NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017 and 2016
NOTE 1 - NATURE OF BUSINESS AND REVERSE
STOCK SPLIT
Nature of Business
Flux Power Holdings, Inc. ("Flux") was incorporated in 1998
in the State of Nevada. On June 14, 2012, we changed our name to Flux Power Holdings, Inc. Flux's operations are conducted through its wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), a California corporation (collectively, the "Company").
The Company designs, develops and sells rechargeable lithium-ion energy storage systems for industrial applications, such as, electric fork lifts and airport ground support equipment.
The Company has structured its business around its core technology, “The Battery Management System” (“BMS”). The Company’s BMS provides three critical functions to their battery systems: cell balancing, monitoring and error reporting. Using its proprietary management technology, the Company is able to offer complete integrated energy storage solutions or custom modular standalone systems to their customers. The Company has also developed a suite of complementary technologies and products that accompany their core products. Sales during the years ended June 30, 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.
Reverse Stock Split
On August 10, 2017, we filed a certificate of amendment to our articles of incorporation with the State of Nevada effectuating a reverse split of the Company
’s common stock at a ratio of 1 for 10
, whereby every ten pre-reverse stock split shares of common stock automatically converted into one-post reverse stock split share of common stock, without changing the $0.001 par value or authorized number of our common stock
(the “Reverse Stock Split”). The Reverse Stock Split became effective in the State of Nevada on August 18, 2017. Mr. Michael Johnson, a current member of our board of directors and a holder of a majority of our issued and outstanding common stock approved the Reverse Stock Split on July 7, 2017. On that date, every 10 issued and outstanding shares of the Company’s common stock automatically converted into one outstanding share. No fractional shares were issued in connection with the Reverse Stock Split. If, as a result of the Reverse Split, a stockholder would otherwise have been entitled to a fractional share, each fractional share was rounded up. As a result of the Reverse Stock Split, the number of the Company’s outstanding shares of common stock decreased from 250,842,418 (pre-split) shares to 25,085,526 (post-split) shares. The Reverse Stock Split affected all stockholders of the Company’s common stock uniformly, and did not affect any stockholder’s percentage of ownership interest, except for that which may have been effected by the rounding up of fractional shares. The par value of the Company’s stock remained unchanged at $0.001 per share and the number of authorized shares of common stock remained the same after the Reverse Stock Split. In addition, by reducing the number of the Company’s outstanding shares, the Company’s loss per share in all periods will be increased by a factor of ten.
As the par value per share of the Company
’s common stock remained unchanged at $0.001 per share, a total of $226,000 was reclassified from common stock to additional paid-in capital. In connection with the Reverse Stock Split, proportionate adjustments have been made to the per share exercise price and the number of shares issuable upon the exercise or conversion of all outstanding options, warrants, convertible or exchangeable securities entitling the holders to purchase, exchange for, or convert into, shares of common stock. All references to shares of common stock and per share data for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred an accumulated deficit of $
19,697,000 through June 30, 2017 and a net loss of $4,435,000 for the year ended June 30, 2017. To date, our revenues and operating cash flows have not been sufficient to sustain our operations and we have relied on debt and equity financing to fund our operations. These factors raise substantial doubt about our ability to continue as a going concern for the twelve months following the date of our Annual Report on Form 10-K, September 21, 2017. Our ability to continue as a going concern is dependent upon our ability to raise additional capital on a timely basis until such time as revenues and related cash flows are sufficient to fund our operations.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our op
erations. These steps include (a) developing additional products to cater to the Class 1 and Class 2 industrial equipment markets; and (b) expand our sales force throughout the United States. In that regard, the Company has increased its research and development efforts to focus on completing the development of energy storage solutions that can be used on larger fork lifts and has also doubled its sales force since December 2016 with personnel having significant experience in the industrial equipment handling industry.
Management
also plans to raise additional required capital through the sale of equity securities through private placements, convertible debt placements and the utilization of our existing related-party credit facility.
We currently have a line of credit facility with our largest shareholder with a maximum principal amount available of $10,000,000. As of
June 30, 2017 and September 21, 2017, an aggregate of $4,815,000 and $3,480,000, respectively was available for future draws at the lender’s discretion. The related party credit facility matures on January 31, 2019, but may be further extended by the lender (see Notes 6 and 15).
