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PART
I
ITEM
1 – BUSINESS
Overview
We
design, develop, manufacture, and sell a portfolio of advanced lithium-ion energy storage solutions for electrification of a range of
industrial commercial sectors which include material handling, airport ground support equipment (“GSE”), and other commercial
and industrial applications. We believe our mobile and stationary energy storage solutions provide our customers a reliable, high performing,
cost effective, and more environmentally friendly alternative as compared to traditional lead acid and propane-based solutions. Our modular
and scalable design allows different configurations of lithium-ion battery packs to be paired with our proprietary wireless battery management
system to provide the level of energy storage required and “state of the art” real time monitoring of pack performance. We
believe that the increasing demand for lithium-ion battery packs and more environmentally friendly energy storage solutions in the material
handling sector should continue to drive our revenue growth.
Our
Strategy
Our
long-term strategy is to meet the rapidly growing demand for lithium-ion energy solutions and to be the supplier of choice, targeting
large companies having demanding energy storage needs. We have established selling relationships equipment OEMs and customers with large
fleets of forklifts and GSEs. We intend to reach this goal by investing in research and development to expand our product mix, by expanding
our sales and marketing efforts, improving our customer support efforts and continuing our efforts to increase production capacity and
efficiencies. Our research and development efforts will continue to focus on providing adaptable, reliable and cost-effective energy
storage solutions for our customers.
Our
largest sector of penetration thus far has been the material handling sector which we believe is a multi-billion dollar addressable market.
We believe the sector will provide us with an opportunity to grow our business as we enhance our product mix and service levels and grow
our sales to large fleets of forklifts and GSEs. Applications of our modular packs for other industrial and commercial uses, such as
solar energy storage, are providing additional current growth and further opportunities. We intend to continue to expand our supply chain
and customer partnerships and seek further partnerships and/or acquisitions that provide synergy to meeting our growth and “building
scale” objectives.
Supply
Chain Issues and Higher Procurement Costs
Due
to COVID-19 pandemic, supply chain disruptions continue, notably with delivery delays at the ports of Los Angeles and Long Beach. In
addition, the price of steel and certain other electrical components used in our products have seen dramatic increases, along with increased
shipping costs. It is impossible to predict how long the current disruptions to the cost and availability of raw materials and component
parts will last. We implemented price increases on certain new product orders in October 2021 and April 2022 to offset rising global
costs of raw materials and component parts. In addition, we increased our inventory of raw materials and component parts to $16.3 million
as of June 30, 2022 to mitigate supply chain disruptions and support timely deliveries. However, there can be no assurance that our price
increases, inventory levels or any future steps we take will be sufficient to offset the rising procurement costs and manage sourcing
of raw materials and component parts effectively.
To
address some of these negative consequences and to support the future growth of our business, we have implemented a number of new strategic
initiatives:
Strategic
Initiatives.
To
support our high growth business and strategy, our first priority over the coming quarters is achieving “profitability,”
specifically, cash flow breakeven. Accordingly, we have strategic initiatives underway in two areas:
| ○ | Gross
margin improvements |
|
● |
Utilize
lower cost, more reliable, and secondary suppliers of key components including cells, steel, electronics, circuit boards and other
key components. |
|
● |
Actively
manage our suppliers to avoid supply chain disruptions and related risks. |
|
● |
Introduce
new designs, including a simplified “platform” that reduces part count, lowers cost, improves manufacturability and serviceability. |
|
● |
Focus
on ensuring profitability of all product lines including managing mix of products. |
|
● |
Seek
more competitive carriers to reduce shipping costs. |
|
● |
Implement
Lean Manufacturing process to enhance capacity utilization, efficiency, quality. |
|
● |
Introduce
comprehensive “cost of quality” initiative to ensure effective and robust processes. |
|
● |
Implement
“automated cell module assembly” to assemble purchased “individual” battery cells into a “module”
for the battery pack. This will enable lower inventory from simplified SKU count and lower costs. |
| ○ | Business
expansion to accelerate gross margin |
| ● | Leverage
current high-profile “proven customer relationships” to respond to growing demand
of large fleets for lithium-ion value proposition. |
| ● | Pursue
new market that can leverage our technology and manufacturing capabilities. |
| ● | Expand
features of our popular “SkyBMS” (telemetry) which provides customized fleet
management, and real time reports. |
| ● | Expand
our manufacturing and service capacities to ensure customer satisfaction from increased deliveries,
and service. |
| ● | Capitalize
on our leadership position with new offerings. |
| ● | While
we are “agnostic to the type of lithium chemistry,” ensure our research to support
other chemistries as they may become available. Ensure we have leadership with our core technology,
without dependence on purchasing critical technology. |
There
can be no assurance that these initiatives and efforts will be successful.
DESCRIPTION
OF OUR BUSINESS
Our
Business
We
have leveraged our experience in lithium-ion technology to design and develop a portfolio of industrial and commercial energy storage
packs that we believe provide attractive solutions to customers seeking an alternative to lead acid and propane-based power products.
We believe that the following attributes are significant contributors to our success:
Engineering
and integration experience in lithium-ion for motive applications: Our engineers design, develop, test, and service our advanced
lithium-ion energy storage solutions. We have been developing lithium-ion applications for the advanced energy storage market since 2010,
starting with products for automotive electric vehicle manufacturers. We believe our engineering experience enables us to develop competitive
solutions that meet our customers’ needs currently and in the foreseeable future.
UL
Listing: We launched our Class 3 Walkie Pallet Pack product line in 2014 and obtained UL Listing for all three different power
configurations. We have also obtained UL Listing for our Class 1 Packs, our Class 2 Packs, and our Class 3 End Rider. In addition, we
have completed the process for obtaining UL Listings for our newest source of battery cells. We believe this UL Listing provides us a
significant competitive advantage and provides assurance to customers that our technology has been rigorously tested by an independent
third party and determined to be safe, durable and reliable.
