NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 201
7
(Unaudited)
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, 2017 filed with the SEC on September 22, 2017. In the opinion of management, the accompanying condensed consolidated interim financial statements include all necessary adjustments. 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 consolidated balance sheet at June 30, 2017 has been derived from the audited balance sheet at June 30, 2017 contained in such Form 10-K.
Nature of Business
Flux Power Holdings, Inc.
designs, develops and sells rechargeable advanced lithium-ion batteries for industrial equipment. As used herein, the terms “we”, “us”, “our”, “Flux” and “Company” refer to Flux Power Holdings, Inc. and our wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), unless otherwise indicated. We have structured our business around our core technology, “The Battery Management System” (“BMS”). Our BMS provides three critical functions to our battery systems: cell balancing, monitoring and error reporting. Using our proprietary management technology, we are able to offer complete integrated energy storage solutions or custom modular standalone systems to our customers. We have also developed a suite of complementary technologies and products that accompany our core products. Sales have been primarily to customers located throughout the United States.
Reverse Stock Split
On August 10, 2017, we filed a certificate of amendment to our articles of incorporation with the State of Nevada effectuating a reverse split of the Company
’s common stock at a ratio of 1 for 10, whereby every ten pre-reverse stock split shares of common stock automatically converted into one-post reverse stock split share of common stock, without changing the $0.001 par value or authorized number of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the State of Nevada on August 18, 2017. Mr. Michael Johnson, a current member of our board of directors and a holder of a majority of our issued and outstanding common stock approved the Reverse Stock Split on July 7, 2017. On that date, every 10 issued and outstanding shares of the Company’s common stock automatically converted into one outstanding share. No fractional shares were issued in connection with the Reverse Stock Split. If, as a result of the Reverse Split, a stockholder would otherwise have been entitled to a fractional share, each fractional share was rounded up. As a result of the Reverse Stock Split, the number of the Company’s outstanding shares of common stock decreased from 250,842,418 (pre-split) shares to 25,085,526 (post-split) shares. The Reverse Stock Split affected all stockholders of the Company’s common stock uniformly, and did not affect any stockholder’s percentage of ownership interest, except for that which may have been affected by the rounding up of fractional shares. 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 was increased by a factor of ten.
As the par value per share of the Company
’s common stock remained unchanged at $0.001 per share, a total of $226,000 was reclassified from common stock to additional paid-in capital. In connection with the Reverse Stock Split, proportionate adjustments have been made to the per share exercise price and the number of shares issuable upon the exercise or conversion of all outstanding options, warrants, convertible or exchangeable securities entitling the holders to purchase, exchange for, or convert into, shares of common stock. All references to shares of common stock and per share data for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
NOTE 2
–
LIQUIDITY AND
GOING CONCERN
The accompanying
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred an accumulated deficit of $21,143,000 through September 30, 2017, and a net loss of $1,446,000 for the three months ended September 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 concernfor the twelve months following the filing date of our Quarterly Report on Form 10-Q, November 14, 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 to improve operations with the goal of sustaining our operations. These steps include (a) developing additional products to
serve the Class 1 and Class 2 industrial equipment markets; and (b) expand our sales force throughout the United States. In that regard, we have increased our research and development efforts to focus on completing the development of energy storage solutions that can be used on larger forklifts and have also doubled our sales force since December 2016 with personnel having significant experience in the industrial equipment handling industry. The impact of these steps is expected to be seen beginning in the second quarter of fiscal year 2017.
We have evaluated our expected cash requirements over the next twelve months, which include, but are not limited to, investments in additional sales and marketing and product development resources, capital expenditures, and working capital requirements and have determined that our existing cash resources are not sufficient to meet our anticipated needs during the next twelve months, and that additional financing is required to support current operations. Based on our current and planned levels of expenditure, we estimate that total financing proceeds of approximately $5,000,000 will be required to fund current and planned operations for the twelve months following the filing date of this Quarterly Report on Form 10-Q, November 14, 2017. In addition, we anticipate that further additional financing may be required to fund our business plan subsequent to that date, until such time as revenues and related cash flows become sufficient to support our operating costs.