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
A summary of the Company
’s significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include Flux Power Holdings, Inc. and its wholly-owned subsidiary Flux Power, Inc. after elimination of all intercompany accounts and transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation for comparative purposes.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as certain financial statement disclosures. Significant estimates include valuation allowances relating to accounts receivable, inventory, and deferred tax assets, and valuation of derivative liabilities and equity instruments. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Cash and Cash Equivalents
As of June 30, 2017
, cash totaled approximately $121,000 and consists of funds held in a non-interest bearing bank deposit account. The Company considers all liquid short-term investments with maturities of less than three months when acquired to be cash equivalents. The Company had no cash equivalents at June 30, 2017 and 2016.
Fair Values of Financial Instruments
The carrying amount of our cash, accounts payable, accounts receivable, and accrued liabilities approximates their estimated fair values due to the short-term maturities of those financial instruments. The carrying amount of the line of credit agreement approximates its fair values as interest approximates current market interest rates for similar instruments. Management has concluded that it is not practical to determine the estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated at arm
’s length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent valuation would not be practical due to the lack of data regarding similar instruments, if any, and the associated potential costs. Derivative liabilities recorded in connection with warrants are reported at their estimated fair value, with changes in fair value reported in results of operations (see Note 11).
Except for derivative liabilities referenced above, the Company does not have any other assets or liabilities that are measured at fair value on a recurring or non-recurring basis.
Accounts Receivable
Accounts receivable are carried at their estimated collectible amounts. The Company has not experienced collection issues related to its accounts receivable, and has not recorded an allowance for doubtful accounts during the
fiscal year ended June 30, 2017 and 2016.
Inventories
Inventories consist primarily of battery management systems and the related subcomponents, and are stated at the lower of cost (first-in, first-out) or market. The Company evaluates inventories to determine if write-downs are necessary due to obsolescence or if the inventory levels are in excess of anticipated demand at market value based on consideration of historical sales and product development plans. The Company wrote off obsolete inventory in the amount of approximately
$56,000 and $30,000 during the years ended June 30, 2017 and 2016, respectively.
We reviewed our inventory valuation with regards to our gross loss for the year ended June 30, 2017. The gross loss was due to factors related to new product launch, such as low volume, early higher cost designs, and limited sourcing, as well as, the continued warranty expense of repairing products in the field and returned products. As such, we do not believe the loss is related to raw material inventory issues that would require write-downs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are provided using the straight-line method over the estimated useful lives, of the related assets ranging from three to ten years, or, in the case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term.
Stock-based Compensation
Pursuant to the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 718-10,
Compensation-Stock Compensation
, which establishes accounting for equity instruments exchanged for employee service, we utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.
Common stock or equity instruments such as warrants issued for services to non-employees are valued at their estimated fair value at the measurement date (the date when a firm commitment for performance of the services is reached, typically the date of issuance, or when performance is complete). If the total value exceeds the par value of the stock issued, the value in excess of the par value is added to the additional paid-in-capital.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, price is fixed or determinable, and collectability of the selling price is reasonably assured. Delivery occurs when risk of loss is passed to the customer, as specified by the terms of the applicable customer agreements. When a product is sold on consignment, the item remains in our inventory and revenue is not recognized until the product is ultimately sold to the end user. When a right of return exists, contractually or implied, the Company recognizes revenue on the sell-through method. Under this method, revenue is not recognized upon delivery of the products. Instead, the Company records deferred revenue upon delivery and recognize
s revenue when the product is sold through to the end user. As of June 30, 2017 and 2016, the Company did not have any deferred revenue.
Product Warranties
The Company evaluates its exposure to product warranty obligations based on historical experience. Our products, primarily lift equipment packs, are warrantied for five years unless modified by a separat
e agreement. As of June 30, 2017 and 2016, the Company carried warranty liability of approximately $85,000 and $120,000, respectively, which is included in accrued expenses on the Company’s consolidated balance sheets.
Impairment of Long-lived Assets
In accordance with authoritative guidance for the impairment or disposal of long-lived assets, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows.