Original
equipment manufacturer (OEM) approvals: Many of our energy storage packs have been tested and approved for use by Toyota Material
Handling USA, Inc., Crown Equipment Corporation, and The Raymond Corporation, among the top global lift truck manufacturers by revenue
according to Material Handling & Logistics. We also provide a “private label” Class 3 Walkie Pallet Pack to a major forklift
OEM.
Broad
product offering and scalable design: We offer energy storage packs for use in a variety of industrial motive applications. We
believe that our modular and scalable design enables us to optimize design, inventory, and part count to accommodate natural product
extensions of our products to meet customer requirements. We have leveraged our Class 3 Walkie Pallet Pack design to develop larger energy
storage packs for larger forklifts, GSE Packs, and other industrial equipment applications. Natural product extensions, based on our
modular, scalable designs, include solar backup power for electric vehicle (“EV”) mobile charging stations and robotic warehouse
equipment.
Significant
advantages over lead acid and propane-based solutions: We believe that lithium-ion battery systems have significant advantages
over existing technologies and will displace lead acid batteries and propane-based solutions, in most applications. Relative to lead
acid batteries, such advantages include environmental benefits, no water maintenance, faster charge times, greater cycle life, longer
run times, and less energy used that provide operational and financial benefits to customers. When compared to lead acid solutions, our
energy storage solutions do not discharge carbon dioxide in the atmosphere due to lithium chemistry efficiencies. In addition, when compared
to propane-based solutions, lithium-ion systems avoid the generation of exhaust emissions and associated odor and environmental contaminates,
and maintenance of an internal combustion engine, which has substantially more parts subject to wear than an electric motor.
Proprietary
Battery Management System: Critical to our success is our innovative and proprietary versatile BMS that optimizes the performance
of our lithium-ion energy solutions and provides a platform for adding new battery pack features, including customized telemetry (pack
data and reports available anytime, anywhere) for customers. The BMS serves as the brain of the battery pack, managing cell balancing,
charging, discharging, monitoring and communication between the pack and the forklift. Our “next generation” versatile BMS
is currently part of our full product lines and provides significant product features for improved customer productivity. Our BMS also
enables ongoing feature development for reduced cost and higher performance. We have included our proprietary telemetry solution, branded
“SkyBMS” which provides real time reports on pack performance, health, and remaining useful life.
Our
Products
We
design, develop, test and sell our energy storage packs for use in a broad range of lift trucks, industrial equipment including airport
GSE, energy storage for solar applications, and other commercial applications. Within each of these product segments, we offer a range
of power and equipment solutions. Our current product offering is summarized in the chart below.
![](https://content.edgar-online.com/edgar_conv_img/2022/09/28/0001493152-22-026952_form10-k_001.jpg)
Our
battery pack system design is adaptable with three core design modules used in our entire family of small, medium, and large pack forklift
products. A scalable modular design allows for core modules to be configured to address a variety of unique power and space requirements.
We also have the capability to offer varying chemistries and configurations based on the specific application. Currently, our energy
storage packs use lithium iron phosphate (LiFePO4) battery cells, which we source from a variety of overseas suppliers that meet our
power, reliability, safety and other specifications. Our BMS works with a number of battery configurations providing the flexibility
to use battery cells developed and manufactured by other suppliers. We believe we can readily adapt our energy storage packs to incorporate
new chemistries as they become available in the future in order to meet changing customer preferences and to reduce the cost of our products.
We
also offer 24-volt onboard chargers for our Class 3 Walkie Pallet Packs, and smart “wall mounted” chargers for larger applications.
Our smart charging solutions are designed to interface with our BMS and integrate easily into most all major chargers in the market.
New
Product Update
During
the second half of the Fiscal 2022, we introduced new product designs to respond to customer requests and to allow for greater operational
efficiencies for us. Some of the improvements included higher capacities for extra-long and demanding shifts, easier servicing, cost
efficiencies, and other features to solve a variety of existing performance challenges of customer operations. We intend to continue
to develop and to introduce new product designs for margin enhancement, part commonality and improved serviceability.
In
March 2022, we introduced three (3) new products:
|
|
|
Product
|
|
|
|
Description |
|
● |
|
L36
lithium-ion battery pack, a 36-volt option for 3-wheel forklifts; |
|
● |
|
The
L36 addresses the 3-wheel forklift market. According to our OEM partners the 3-wheel forklift offerings are some of their best selling
products. We are now strategically placed to fully address this market. |
|
● |
|
C48
lithium-ion battery pack for Automated Guided Vehicles (AGV) and Autonomous Mobile Robots (AMR); and |
|
● |
|
The
improved robustness and environmental protections mean it is no longer just a solar battery, but is now being sold into tugs and
other types of industrial equipment, expanding our product offerings. |
|
● |
|
S24
lithium-ion battery pack providing twice the capacity (210Ah) for Walkie Pallet Jacks for heavy duty |
|
● |
|
The
S24-210Ah is a new high-capacity variant of our ‘slim’ walkie battery and addresses some of the toughest walkie applications
in the market, giving exceptional runtime and fast recharge times when paired with an external high-powered charger. |
Industry
Overview
Historically,
lithium-ion battery solutions were unable to compete with lead acid and propane-based solutions in industrial applications on the basis
of cost. However, the supply of lithium-ion batteries has rapidly expanded, leading to price declines of eighty-five percent (85%) since
2010 according to BloombergNEF. BloombergNEF also estimates that lithium-ion battery prices, which averaged $1,160 per kilowatt hour
in 2010, were $156 per kWh in 2019 and could drop below $100 per kWh in 2024. Lithium metal itself represents well less than 5% cost
of our packs.
The
sharp decline in the price of lithium-ion batteries has made these energy solutions more cost competitive. Affordability has in turn
enabled customers to shift away from lead acid and propane-based solutions for power lift equipment to lithium-ion based solutions with
more favorable environmental and performance characteristics. We believe our position as a pioneer in the field and our extensive experience
providing lithium-ion based energy storage solutions will enable us to take advantage of this shift in customer preferences.