We intend to continue to seek capital through the sale of equity securities through private placements, in addition to utilizing our existing credit facility with Esenjay Investments, LLC (“Esenjay”). Esenjay is deemed to be a related party as Mr. Michael Johnson, the beneficial owner and director of Esenjay, is a current member of our board of directors and a major shareholder of the Company. The credit facility bears interest at 8 % per annum, matures on January 31, 2019, and is convertible into shares of common stock at $0.60 per share (the “Unrestricted Line of Credit”).
Between July 1, 2014 and September 30, 2017, we have borrowed an aggregate of $10,430,000, of which $3,750,000 has been converted to equity, pursuant to various credit facilities with Esenjay of which the Unrestricted Line of Credit remains outstanding. As of September 30, 2017, the amount outstanding under the Unrestricted Line of Credit was $6,680,000, with $3,320,000 available for future draws at Esenjay’s discretion. As of November 14, 2017, the amount outstanding under the Unrestricted Line of Credit was $7,415,000, with an aggregate of $2,585,000 available for future draws. Esenjay owns approximately 64% of our issued and outstanding common stock as of November 14, 2017.
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
our assets and discharge our liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying condensed consolidated financial statements.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 3, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 201
7. There have been no material changes in these policies or their application.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation for comparative purposes.
Net Loss Per Common Share
The Company calculates basic loss per common share by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted loss per common share includes the impact from all dilutive potential common shares relating to outstanding convertible securities.
For the three months ended September 30, 201
7 and 2016, basic and diluted weighted-average common shares outstanding were 25,086,794 and 23,086,349, respectively. The Company incurred a net loss for the three months ended September 30, 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 September 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 15,050,184 and 5,114,007, respectively.
Fair Values of Financial Instruments
The carrying amount of our cash, accounts payable, accounts receivable, and accrued liabilities approximates their estimated fair values due to the short-term maturities of those financial instruments. The carrying amount of the line of credit agreement approximates its fair values as interest approximates current market interest rates for similar instruments. Management has concluded that it is not practical to determine the estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated at arm
’s length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent valuation would not be practical due to the lack of data regarding similar instruments, if any, and the associated potential costs. The Company does not have any other assets or liabilities that are measured at fair value on a recurring or non-recurring basis.
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 condensed consolidated financial statements.
NOTE 4 - RELATED PARTY DEBT AGREEMENTS
Esenjay Unrestricted Line Of Credit
Between October 2011 and September 2012, the Company entered into three debt agreement
s 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 September 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
Unrestricted Line of Credit are subject to Esenjay's approval.
The outstanding principal balance of the Unrestricted Line of Credit as of September 30, 2017 was $6,680,000, convertible into 11,133,333 shares of common stock, resulting in a remaining $3,320,000 available for future draws under this agreement, subject to lender
’s approval. During the three months ended September 30, 2017 and 2016, the Company recorded approximately $121,000 and $16,000, respectively of interest expense in the accompanying condensed consolidated statements of operations related to the Unrestricted Line of Credit. Subsequent to September 30, 2017, we have borrowed an additional $2,585,000 under the credit facility (see Note 9).
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. During the three months ended September 30, 2017, we recorded approximately $15,000 of interest expense in the accompanying condensed consolidated statements of operations related to the Convertible Note.
NOTE
5
- STOCKHOLDERS’ DEFICIT
Advisory Agreement
Catalyst Global LLC.
Effective April 1, 2017, we entered into a renewal contract (the “2017 Renewal”) with Catalyst Global LLC to provide investor relations services for 12 months in exchange for monthly fees of $3,500 per month and 23,333 shares of restricted common stock per quarter. The initial tranche of 23,333 shares was valued at $0.45 per share or $10,500 when issued on June 7, 2017, the second tranche of 23,333 shares was valued at $0.50 per share or $11,667 when issued on September 25, 2017. The 2017 Renewal is cancelable upon 60 days written notice.