If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. The Company believes that no impairment indicators were present, and accordingly no impairment losses were recognized during the
fiscal years ended June 30, 2017 and 2016.
Research and Development
The Company is actively engaged in new product development efforts. Research and development cost relating to possible future products are expensed as incurred.
Income Taxes
Pursuant to FASB ASC Topic No. 740,
Income Taxes,
deferred tax assets or liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.
The Company has analyzed filing positions in all of the federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As a result, no unrecognized tax benefits have been identified as of June 30,
2017 or June 30, 2016, and accordingly, no additional tax liabilities have been recorded.
The Company records deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities and on operating loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Net Loss Per Common Share
The Company calculates basic loss per common share by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted loss per common share includes the impact from all dilutive potential common shares relating to outstanding convertible securities.
For the year
s ended June 30, 2017 and 2016, basic and diluted weighted-average common shares outstanding were 24,544,605 and 14,927,390, respectively. The Company incurred a net loss for the years ended June 30, 2017 and 2016, and therefore, basic and diluted loss per share for each fiscal year are the same because the inclusion of potential common equivalent shares were excluded from diluted weighted-average common shares outstanding during the period, as the inclusion of such shares would be anti-dilutive. The total potentially dilutive common shares outstanding at June 30, 2017 and 2016, excluded from diluted weighted-average common shares outstanding, which include common shares underlying outstanding convertible debt, stock options and warrants, were 12,607,853 and 5,795,292, respectively.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risk.
The Company evaluates free-standing derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. The classification of a derivative instrument is reassessed at each reporting date. If the classification changes because of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
Instruments classified as derivative liabilities are recorded initially at their estimated fair value and are re-measured each reporting period (or upon reclassification). The change in fair value is recorded on our consolidated statements of operations in other (income) expense.
The Company follows FASB ASC Topic No. 815,
Derivatives and Hedging
("ASC No. 815") to classify and value warrant liabilities. Warrants classified as derivative liabilities are recorded at their fair values at the issuance date and are revalued at each subsequent reporting date. Using a Monte Carlo simulation model, multiple random price paths for the stock price are generated to simulate many possible future outcomes, which are then discounted at the risk-free rate. These simulated paths are then averaged to determine the fair value of the warrants (see Note 9).
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable provides for a rate of conversion that is below market value. Such feature is normally characterized as a "beneficial conversion feature” of which we measure the estimated fair value in circumstances in which the conversion feature is not required to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
New Accounting Standards
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15 regarding ASC topic No. 205,
Presentation of Financial Statements - Going Concern
. The standard requires all companies to evaluate if conditions or events raise substantial doubt about an entity’s ability to continue as a going concern and requires different disclosure of items that raise substantial doubt that are, or are not, alleviated as a result of consideration of management’s plans. The new guidance is effective for annual periods ending after December 15, 2016. We adopted ASU No 2014-15 for the year ended June 30, 2017 and have reflected the required disclosures in the accompanying consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on reducing the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance. The new guidance is effective for the fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted including an adoption in an interim period. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which will simplify how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as, classification in the statement of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU No. 2016-09 is not expected to have a material impact on our consolidated financial statments.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The amendments in this ASU change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The guidance is effective for the Company’s fiscal year beginning July 1, 2019. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. This update outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In May 2015, the FASB issued ASU No. 2015-14 deferring the effective date to annual reporting periods beginning after December 15, 2017, which is effective for the Company’s fiscal year beginning July 1, 2018. Early adoption is permitted only as of an annual reporting period beginning after December 15, 2016. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
NOTE 4 - INVENTORIES
Inventories consist of the following:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Raw materials
|
|
$
|
445,000
|
|
|
$
|
189,000
|
|
Work in process
|
|
|
251,000
|
|
|
|
-
|
|
Finished goods
|
|
|
870,000
|
|
|
|
13,000
|
|
Total Inventories
|
|
$
|
1,566,000
|
|
|
$
|
202,000
|
|
Inventories consist primarily of our energy storage systems and the related subcomponents, and are stated at the lower of cost or market. Inventory held at consignment locations is included in our finished goods inventory and totaled $
32,000 and $10,000 as of June 30, 2017 and June 30, 2016, respectively.