Lift
Equipment - Material Handling Equipment
We
focus on energy storage solutions for industrial equipment and related industrial applications because we believe they represent large
and growing markets that are just beginning to adopt lithium-ion based technology. We apply our scalable, modular designs to natural
product extensions in the industrial equipment market. These markets include not only the sale of lithium-ion battery solutions for new
equipment but also a replacement market for existing lead acid battery packs.
According
to Modern Materials Handling, worldwide new lift truck orders reached approximately 1.4 million units in 2017. The Industrial Truck Association
(“ITA”) has estimated that approximately 200,000 lift trucks had been sold yearly since 2013 in North America (Canada, the
United States and Mexico), with sales relatively evenly distributed between electric rider (Class 1 and Class 2), motorized hand (Class
3), and internal combustion engine powered lift trucks (Class 4 and Class 5). The ITA estimates that electric products represented approximately
sixty-nine percent (69%) of the North American shipments in 2020, reflecting the long-term trend of increasing mix of electric products
versus internal combustion (propane) engines. Driven by growth in global manufacturing, e-commerce and construction, Research and Markets
expects that the global lift truck market will grow at a compound annual growth rate of six and four-tenths percent (6.4%) through 2024.
Customers
Our
customers include OEMs, lift equipment dealers, battery distributors and end users. Our customers vary from small companies to Fortune
500 companies.
During
the year ended June 30, 2022, we had four (4) major customers that each represented more than 10% of our revenues on an individual basis,
and together represented approximately $29,254,000 or 69% of our total revenues. During the year ended June 30, 2021, we had three (3)
major customers that each represented more than 10% of our revenues on an individual basis, and together represented approximately $16,004,000
or 61% of our total revenues.
Shift
Toward Lithium-ion Battery Technologies
The
lithium-ion battery value proposition of higher performance, environmental benefit, and lower life cycle cost is driving an increase
in demand for safe and efficient alternatives to lead acid and propane-based power products. The lithium-ion value proposition includes
a number of factors impacting customer preferences:
Duration
of Charge/Run Times: Lithium-based energy storage systems can perform for a longer duration compared to lead acid batteries.
Lithium-ion batteries provide up to 50% longer run times than lead acid batteries of comparable capacity, or amps-per-hour rating, allowing
equipment to be operated over a long period of time between charges.
High/Sustained
Power: Lithium-ion batteries are better suited to deliver high power versus legacy lead acid. For example, a 100Ah lead acid
battery will only deliver 80Ah if discharged over a four-hour period. In contrast, a 100Ah lithium-ion system will achieve over 92Ah
even during a 30-minute discharge. Additionally, during discharge, the energy storage pack sustains its initial voltage, maximizing the
performance of the forklift truck, whereas, lead acid voltages, and hence power, decline over the working shift.
Charging
Time: Lead acid batteries are limited to one shift a day, as they discharge for eight hours, need eight hours for charging, and
another eight hours for cooling. For multi-shift operations, this typically requires battery changeout for the equipment. Because lithium
batteries can be recharged in as little as one hour and do not degrade when subjected to opportunity charging, hence, battery changeout
is unnecessary.
Safe
Operation: The toxic nature of lead acid batteries presents significant safety and environmental issues in the event of a cell
breach. During charging, lead acid batteries emit combustible gases and increase in temperature. Lithium-ion (particularly LFP) batteries
do not get as hot and avoid many of the safety and environmental issues associated with lead acid batteries.
Extended
Life: The performance of lead acid batteries degrades after approximately 500 charging cycles in industrial equipment applications.
In comparison, lithium-ion batteries last up to five times longer in the same application.
Size
and Weight: Lithium is about one-third the weight of lead acid for comparable power ratings. Lower weight enables forklift OEMs
the ability to optimize the design of the truck based on a smaller footprint for lithium-ion instead of lead acid.
Lower
Cost: Lithium-ion batteries provide power dense solutions with extended cycle life, reduced maintenance and improved operational
performance, resulting in lower total cost of ownership.
Less
Energy Used: we believe our lithium-ion batteries use 20-50% less energy based on our internal studies comparing lithium-ion
to lead acid.
Marketing
and Sales
We
sell our products through a number of different channels including OEMs, lift equipment dealers and battery distributors as well as directly
to end users. In the industrial motive market, OEMs sell their lift products through dealer networks and directly to end customers. Because
of environmental issues associated with lead acid batteries and to preserve customer choice, industrial lift products are typically sold
without a battery pack. Equipment dealers source battery packs from battery distributors and battery pack suppliers based on demand or
in response to customer specifications. End customers may specify a specific type and manufacturer of battery pack to the equipment dealer
or may purchase battery packs from battery distributors or directly from battery suppliers.
Our
direct sales staff is assigned to major geographies throughout North America to collaborate with our sales partners who have an established
customer base. We plan to hire additional sales staff to support our expected sales growth. In addition, we have developed a nation-wide
sales network of relationships with equipment OEMs, their dealers, and battery distributors. To support our products, we have a nation-wide
network of service providers, typically forklift equipment dealers and battery distributors, who provide local customer service to large
customers. We also maintain a customer support center and provide Tech Bulletins and training to our service and sales network out of
our corporate headquarters. We have partnered with an experienced GSE distributor, to market our lithium-ion battery packs for airport
GSE
Manufacturing
and Assembly
Rather
than manufacture our own battery cells and be limited to a single chemistry, our battery cells are sourced from a limited number of manufacturers
located in China. We source the remainder of the components primarily from vendors in the United States. We developed our BMS to be agnostic
to a battery’s lithium-ion chemistry and cell manufacturer. Despite such flexibility, we have experienced occasional supply interruptions
in the past, and more recently, we have been forced to navigate supply chain and transportation issues stemming from the global pandemic.
