been recorded as a derivative liability in the accompanying condensed consolidated financial statements.
Warrants classified as derivative liabilities are recorded at their fair values at the issuance date and are revalued at each subsequent reporting date.
On August 23, 2016, we proposed to our 2012 Warrant Holders that the Re-set Provision included in the 2012 Warrants be eliminated. Upon receiving consents to eliminate the Re-set Provision from a majority of the 2012 Warrant Holders, the Re-set Provision and the related derivative liability were eliminated as of January 23, 2017. Prior to elimination, the derivative liabilities had an average fair value per warrant and aggregate value as of January 23, 2017 of $0.001 and $1,000, respectively and an average fair value per warrant and aggregate value as of June 30, 2016 of $0.01 and $24,000, respectively.
Significant assumptions used to estimate the fair value of the warrants classified as derivative liabilities are summarized below:
|
|
|
As of
January 23, 2017
|
|
|
As of
June 30, 2016
|
|
Risk-free interest rate
|
|
|
|
0.47%
|
|
|
|
0.44%
|
–
|
0.49%
|
|
Expected life (average) (years)
|
|
|
0
.43
|
–
|
0.
76
|
|
|
0.96
|
–
|
1.33
|
|
Stock price (based on prices on valuation date)
|
|
|
|
$0.
04
|
|
|
|
|
$0.05
|
|
|
Exercise price
|
|
|
|
$0.14
|
|
|
|
|
$0.15
|
|
|
Expected volatility
|
|
|
|
110%
|
|
|
|
|
110%
|
|
|
The change in the estimated fair value of warrants classified as derivative liabilities during the three and
nine months ended March 31, 2017 was $1,000 and $14,000, respectively, and is included as a component of other income (expense) in the accompanying condensed consolidated statements of operations.
NOTE 9 - FAIR VALUE MEASUREMENTS
We follow FASB ASC Topic No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition.
ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
Level 1: Quoted market prices in active markets for identical assets and liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. As of
March 31, 2017 and June 30, 2016, the fair value of our Level 3 financial instruments was $0 and $24,000, respectively. The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the nine months ended March 31, 2017:
Fair value measurements of warrants using significant unobservable inputs (Level 3)
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
24,000
|
|
Change in fair value of warrant liability
|
|
|
(14,000
|
)
|
Warrant exchange for common stock (Note 7)
|
|
|
(10,000
|
)
|
Balance at
March 31, 2017
|
|
$
|
-
|
|
The fair value of our warrant derivative liabilities and the change in the estimated fair value of derivative liabilities that we recorded during the
nine months ended March 31, 2017, related to warrants issued in connection with our private placement transactions (see Notes 7 and 8).
NOTE 10 - OTHER RELATED PARTY TRANSACTIONS
Transactions with Epic Boats
The Company subleases office and manufacturing space to Epic Boats (an entity founded and controlled by Chris Anthony, our board member and former Chief Executive Officer) in our facility in Vista, California pursuant to a month-to-month sublease agreement.
Pursuant to this agreement, Epic Boats pays Flux Power 10% of facility costs through the end of our lease agreement.
The Company received $
4,000 and $12,000, respectively during the three months and nine months ended March 31,2017, from Epic Boats under the sublease rental agreement which is recorded as a reduction to rent expense and the customer deposits discussed below.
On October 21, 2009, we entered into an agreement with Epic Boats where Epic Boats assigned and transferred to Flux Power the entire right, title, and interest into products, technology, intellectual property, inventions and all improvements thereof, for several product types. As of
March 31, 2017 and June 30, 2016, customer deposits totaling approximately $124,000 and $136,000, respectively, related to such products were recorded in the accompanying condensed consolidated balance sheets.
NOTE 11 - CONCENTRATIONS
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and unsecured trade accounts receivable. The Company maintains cash balances at a financial institution in San Diego, California. Our cash balance at this institution is secured by the Federal Deposit Insurance Corporation up to $250,000. As of
March 31, 2017, cash totaled approximately $70,000, which consists of funds held in a non-interest bearing bank deposit account. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.