NOTE
5
- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the fol
lowing:
|
|
June 30,
201
7
|
|
|
June 30,
201
6
|
|
Vehicles
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Machinery and equipment
|
|
|
84,000
|
|
|
|
71,000
|
|
Office equipment
|
|
|
133,000
|
|
|
|
105,000
|
|
Furniture and Equipment
|
|
|
36,000
|
|
|
|
34,000
|
|
Leasehold improvements
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
264,000
|
|
|
|
211,000
|
|
Less: Accumulated depreciation
|
|
|
(205,000
|
)
|
|
|
(165,000
|
)
|
Property, plant and equipment, net
|
|
$
|
59,000
|
|
|
$
|
46,000
|
|
Depreciation expense was approximately $
40,000 and $25,000, for the years ended June 30, 2017 and 2016, respectively, and is included in selling and administrative expenses in the accompanying consolidated statements of operations.
NOTE
6
- RELATED PARTY DEBT AGREEMENTS
Esenjay Unrestricted Line Of Credit
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 June 30, 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, available for future draws.
The Unrestricted Line of Credit has a maximum borrowing amount of $10,000,000, is convertible at a rate of $0.60 per share, bears interest at 8% per annum and matures on January 31, 2019.
Advances under the Unsecured Line of Credit are subject to Esenay's approval.
On December 29, 2015, we entered into a Second Amendment to the Unrestricted Line of Credit (“Second Amendment”), with Esenjay which modified certain terms of the Unrestricted Line of Credit resulting in
approximately $310,000 of debt issuance costs, and accordingly, was amortized over the remaining seven-month term through July 30, 2016, at which time it was fully amortized. During the years ended June 30, 2017 and 2016, we recorded approximately $44,000 and $266,000, respectively of deferred financing amortization costs, which are included in interest expense in the accompanying consolidated statements of operations.
In
August 2016 and April 2016, $400,000 and $1,350,000, respectively, of the outstanding debt under the Unrestricted Line of Credit was settled, in conjunction with our then outstanding private placement discussed further in Note 8, via the issuance of 4,375,000 shares of our common stock.
The common stock shares issued during fiscal
2017 and 2016 as settlement of the Unrestricted Line of Credit have not been registered under the Securities Act. The shares were offered and sold in reliance upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act. The transactions have been accounted for as a capital transaction in accordance with FASB ASC Topic No. 470-50, “
Debt, Modifications and Extinguishments
”. Accordingly, no gain or loss has been recognized.
The outstanding principal balance of the Unrestricted Line of Credit as of June 30,
2017 was $5,185,000, convertible into 8,642,000 shares of common stock, resulting in a remaining $4,815,000 available for future draws under this agreement, subject to lender’s approval. During the years ended June 30, 2017 and 2016, the Company recorded approximately $162,000 and $92,000, respectively of interest expense in the accompanying consolidated statements of operations related to the Unrestricted Line of Credit. Subsequent to June 30, 2017, we have borrowed $1,335,000 under the credit facility (see Note 15).
Shareholder Convertible Promissory Note
On April 27, 2017, we formalized an oral agreement for advances totaling $500,000, received from a shareholder (“Shareholder”) into a written Convertible Promissory Note (the “Convertible Note”). Borrowings under the Convertible Note accrue interest at 12% per annum, with all unpaid principal and accrued interest due and payable on October 27, 2018. In addition, at any time commencing on or after the date that is six (6) months from the issue date, at the election of Shareholder, all or any portion of the outstanding principal, accrued but unpaid interest and/or late charges under the Convertible Note may be converted into shares of the Company
’s common stock at a conversion price of $1.20 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. As a result, the Convertible Note is convertible into 416,667 shares of common stock at June 30, 2017. During the year ended June 30, 2017, the Company recorded approximately $22,000 of interest expense in the accompanying consolidated statements of operations related to the Unrestricted Line of Credit.