We are continuing to monitor and test potential new cell technologies on an ongoing basis to help mitigate our supply chain risks. Final
assembly, testing and shipping of our products is done from our ISO 9001 certified facility in Vista, California, which includes three
assembly lines.
We
buy chargers from several sources, including a U.S. based supplier. Additionally, we are a qualified dealer for a well-known manufacturer
of “high capacity, modular, smart chargers” which support our larger packs.
Research
and Development
Our
engineers design, develop, test, and service our advanced lithium-ion energy storage solutions at our company headquarters in Vista,
California. We believe our strengths include our core competencies and capabilities in designing and developing proprietary technology
for our BMS, lean manufacturing processes, systems engineering, engineering application, and software engineering for both battery packs
and telemetry. We believe that our ability to develop new features and technology for our BMS is essential to our growth strategy.
As
we continue to develop and expand our product offerings, we anticipate that research and development will continue to be a substantial
part of our strategic priorities in the future. We seek to develop innovative new and improved products for cell and system management
along with associated communication, display, current sensing and charging tools. Our research and development efforts are focused on
improving performance, reliability and durability of our energy storage solutions for our customers and on lowering our costs of production.
Competition
Our
competitors in the lift equipment market are primarily major lead acid battery manufacturers, including Stryten Energy, East Penn Manufacturing
Company, EnerSys Corporation, and Crown Battery Corporation. Although these competitors have been introducing offerings of a lithium-ion
battery, we do not believe that these suppliers offer lithium-based products for lift equipment in any significant volume to end users,
equipment dealers, OEMs or battery distributors. Several OEMs offer lithium-ion battery packs on Class 3 forklifts for sale only with
their own new forklifts. Some OEMs also offer forklift models designed with an integrated lithium-ion battery. As the demand for lithium-ion
battery packs has increased, small lithium battery pack providers have entered the market, most of whom we believe are suppliers of other
power products and have simply added a lithium product to their product lines.
The
key competitive factors in this market are performance, reliability, durability, safety and price. We believe we compete effectively
in all of these categories in light of our experience with lithium-ion technology, including our development capabilities and the performance
of our proprietary BMS. We believe that the UL Listing covering many of our core products is a significant differentiating competitive
advantage and we intend to extend that advantage by seeking to obtain UL Listings for our other energy storage pack products in the coming
months. In addition, because our BMS is not reliant on any specific battery cell chemistry, we believe we can adapt rapidly to changes
in advanced battery technology or customer preferences.
Intellectual
Property
Our
success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely
on a combination of patents pending, patent applications, trade secrets, including know-how, employee and third-party nondisclosure agreements,
copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights
in our technology. In addition to such factors as innovation, technological expertise and experienced personnel, we believe that a strong
patent position is important to remain competitive.
As
of June 30, 2022, we have two issued patents and three trademark registrations protecting the Flux Power name and logo. We have filed
three new patents on advanced technology related to lithium-ion battery packs. The technology behind these pending patents are designed
to:
|
● |
increase
battery life by optimizing the charging cycle, |
|
● |
give
users a better understanding of the health of their battery in use, and |
|
● |
apply
artificial intelligence to predictively balance the cells for optimal performance. |
We
do not know whether any of our efforts will result in the issuance of patents or whether the examination process will require us to narrow
our claims. Even if granted, there can be no assurance that these pending patent applications will provide us with protection.
Suppliers
We
obtain a limited number of components and supplies included in our products from a small group of suppliers. During the year ended June
30, 2022, we had one (1) supplier who accounted for more than 10% of our total purchases, which represented approximately $13,884,000
or 28% of our total purchases.
During
the year ended June 30, 2021, we had two (2) suppliers who accounted for more than 10% of our total purchases, on an individual basis,
and together represented approximately $9,260,000 or 27% of our total purchases.
Government
Regulations
Product
Safety Regulations. Our products are subject to product safety regulations by Federal, state, and local organizations. Accordingly,
we may be required, or may voluntarily determine to obtain approval of our products from one or more of the organizations engaged in
regulating product safety. These approvals could require significant time and resources from our technical staff and, if redesign were
necessary, could result in a delay in the introduction of our products in various markets and applications.
Environmental
Regulations. Federal, state, and local regulations impose significant environmental requirements on the manufacture, storage,
transportation, and disposal of various components of advanced energy storage systems. Although we believe that our operations are in
material compliance with current applicable environmental regulations, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on us or otherwise subject us to future liabilities.
Moreover,
Federal, state, and local governments may enact additional regulations relating to the manufacture, storage, transportation, and disposal
of components of advanced energy storage systems. Compliance with such additional regulations could require us to devote significant
time and resources and could adversely affect demand for our products. There can be no assurance that additional or modified regulations
relating to the manufacture, storage, transportation, and disposal of components of advanced energy systems will not be imposed.
Occupational
Safety and Health Regulations. The California Division of Occupational Safety and Health (Cal/OSHA) and other regulatory agencies
have jurisdiction over the operations of our Vista, California facility. Because of the risks generally associated with the assembly
of advanced energy storage systems we expect rigorous enforcement of applicable health and safety regulations. Frequent audits by, or
changes, in the regulations issued by Cal/OSHA, or other regulatory agencies with jurisdiction over our operations, may cause unforeseen
delays and require significant time and resources from our technical staff.
Human
Capital Resources
As
of June 30, 2022, we had 121 employees. We engage outside consultants for business development, operations and other functions from time
to time. None of our employees is currently represented by a trade union.
Corporate
Office
Our
corporate headquarters and production facility totals approximately 63,200 square feet and is located in Vista, California. Our production
facility is ISO 9001 certified. The telephone number at our principal executive office is (760)-741-FLUX or (760)-741-3589.
Other
Information
Our
Internet address is www.fluxpower.com. We make available on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission
(“SEC”). Other than the information expressly set forth in this annual report, the information contained, or referred to,
on our website is not part of this annual report.