Warrant Activity
Warrant detail is reflected below:
|
|
Number
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
|
Remaining Contract
Term (# years)
|
|
Shares purchasable under outstanding warrants at June 30, 2017
|
|
|
2,342,590
|
|
|
$
|
1.97
|
|
|
0.12
|
-
|
1.55
|
|
Stock purchase warrants expired
|
|
|
(98,482
|
)
|
|
$
|
2.28
|
|
|
|
-
|
|
|
Shares purchasable under outstanding warrants at
September 30, 2017
|
|
|
2,244,108
|
|
|
$
|
1.95
|
|
|
|
1.33
|
|
|
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 three months ended September 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,
2017
|
|
|
716,277
|
|
|
$
|
1.01
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2017
|
|
|
716,277
|
|
|
$
|
1.01
|
|
|
|
6.83
|
|
Exercisable at September 30,
2017
|
|
|
612,623
|
|
|
$
|
1.09
|
|
|
|
6.60
|
|
Activity in stock options during the three months ended September 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,
2016
|
|
|
900,402
|
|
|
$
|
1.10
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(80,132
|
)
|
|
|
2.55
|
|
|
|
|
|
Outstanding at September 30,
2016
|
|
|
820,270
|
|
|
$
|
1.00
|
|
|
|
6.20
|
|
Exercisable at September 30,
2016
|
|
|
602,345
|
|
|
$
|
1.15
|
|
|
|
6.02
|
|
Stock-based compensation expense recognized in our
condensed consolidated statements of operations for the three months ended September 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 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 three months ended September 30, 201
7 was $0.48 and as a result the intrinsic value of the exercisable options at September 30, 2017 was $5,000.
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:
Three months ended September 30,
|
|
201
7
|
|
|
201
6
|
|
Research and development
|
|
$
|
8,000
|
|
|
$
|
7,000
|
|
General and administrative
|
|
|
3,000
|
|
|
|
3,000
|
|
Total stock-based compensation expense
|
|
$
|
11,000
|
|
|
$
|
10,000
|
|
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:
Three months ended September 30,
|
|
201
7
|
|
201
6
|
Expected volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
Risk free interest rate
|
|
|
1.31
|
%
|
|
|
1.31
|
%
|
Forfeiture rate
|
|
|
23.0
|
%
|
|
|
23.0
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years)
|
|
|
3
|
|
|
|
3
|
|
The remaining amount of unrecognized stock-based compensation expense at September 30, 201
7 relating to outstanding stock options is approximately $30,000 which is expected to be recognized over the weighted average period of 1.22 years.
NOTE
6
- OTHER RELATED PARTY TRANSACTIONS
Transactions with Epic Boats
The Company subleases office and manufacturing space to Epic Boats (an entity founded and controlled by Chris Anthony, our 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 $
5,000 and $4,000 during the three-month ended September 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 September 30, 2017 and June 30, 2017, customer deposits totaling approximately $115,000 and $120,000, respectively, were recorded in the accompanying condensed consolidated balance sheets. There were no receivables outstanding from Epic Boats as of September 30, 2017 and June 30, 2017.
NOTE
7
- CONCENTRATIONS
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and unsecured trade accounts receivable. The Company maintains cash balances at a financial institution in San Diego, California. Our cash balance at this institution is secured by the Federal Deposit Insurance Corporation up to $250,000.
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 September 30, 201
7, we had three major customers that each represented more than 10% of our revenues on an individual basis, or approximately 71% in the aggregate.
During the three months ended September 30, 2016, we had
two major customers that each represented more than 10% of our revenues on an individual basis, or approximately 50% 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 September 30,
2017 we had three suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 50% in the aggregate.
During the three months ended September 30, 2016 we had three suppliers who accounted for more than 10% of our total inventory purchases on an individual basis or approximately 54% in the aggregate.
NOTE
8
- COMMITMENTS AND CONTINGENCIES
From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and
adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events. As of September 30, 2017, we are not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.
NOTE
9
- SUBSEQUENT EVENTS
On October 26, 2017
, pursuant to the 2014 Equity Incentive Plan, the Company issued 1,880,000 incentive stock options of the Company’s common stock, with an aggregated estimated grant-date fair value of $769,000, to 20 Company employees. In addition, the Company issued 90,000 non-qualified stock options of the Company’s common stock, with an aggregated estimated grant-date fair value of $37,000, to three members of its Board of Directors.
During the period from October 1,
2017 through November 14, 2017 we borrowed an aggregate of $735,000 from Esenjay under our Unrestricted Line of Credit. As of November 14, 2017, the amount outstanding under the Unrestricted Line of Credit was $7,415,000, with an aggregate of $2,585,000 available under the Unrestricted Line of Credit for future draws at Esenjay’s discretion. As of November 14, 2017, Esenjay owns approximately 64% of our issued and outstanding common stock (See Note 4).