NOTE
7
- 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 b
ore interest at 8% per annum, with all unpaid principal and accrued interest due and payable on September 19, 2016. On December 23, 2016, the Company had repaid in full the $215,000 outstanding under the Note, accrued interest totaling $42,000 and the late payment penalty fee of $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 $
1.20, for a term of five years, at an exercise price per share equal to $2.00. Accordingly, in connection with the advance of $215,000, Lender is entitled to purchase up to 179,167 shares of common stock upon exercise of the warrant at $2.00 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 is recorded as a debt discount and is 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, 2017, the Line of Credit has been paid in full. As of June 30, 2016, the $215,000 principal amount outstanding under this agreement was presented net of unamortized debt discount totaling $19,000. During years ended June 30, 2017 and 2016 the Company recorded approximately $19,000 and $86,000, respectively of debt discount amortization, which is included in interest expense in the accompanying consolidated statements of operations.
NOTE
8
- STOCKHOLDERS’ DEFICIT
Private Placement
– Fiscal
2016
In April 2016, our Board of Directors approved the private placement of up to 7,750,000 shares of our common stock to select accredited investors for a total amount of $3,100,000, or $0.40 per share of common stock. On July 28, 2016, our Board of Directors increased the aggregate amount offered to up to $4,000,000 and extended the termination date to August 31, 2016 (the “Offering”).
During fiscal 2017, we sold 3,687,500 shares of common stock for a total purchase price of $1,475,000 to six accredited investors of which $1,075,000 was received in cash and $400,000 was received via the settlement of outstanding liabilities. Esenjay, our controlling shareholder and primary credit line holder, purchased 1,000,000 shares in exchange for the settlement of $400,000 of debt owed to Esenjay by the Company. Two of the accredited investors who invested an aggregate of $200,000 are siblings of Mr. Johnson. During fiscal 2016, a total of $2,425,000 had been raised of which $1,050,000 was received in cash and $1,375,000 was received via the settlement of outstanding liabilities. Esenjay purchased 625,000 shares for cash proceeds of $250,000 and 3,375,000 shares in exchange for the settlement of $1,350,000 of debt owed to Esenjay by the Company. In addition, we sold 2,000,000 shares (of which 250,000 shares (valued at $100,000) were not issued until subsequent to June 30, 2016) to two unrelated accredited investors for $800,000 in cash and 63,000 shares (valued at $25,000) in exchange for settlement of accounts payable to a vendor. 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. 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.
The initial closing of the Offering in May 2016 at a price of $0.
40 per share triggered an anti-dilution provision for warrant holders under our 2012 Private Placement pursuant to which an aggregate of 297,035 shares of common stock may be purchased upon exercise. As a result, the exercise price of such warrants was reduced from $2.69 to $1.55 per share. The remaining terms, including expiration dates, of all effected warrants remain unchanged (See Note 9).
Advisory Agreements
Catalyst Global LLC.
Effective April 1, 2016, we entered into a renewal contract (the “2016 Renewal”) with Catalyst Global LLC (“CGL”) to provide investor relations services for 12 months in exchange for monthly fees of $2,000 per month and 54,000 shares of unregistered common stock issued as follows: 31,500 shares on June 30, 2016 for services provided during the three months ended June 30, 2016 and 7,500 shares issued upon each of the six-, nine-, and twelve-month anniversaries of the contract. The initial tranche was valued at $0.50 per share or approximately $14,500 when issued on June 30, 2016, the second tranche of 7,500 shares was issued on September 29, 2016 and was valued at $0.40 per share or $3,000, the third tranche of 7,500 shares was issued on January 23, 2017 and was valued at $0.40 per share or $3,000 and the fourth tranche of 7,500 shares was issued on March 20, 2017 and was valued at $0.45 per share or $3,375.
Effective April 1, 2017, we entered into a renewal contract (the “2017 Renewal”) with Catalyst Global LLC (“CGL”) to provide investor relations services for 12 months in exchange for monthly fees of $
3,500 per month and 7,777 shares of restricted common stock per month, issued on a quarterly basis. During the three months ended June 30, 2017, we issued 23,331 shares of common stock to Catalyst valued at $0.45 per share or $10,499. The 2017 Renewal is cancelable upon 60 days written notice.