The
SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding
issuers, such as us, that file electronically with the SEC.
ITEM
1A - RISK FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the summary of risk factors described below,
together with all of the other information included in this report, before making an investment decision. If any of the following risks
actually occur, our business, financial condition or results of operations could suffer. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You also should read the section entitled “Special Note Regarding
Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance
of such statements in the context of this report. The risk factors below do not address all the risks relating to securities, business
and operations, and financial condition.
Risk
Factors Relating to Our Business
We
have a history of losses and negative working capital.
For
the fiscal years ended June 30, 2022 and 2021, we had net losses of $15,609,000 and $12,793,000, respectively. We have historically experienced
net losses and until we generate sufficient revenue, we anticipate to continue to experience losses in the near future.
As
of June 30, 2022 and 2021, we had a cash balance of $485,000 and $4,713,000, respectively. We expect that our existing cash balances,
credit facilities, and cash resources from operations will be sufficient to fund our existing and planned operations for the next twelve
months. Until such time as we generate sufficient cash to fund our operations, we will need additional capital to continue our operations
thereafter.
We
have relied on equity financings, borrowings under short-term loans with related parties, our credit facilities and/or cash resources
from operating activities to fund our operations. However, there is no guarantee that we will be able to obtain additional funds in the
future or that funds will be available on terms acceptable to us, if at all. Any future financing may result in dilution of the ownership
interests of our stockholders. If such funds are not available on acceptable terms, we may be required to curtail our operations or take
other actions to preserve our cash, which may have a material adverse effect on our future cash flows and results of operations.
We
will need to raise additional capital or financing to continue to execute and expand our business.
While
we expect that our existing cash and additional funding available under our SVB Line of Credit, combined with funds available to us under
our subordinated line of credit and the potential net proceeds from our At-The-Market offering will be sufficient to meet our anticipated
capital resources and to fund our planned operations for the next twelve months, such sources of funding are subject to certain restrictions
and covenants and our ability to sell stock will be impacted by market conditions. If we are unable to meet the conditions provided in
the loan documents, the funds will not be available to us. In addition, should there be any delays in the receipts of key component parts,
due in part to supply change disruptions, our ability to fulfil the backlog of sales orders will be negatively impacted resulting in
lower availability of cash resources from operations. In that event, we may be required to raise additional capital to support our expanded
operations and execute on our business plan by issuing equity or convertible debt securities. In the event we are required to obtain
additional funds, there is no guarantee that additional funds will be available on a timely basis or on acceptable terms. To the extent
that we raise additional funds by issuing equity or convertible debt securities, our stockholders may experience additional dilution
and such financing may involve restrictive covenants. Newly issued securities may include preferences, superior voting rights, and the
issuance of warrants or other convertible securities that will have additional dilutive effects. We cannot assure that additional funds
will be available when needed from any source or, if available, will be available on terms that are acceptable to us. Further, we may
incur substantial costs in pursuing future capital and/or financing. We may also be required to recognize non-cash expenses in connection
with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and
results of operations. Our ability to obtain needed financing may be impaired by such factors as the weakness of capital markets, and
the fact that we have not been profitable, which could impact the availability and cost of future financings. If such funds are not available
when required, management will be required to curtail investments in additional sales and marketing and product development, which may
have a material adverse effect on future cash flows and results of operations.
Backlog
may not be indicative of future operating results.
Future
revenue for the Company can be influenced by order backlog. Backlog represents the dollar amount of revenues we expect to recognize in
the future from contracts awarded and in progress. Backlog substantially represents new orders. Backlog is not a measure defined by generally
accepted accounting principles and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable
to methodologies used by other companies in determining their backlog amounts. The backlog values we disclose include anticipated revenues
associated with: (1) the original contract amounts; (2) change orders for which we have received written confirmations from the applicable
customers; (3) change orders for which we expect to receive confirmations in the ordinary course of business; and (4) claims that we
have made against customers. In addition, the timing of order placement, size, and customer delivery dates can create unusual fluctuations
in backlog.
We
include unapproved change orders for which we expect to receive confirmations in the ordinary course of business in backlog, generally
to the extent of the lesser of the amounts management expects to recover or the associated costs incurred. Any revenue that would represent
profit associated with unapproved change orders is generally excluded from backlog until written confirmation is obtained from the applicable
customer. However, consideration is given to our history with the customer as well as the contractual basis under which we may be operating.
Accordingly, in certain cases based on our historical experience in resolving unapproved change orders with a customer, the associated
profit may be included in backlog. However, if an unapproved change order is under dispute or has been previously rejected by the customer,
the associated amount of revenue is treated as a claim.
For
amounts included in backlog that are attributable to claims, we include unapproved claims in backlog when we have a legal basis to do
so, consider collection to be probable and believe we can reliably estimate the ultimate value. Claims revenue is included in backlog
to the extent of the lesser of the amounts management expects to recover or associated costs incurred.
Backlog
may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers.
Our ability to realize revenue from the current backlog is dependent on among other things, the delivery of key parts from our vendors
in a timely manner. We can provide no assurance as to the profitability of our contracts reflected in backlog.
Economic
conditions may adversely affect consumer spending and the overall general health of our customers, which, in turn, may adversely affect
our financial condition, results of operations and cash resources.
Uncertainty
about the current and future global economic conditions may cause our customers to defer purchases or cancel purchase orders for our
products in response to tighter credit, decreased cash availability and weakened consumer confidence. Our financial success is sensitive
to changes in general economic conditions, both globally and nationally. Recessionary economic cycles, higher interest borrowing rates,
higher fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels,
higher tax rates and other changes in tax laws or other economic factors that may affect consumer spending or buying habits could continue
to adversely affect the demand for our products. If credit pressures or other financial difficulties result in insolvency for our customers,
it could adversely impact our financial results. There can be no assurances that government and consumer responses to the disruptions
in the financial markets will restore consumer confidence.