Customer Concentrations
During the three months ended
March 31, 2017, we had four major customers that each represented more than 10% of our revenues on an individual basis, or approximately 69% in the aggregate. During the nine months ended March 31, 2017, we had three major customers that each represented more than 10% of our revenues on an individual basis, or approximately 58% in the aggregate.
During the three months ended March 31, 2016, we had four customers that represented more than 10% of our revenues on an individual basis, representing approximately 92%,
in the aggregate. During the nine months ended March 31, 2016, we had four customers that represented more than 10% of our revenues on an individual basis, representing approximately 75% in the aggregate.
Suppliers/Vendor Concentrations
We obtain a limited number of components and supplies included in our products from a small group of suppliers. During the three
months ended March 31, 2017, we had two suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 54% in the aggregate. During the nine months ended March 31, 2017, we had three suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 60% in the aggregate.
During the three months ended March 31, 2016, we had three suppliers who accounted for more than 10% of our total inventory purchases on an individual basis and approximately 62% in the aggregate. During the nine months ended March 31, 2016, we had
two suppliers who accounted for more than 10% of our total inventory purchases on an individual basis and approximately 50% in the aggregate.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
From time to time, we may be involved in litigation relating to claims arising out of our operations. Since June 2015, we have been a party to a legal proceeding arising from a work related injury that took place in June 2013. We deny and dispute all liability and damage allegations made by or on behalf of the plaintiff. However, having fully considered the risks, time and costs associated with continued litigation of this claim, as well as an appeal, we decided to fully and finally resolve and settle the dispute. Accordingly, on August 26, 2016 we entered into a settlement agreement with the plaintiff whereby in exchange for the plaintiff releasing Flux Power from any and all claims of any nature that the plaintiff had or now has or might in the future have against us, we paid the plaintiff $10,000 as settlement in September 2016.
NOTE 13 - SUBSEQUENT EVENTS
Management has evaluated events subsequent to
March 31, 2017, through the date of this filing with the SEC for transactions and other events that may require adjustment of and/or disclosure in such financial statements.
On April 11, 2017, we entered into a Fifth Amendment to the Unrestricted Line of Credit (the “Amendment”), pursuant to which we agreed to amend certain terms of the Unrestricted Line of Credit dated September 24, 2012, as amended by that certain First Amendment to the Unrestricted Line of Credit dated October 16, 2013, as amended by that certain Second Amendment to the Unrestricted Line of Credit dated December 29, 2015, as amended by that certain Third Amendment to the Unrestricted Line of Credit dated March 29, 2016, and as further amended by a certain Fourth Amendment to the Unrestricted Line of Credit dated July 27, 2016, (as amended, the “Agreement”). Under the Amendment, the Agreement was modified and amended to (i) increase the maximum principal amount of the loan provided under the Agreement from $3,500,000 to $5,000,000; and (ii) effective April 1, 2017, increase the annual interest rate on the outstanding balance and future drawdowns on the loan from 6% per annum to 8% per annum.
During the period from
April 1, 2017 through May 15, 2017 we borrowed an aggregate of $830,000 from Esenjay under our Unrestricted Line of Credit. As of May 15, 2017, the amount outstanding under the Unrestricted Line of Credit was $4,155,000, with an aggregate of $845,000 available under the Unrestricted Line of Credit for future draws at Esenjay’s discretion.
On April 27, 2017, we formalized an oral agreement for Advances
totaling $500,000, received from Shareholder into a written Convertible Promissory Note (the “Convertible Note”). Borrowings under the Convertible Note accrue interest at 12% per annum, with all unpaid principal and accrued interest due and payable on October 27, 2018. In addition, at any time commencing on or after the date that is six (6) months from the issue date, at the election of Shareholder, all or any portion of the outstanding principal, accrued but unpaid interest and/or late charges under the Convertible Note may be converted into shares of the Company’s common stock at a conversion price of $0.12 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.