Warrant Activity
Warrant detail is reflected below:
|
|
Number
|
|
|
Weighted Average
|
|
|
Remaining Contract
|
|
Shares
purchasable under outstanding warrants at June 30, 2016
|
|
|
2,804,010
|
|
|
$
|
2.00
|
|
|
|
0.39
|
-
|
2.50
|
|
Stock purchase warrants
expired
|
|
|
(190,000
|
)
|
|
$
|
3.00
|
|
|
|
|
-
|
|
|
Stock purchase warrants
exchanged
|
|
|
(271,420
|
)
|
|
$
|
1.40
|
|
|
|
|
-
|
|
|
Shares purchasable under outstanding warrants at June 30,
2017
|
|
|
2,342,590
|
|
|
$
|
1.97
|
|
|
|
0.12
|
-
|
1.55
|
|
In 2012, we issued warrants to certain investors and a consultant (together, the "2012 Warrant Holders") to purchase a total of 297,035 shares of our common stock at $4.10 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 June 30, 2017, twenty (20) 2012 Warrant Holders had accepted this offer and accordingly, we have exchanged warrants to purchase 271,420 shares of common stock at an exercise price of $1.40 per share, valued at approximately $10,000, into 163,395 shares of common stock.
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 1
0,000,000 shares of our common stock.
Activity in stock options during the year ende
d June 30, 2017 and related balances outstanding as of that date are reflected below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term (# years)
|
|
Outstanding at June 30,
2016
|
|
|
900,402
|
|
|
$
|
1.13
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(184,125
|
)
|
|
$
|
1.63
|
|
|
|
|
|
Outstanding at June 30,
2017
|
|
|
716,277
|
|
|
$
|
1.10
|
|
|
|
7.09
|
|
Exercisable at June 30,
2017
|
|
|
589,476
|
|
|
$
|
1.11
|
|
|
|
6.80
|
|
Activity in stock options dur
ing the year ended June 30, 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
|
|
|
610,136
|
|
|
$
|
1.61
|
|
|
|
|
|
Granted
|
|
|
438,500
|
|
|
$
|
0.50
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(148,234
|
)
|
|
$
|
1.21
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
900,402
|
|
|
$
|
1.13
|
|
|
|
7.55
|
|
Exercisable at June 30, 2016
|
|
|
652,590
|
|
|
$
|
1.35
|
|
|
|
6.95
|
|
Stock-based compensation expense recognized in our consolidated statements of operations
for the year ended June 30, 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 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 year ended June 30, 2017, was $0.43, and as a result the intrinsic value of the exercisable options at June 30, 2017, was $2,000.
We allocated stock-based compensation expense included in the consolidated statements of operations for employee option grants and non-employee option grants as follows:
Years ended June 30,
|
|
201
7
|
|
|
201
6
|
|
Research and development
|
|
$
|
13,000
|
|
|
$
|
21,000
|
|
General and administrative
|
|
|
27,000
|
|
|
|
88,000
|
|
Total stock-based compensation expense
|
|
$
|
40,000
|
|
|
$
|
109,000
|
|
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:
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
100%
|
|
|
|
|
100%
|
|
|
Risk free interest rate
|
|
|
1.31%
|
|
|
|
|
1.31%
|
|
|
Forfeiture rate
|
|
17%
|
-
|
24%
|
|
|
17%
|
-
|
24%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
0%
|
|
|
Expected term (years)
|
|
|
3
|
|
|
|
|
3
|
|
|
The remaining amount of unrecognized stock-based compe
nsation expense at June 30, 2017 relating to outstanding stock options, is approximately $41,000, which is expected to be recognized over the weighted average period of 1.27 years.
NOTE
9
- Warrant Derivative Liability
In 2012, we issued warrants to certain investors and a consultant (together, the "2012 Warrant Holders") to purchase a total of
297,035 shares of our common stock at $4.10 per share (the "2012 Warrants"). The 2012 Warrants include exercise price re-set provisions (the "Re-set Provisions") should future equity offerings be offered at a price lower than the warrant exercise price. In accordance with ASC No. 815, the Re-set Provisions are recorded as derivative liabilities in the accompanying 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.