We
are dependent on a few customers for the majority of our net revenues, and our success depends on demand from OEMs and other users of
our battery products.
Historically
a majority of our product sales have been generated from a small number of OEMs and customers, including four (4) customers who, on an
aggregate basis, made up 69% of our sales for the year ended June 30, 2022, and three (3) customers who, on an aggregate basis, made
up 61% of our sales for the year ended June 30, 2021. As a result, our success depends on continued demand from this small group of customers
and their willingness to incorporate our battery products in their equipment. The loss of a significant customer would have an adverse
effect on our revenues. There is no assurance that we will be successful in our efforts to convince end users to accept our products.
Our failure to gain acceptance of our products could have a material adverse effect on our financial condition and results of operations.
Additionally,
OEMs, their dealers and battery distributors may be subject to changes in demand for their equipment which could significantly affect
our business, financial condition and results of operations.
Our
business is vulnerable to a near-term severe impact from the COVID-19 outbreak, and the continuation of the pandemic could have a material
adverse impact on our operations and financial condition.
COVID-19
and another public health epidemic/pandemic could pose the risk that we or our employees, contractors, customers, suppliers, third party
shipping carriers, government and other partners may be prevented from or limited in their ability to conduct business activities for
an indefinite period of time, including due to the spread of the disease within these groups or due to shutdowns that may be requested
or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our
business, the continued spread of COVID-19 and the measures taken by the governments of states and countries affected could disrupt,
among other things, the supply chain and the manufacture or shipment of our products. Our manufacturing operations may be subject to
closure or shut down for a variety of reasons. While manufacturing operations were not materially impacted, future operations could be
affected by the continued spread of COVID-19. Any substantial disruption in our manufacturing operations from COVID-19, or its related
impacts, would have a material adverse effect on our business and would impede our ability to manufacture and ship products to our customers
in a timely manner, or at all.
The
effect of the COVID-19 pandemic and its associated restrictions may adversely impact many aspects of our business, including customer
demand, the length of our sales cycles, disruptions in our supply chain, lower the operating efficiencies at our facility, worker shortages
and declining staff morale, and other unforeseen disruptions. The demand for our products may significantly decline if the COVID-19 pandemic
continues, restrictions are implemented or re-implemented, or the virus resurges and spreads and our customers suffer losses in their
businesses. The supply of our raw materials and our supply chain may be disrupted and adversely impacted by the pandemic. The occurrence
of any of the foregoing events and their adverse effect on capital markets and investor sentiment may adversely impact our ability to
raise capital when needed or on terms favorable to us and our stockholders to fund our operations, which could have a material adverse
effect on our business, financial condition and results of operations. The extent to which the COVID-19 outbreak impacts our results,
its effect on near or long-term value of our share price are highly uncertain and cannot be predicted, including new information that
may emerge concerning the severity of the virus and the actions to contain its impact.
We
do not have long term contracts with our customers.
We
do not have long-term contracts with our customers. Future agreements with respect to pricing, returns, promotions, among other things,
are subject to periodic negotiation with each customer. No assurance can be given that our customers will continue to do business with
us. The loss of any of our significant customers will have a material adverse effect on our business, results of operations, financial
condition and liquidity. In addition, the uncertainty of product orders can make it difficult to forecast our sales and allocate our
resources in a manner consistent with actual sales, and our expense levels are based in part on our expectations of future sales. If
our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls.
Real
or perceived hazards associated with Lithium-ion battery technology may affect demand for our products.
Press
reports have highlighted situations in which lithium-ion batteries in automobiles and consumer products have caught fire or exploded.
In response, the use and transportation of lithium-ion batteries has been prohibited or restricted in certain circumstances. This publicity
has resulted in a public perception that lithium-ion batteries are dangerous and unpredictable. Although we believe our battery packs
are safe, these perceived hazards may result in customer reluctance to adopt our lithium-ion based technology.
Our
products may experience quality problems from time to time that could result in negative publicity, litigation, product recalls and warranty
claims, which could result in decreased revenues and harm to our brands.
A
catastrophic failure of our battery modules could cause personal or property damages for which we would be potentially liable. Damage
to or the failure of our battery packs to perform to customer specifications could result in unexpected warranty expenses or result in
a product recall, which would be time consuming and expensive. Such circumstances could result in negative publicity or lawsuits filed
against us related to the perceived quality of our products which could harm our brand and decrease demand for our products.
We
may be subject to product liability claims.
If
one of our products were to cause injury to someone or cause property damage, including as a result of product malfunctions, defects,
or improper installation, then we could be exposed to product liability claims. We could incur significant costs and liabilities if we
are sued and if damages are awarded against us. Further, any product liability claim we face could be expensive to defend and could divert
management’s attention. The successful assertion of a product liability claim against us could result in potentially significant
monetary damages, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position, and adversely
affect sales of our products. In addition, product liability claims, injuries, defects, or other problems experienced by other companies
in the solar industry could lead to unfavorable market conditions for the industry as a whole, and may have an adverse effect on our
ability to attract new customers, thus harming our growth and financial performance. Although we carry product liability insurance, it
may be insufficient in amount to cover our claims.
Tariffs
could be imposed on lithium-ion batteries or on any other component parts by the United States government or a resulting trade war could
have a material adverse effect on our results of operations.
In
2018, the United States government announced tariffs on certain steel and aluminum products imported into the United States, which led
to reciprocal tariffs being imposed by the European Union and other governments on products imported from the United States. The United
States government has implemented tariffs on goods imported from China.
The
lithium-ion battery industry has been subjected to tariffs implemented by the United States government on goods imported from China.
There is an ongoing risk of new or additional tariffs being put in place on lithium-ion batteries or related part. Since all of our lithium-ion
batteries are manufactured in China, current and potential tariffs on lithium-ion batteries imported by us from China could increase
our costs, require us to increase prices to our customers or, if we are unable to do so, result in lower gross margins on the products
sold by us. China has already imposed tariffs on a wide range of American products in retaliation for the American tariffs on steel and
aluminum. Additional tariffs could be imposed by China in response to actual or threatened tariffs on products imported from China. The
imposition of additional tariffs by the United States could trigger the adoption of tariffs by other countries as well. Any resulting
escalation of trade tensions, including a “trade war,” could have a significant adverse effect on world trade and the world
economy, as well as on our results of operations. At this time, we cannot predict how such enacted tariffs will impact our business.
Tariffs on components imported by us from China could have a material adverse effect on our business and results of operations.
We
are dependent on a limited number of suppliers for our battery cells, and the inability of these suppliers to continue to deliver, or
their refusal to deliver, our battery cells at prices and volumes acceptable to us would have a material adverse effect on our business,
prospects and operating results.
We
do not manufacture the battery cells used in our energy storage packs. Our battery cells, which are an integral part of our battery products
and systems, are sourced from a limited number of manufacturers located in China. While we obtain components for our products and systems
from multiple sources whenever possible, we have spent a great deal of time in developing and testing our battery cells that we receive
from our suppliers. We refer to the battery cell suppliers as our “limited source suppliers.” Additionally,
our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ products and their
ability to continue to manufacture products that are competitive and that comply with laws relating to environmental and efficiency standards.
Our inability to obtain products from one or more of these suppliers or a decline in market acceptance of these suppliers’ products
could have a material adverse effect on our business, results of operations and financial condition. From time to time we have experienced
shortages, allocations and discontinuances of certain components and products, resulting in delays in filling orders. Qualifying new
suppliers to compensate for such shortages may be time-consuming and costly. In addition, we may have to recertify our UL Listings for
the battery cells from new suppliers, which in turn has led to delays in product acceptance. Similar delays may occur in the future.
Furthermore, the performance of the components from our suppliers as incorporated in our products may not meet the quality requirements
of our customers.
To
date, we have no qualified alternative sources for our battery cells although we research and assess cells from other suppliers on an
ongoing basis. We generally do not maintain long-term agreements with our limited source suppliers. While we believe that we will be
able to establish additional supplier relationships for our battery cells, we may be unable to do so in the short term or at all at prices,
quality or costs that are favorable to us.
Changes
in business conditions, wars, regulatory requirements, economic conditions and cycles, governmental changes, pandemic, and other factors
beyond our control could also affect our suppliers’ ability to deliver components to us on a timely basis or cause us to terminate
our relationship with them and require us to find replacements, which we may have difficulty doing. Furthermore, if we experience significant
increased demand, or need to replace our existing suppliers, there can be no assurance that additional supplies of component parts will
be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in
order to meet our requirements or fill our orders in a timely manner. In the past, we have replaced certain suppliers because of their
failure to provide components that met our quality control standards. The loss of any limited source supplier or the disruption in the
supply of components from these suppliers could lead to delays in the deliveries of our battery products and systems to our customers,
which could hurt our relationships with our customers and also materially adversely affect our business, prospects and operating results.
Increases
in costs, disruption of supply or shortage of raw materials, in particular lithium-ion phosphate cells, could harm our business.
We
may experience increases in the costs, or a sustained interruption in the supply or shortage, of raw materials. Any such cost increase
or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. For instance,
we are exposed to multiple risks relating to price fluctuations for lithium-iron phosphate cells.
These
risks include:
|
● |
the
inability or unwillingness of battery manufacturers to supply the number of lithium-iron phosphate cells required to support our
sales as demand for such rechargeable battery cells increases; |
|
|
|
|
● |
disruption
in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and |
|
|
|
|
● |
an
increase in the cost of raw materials, such as iron and phosphate, used in lithium-iron phosphate cells. |
Our
success depends on our ability to develop new products and capabilities that respond to customer demand, industry trends or actions by
our competitors and failure to do so may cause us to lose our competitiveness in the battery industry and may cause our profits to decline.
Our
success will depend on our ability to develop new products and capabilities that respond to customer demand, industry trends or actions
by our competitors. There is no assurance that we will be able to successfully develop new products and capabilities that adequately
respond to these forces. In addition, changes in legislative, regulatory or industry requirements or in competitive technologies may
render certain of our products obsolete or less attractive. If we are unable to offer products and capabilities that satisfy customer
demand, respond adequately to changes in industry trends or legislative changes and maintain our competitive position in our markets,
our financial condition and results of operations would be materially and adversely affected.
The
research and development of new products and technologies is costly and time consuming, and there are no assurances that our research
and development efforts will be either successful or completed within anticipated timeframes, if at all. Our failure to technologically
evolve and/or develop new or enhanced products may cause us to lose competitiveness in the battery market. In addition, in order to compete
effectively in the renewable battery industry, we must be able to launch new products to meet our customers’ demands in a timely
manner. However, we cannot provide assurance that we will be able to install and certify any equipment needed to produce new products
in a timely manner, or that the transitioning of our manufacturing facility and resources to full production under any new product programs
will not impact production rates or other operational efficiency measures at our manufacturing facility. In addition, new product introductions
and applications are risky, and may suffer from a lack of market acceptance, delays in related product development and failure of new
products to operate properly. Any failure by us to successfully launch new products, or a failure by us to meet our customers criteria
in order to accept such products, could adversely affect our results.
Our
business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement
by third parties.
Any
failure to protect our intellectual proprietary rights could result in our competitors offering similar products, potentially resulting
in the loss of some of our competitive advantage and a decrease in our revenue, which would adversely affect our business, prospects,
financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual
property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and
third-party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish
and protect our proprietary rights in our technology.