The change in the fair value of the derivative liabilities income for the years ended June 30, 2017 and 2016 totaled approximately $14,000 and $11,000, respectively
, and is included as a component of other income (expense) in the accompanying consolidated statements of operations (see Note 11)
. The change in the warrant derivative liability is primarily attributable to the exchange of approximately 93% of the outstanding warrants at June 30, 2016 into shares of common stock during fiscal 2017 (see Note 8) and the decrease in the market value of our common stock. Additionally, 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. The derivative liabilities had an average fair value per warrant and aggregate value as of June 30, 2016 of $0.10 and $24,000, respectively.
Significant assumptions used to estimate the fair value of the warrants classified as derivative liabilities are summarized below:
|
|
As of
June 30, 2016
|
|
Risk-free interest rate
|
|
0.44%
|
-
|
0.49
|
%
|
Expected life (average) (years)
|
|
0.96
|
–
|
1.33
|
|
Stock price (based on prices on valuation date)
|
|
|
|
$0.50
|
|
Exercise price
|
|
|
|
$1.55
|
|
Expected volatility
|
|
|
|
110
|
%
|
As discussed
in Note 8 above, during May 2016 we sold shares of our common stock at a price of $0.40 per share, thereby triggering an anti-dilution provision included in the warrants to purchase an aggregate of 297,035 shares of common stock upon exercise. As a result, the exercise price of such warrants was reduced to $1.55 per share. The remaining terms, including expiration dates, of all effected warrants remain unchanged.
NOTE
10
- INCOME TAXES
Pursuant to the provisions of FASB ASC Topic No. 740
Income Taxes
(“ASC 740”)
,
deferred income taxes reflect the net effect of (a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carryforwards. No net provision for refundable Federal income taxes has been made in the accompanying statement of operations because no recoverable taxes were paid previously. Significant components of the Company’s net deferred tax assets at June 30, 2017 and 2016 are shown below. A valuation allowance of approximately $9,927,000 and $8,107,000 has been established to offset the net deferred tax assets as of June 30, 2017 and 2016, respectively, due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets.
The Company is subject to taxation in the United States and California. The Company
’s tax years for 2010 and forward are subject to examination by the United States and California tax authorities due to the carry forward of unutilized net operating losses and research and development credits (if any).
We have incurred losses since inception, so no current income tax provision or benefit has been recorded. Significant components of our net deferred tax assets are shown in the table below.
|
|
Year Ended June 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,126,000
|
|
|
$
|
6,473,000
|
|
Stock compensation
|
|
|
1,646,000
|
|
|
|
1,503,000
|
|
Other, net
|
|
|
155,000
|
|
|
|
131,000
|
|
Net deferred tax assets
|
|
|
9,927,000
|
|
|
|
8,107,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(9,927,000
|
)
|
|
|
(8,107,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards from windfall tax benefits occurring from January 1, 2006 onward. At June 30,
2017, deferred tax assets do not include excess tax benefits from stock-based compensation.
At June 30, 2017
, the Company had unused net operating loss carryovers of approximately $20,242,000 and $20,200,000 that are available to offset future federal and state taxable income, respectively. These operating losses begin to expire in 2030.
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rat
e at June 30, 2017 and 2016, due to the following:
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Federal income taxes at 34%
|
|
$
|
(1,508,000
|
)
|
|
$
|
(1,554,000
|
)
|
State income taxes, net
|
|
|
(392,000
|
)
|
|
|
(404,000
|
)
|
Permanent differences and other
|
|
|
83,000
|
|
|
|
121,000
|
|
Change in the estimated fair market value of derivatives
|
|
|
6,000
|
|
|
|
(11,000
|
)
|
Other true ups, if any
|
|
|
(9,000
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
1,820,000
|
|
|
|
1,848,000
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Internal Revenue Code Sections 382 limits the use of our net operating loss carryforwards if there has been a cumulative change in ownership of more than 50% within a three-year period.
The Company has not yet completed a Section 382 net operating loss analysis. In the event that such analysis determines there is a limitation on the use on net operating loss carryforwards to offset future taxable income, the recorded deferred tax asset relating to such net operating loss carryforwards will be reduced. However, as the Company has recorded a full valuation allowance against its net deferred tax assets, there is no impact on the Company’s consolidated financial statements as of June 30, 2017 and 2016.
We follow FASB ASC Topic No. 740,
Income Taxes
(“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
In accordance with ASC 740, there are no unrecognized
tax benefits as of June 30, 2017 or June 30, 2016.
NOTE
11
- 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. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations. The fair value of our warrant derivative liabilities at June 30, 2017 and 2016 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 year ended June 30,
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 re-pricing modification charge (Note
9)
|
|
|
(10,000
|
)
|
Balance at June 30, 2017
|
|
$
|
-
|
|
The fair value of our warrant derivative liabilities and the change in the estimated fair value of derivative liabilities that we
recorded during fiscal year 2017, related to warrants issued in connection with our private placement transactions (see Notes 8 and 9).
NOTE 1
2
- OTHER RELATED PARTY TRANSACTIONS
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 $
16,000 during each of the years ended June 30, 2017 and 2016, respectively, from Epic Boats under the sublease rental agreement which is recorded as a reduction to rent expense and the customer deposits discussed below.
As of June 30,
2017 and 2016, customer deposits totaling approximately $120,000 and $136,000, respectively, related to such products were recorded in the accompanying consolidated balance sheets. There were no receivables outstanding from Epic Boats as of June 30, 2017 and 2016.
NOTE 1
3
- CONCENTRATIONS
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and unsecured trade accounts receivable. The Company maintains cash balances at a financial institution in San Diego, California. Our cash balance at this institution is secured by the Federal Deposit Insurance Corporation up to $250,000. As of June 30,
2017, cash totaled approximately $121,000, which consists of funds held in a non-interest bearing bank deposit account. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.
Customer Concentrations
During the
year ended June 30, 2017, we had three major customers that each represented more than 10% of our revenues on an individual basis, or approximately $524,000 or 58% of our total revenues.
Dur
ing the year ended June 30, 2016, we had three major customers that each represented more than 10% of our revenues on an individual basis, or approximately $285,000 or 51% of our total revenues.
Suppliers/Vendor Concentrations
We obtain a limited number of components and supplies included in our products from a small group of suppliers. Dur
ing the year ended June 30, 2017 we had three suppliers who accounted for more than 10% of our total purchases, on an individual basis. Purchases for these three suppliers totaled $1,665,000 or 57% of our total purchases.
Dur
ing the year ended June 30, 2016 we had three suppliers who accounted for more than 10% of our total purchases, on an individual basis. Purchases for these three suppliers totaled $793,000 or 66% of our total purchases.
NOTE 1
4
- 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 have 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 agreed to pay the plaintiff $10,000 as settlement. Included in accrued expenses in the accompanying consolidated financial statements as of June 30, 2016 is a $10,000 accrual associated with this claim, which was paid in September 2016.
Operating Leases
The Company’s corporate headquarters totals 22,054 square feet and is located in Vista, California. Effective February 25, 2014, the Company entered into a two-year lease agreement for this facility with average monthly rent payments of approximately $12,000 per month and paid a security deposit of $25,000, or approximately 2 months of rent. Our lease was subsequently amended resulting in average rent expense of $14,000 per month and expiring on May 31, 2018.
The Company also subleases space to a related party, Epic Boats, on a month-to-month basis at a rate of 10% of lease expense.
Total rent expense was $
140,000 and $137,000 for the years ended June 30, 2017 and 2016, respectively, net of sublease income.
NOTE 1
5
- SUBSEQUENT EVENTS
During the period from July 1,
2017 through September 21, 2017 we borrowed an aggregate of $1,335,000 from Esenjay under our Unrestricted Line of Credit. As of September 21, 2017, the amount outstanding under the Unrestricted Line of Credit was $6,520,000, with an aggregate of $3,480,000 available under the Unrestricted Line of Credit for future draws at Esenjay’s discretion. As of September 21, 2017, Esenjay owns approximately 64% of our issued and outstanding common stock (See Note 6).
On September 19, 2017, our Board of Directors appointed Ronald Dutt, as the president, chief financial officer and corporate secretary of the Company. Mr. Dutt has been our chief executive officer, interim chief financial officer and director since March 19, 2014. Previously, he was our chief financial officer since December 7, 2012 and our interim chief executive officer since June 28, 2013. Mr. Dutt has served as the Company's interim corporate secretary since June 28, 2013.
F-20