The
protections provided by patent laws will be important to our future opportunities. However, such patents and agreements and various other
measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:
|
● |
the
patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented
intellectual property rights or for other reasons; |
|
|
|
|
● |
the
costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make
aggressive enforcement impracticable; and |
|
|
|
|
● |
existing
and future competitors may independently develop similar technology and/or duplicate our systems in a way that circumvents our patents. |
Our
patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from
commercially exploiting products similar to ours.
We
cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications
on these inventions, nor can we be certain that our pending patent applications will result in issued patents or that any of our issued
patents will afford protection against a competitor. In addition, patent applications that we intend to file in foreign countries are
subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent
applications related to issue United States patents will be issued. Furthermore, if these patent applications issue, some foreign countries
provide significantly less effective patent enforcement than in the United States.
The
status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, we cannot
be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may
be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to
us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either
of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.
We
rely on trade secret protections through confidentiality agreements with our employees, customers and other parties; the breach of such
agreements could adversely affect our business and results of operations.
We
rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees, customers
and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any
such breach or that our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that
consultants, key employees or other third parties apply technological information independently developed by them or by others to our
proposed projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may
be involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such litigation
could result in substantial cost and diversion of effort by our management and technical personnel.
Our
business depends substantially on the continuing efforts of the members of our senior management team, and our business may be severely
disrupted if we lose their services.
We
believe that our success is largely dependent upon the continued service of the members of our senior management team, who are critical
to establishing our corporate strategies and focus, overseeing the execution of our business strategy and ensuring our continued growth.
Our continued success will depend on our ability to attract and retain a qualified and competent management team in order to manage our
existing operations and support our expansion plans. Although we are not aware of any change, if any of the members of our senior management
team are unable or unwilling to continue in their present positions, we may not be able to replace them readily. Therefore, our business
may be severely disrupted, and we may incur additional expenses to recruit and retain their replacement. In addition, if any of the members
of our senior management team joins a competitor or forms a competing company, we may lose some of our customers.
If
we are forced to implement workforce reductions, our staff resources will be stretched making our ability to comply with legal and regulatory
requirements as a Public Company difficult.
There
can be no assurance that our management team will be able to implement and affect programs and policies in an effective and timely manner
especially if subject to workforce reductions, that adequately respond to increased legal, regulatory compliance and reporting requirements
imposed by such laws and regulations. Our failure to comply with such laws and regulations could lead to the imposition of fines and
penalties and further result in the deterioration of our business.
Compliance
with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
There
have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the (Sarbanes-Oxley)
Act of 2002, new regulations promulgated by the SEC and rules promulgated by the national securities exchanges. These new or changed
laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result
in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance
practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities. Members of our Board of Directors and our chief executive officer and chief financial officer could face an increased risk
of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining
qualified directors and executive officers, which could harm our business. If the actions we take in our efforts to comply with new or
changed laws, regulations and standards differ from the actions intended by regulatory or governing bodies, we could be subject to liability
under applicable laws or our reputation may be harmed.
In
addition, Sarbanes-Oxley specifically requires, among other things, that we maintain effective internal controls for financial reporting
and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls
over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required
by Section 404 of Sarbanes-Oxley. Our testing, or the subsequent testing by our independent registered public accounting firm, when required,
may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with
Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not
have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or
if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting
that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations
by the SEC or other regulatory authorities, which would require additional financial and management resources.
We have
identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses,
or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls,
we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business
and stock price.
Based
on management’s evaluation of our disclosure controls and procedures as of June 30, 2022, we identified material weaknesses in
our internal controls over financial reporting. The material weaknesses were based on our ineffective oversight of our internal control
over financial reporting and lack of sufficient review and approval of the underlying data used in the calculation of warranty reserve.
We are taking remedial measures designed to improve our internal control over financial reporting to remediate material weaknesses, We
are implementing additional control procedures to strengthen the oversight of the Company’s internal control over financial reporting
through review and sign off by the senior management of all significant assumptions and estimates being used and the underlying the data
used in producing financial schedules/estimates and financial reporting. We are also adding a second level of review and approval for
all manual journal entries for significant estimates and assumptions made by management.
We
are committed to remediating our material weakness. However, there can be no assurance as to when this material weakness will be remediated
or that additional material weaknesses will not arise in the future. If we are unable to maintain effective internal control over financial
reporting, our ability to record, process and report financial information timely and accurately could be adversely affected and could
result in a material misstatement in our financial statements, which could subject us to litigation or investigations, require management
resources, increase our expenses, negatively affect investor confidence in our financial statements and adversely impact the trading
price of our common stock.
We
may face significant costs relating to environmental regulations for the storage and shipment of our lithium-ion battery packs.
Federal,
state, and local regulations impose significant environmental requirements on the manufacture, storage, transportation, and disposal
of various components of advanced energy storage systems. Although we believe that our operations are in material compliance with applicable
environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements
on us or otherwise subject us to future liabilities. Moreover, Federal, state, and local governments may enact additional regulations
relating to the manufacture, storage, transportation, and disposal of components of advanced energy storage systems. Compliance with
such additional regulations could require us to devote significant time and resources and could adversely affect demand for our products.
There can be no assurance that additional or modified regulations relating to the manufacture, storage, transportation, and disposal
of components of advanced energy systems will not be imposed.
Natural
disasters, public health crises, political crises and other catastrophic events or other events outside of our control may damage our
sole facility or the facilities of third parties on which we depend, and could impact consumer spending.
Our
sole production facility is located in southern California near major geologic faults that have experienced earthquakes in the past.
An earthquake or other natural disaster or power shortages or outages could disrupt our operations or impair critical systems. Any of
these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition,
if our sole facility, or the facilities of our suppliers, third-party service providers or customers, is affected by natural disasters,
such as earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics,
political crises, such as terrorism, war, political instability or other conflict, or other events outside of our control, our business
and operating results could suffer. Moreover, these types of events could negatively impact consumer spending in the impacted regions
or, depending upon the severity, globally, which could adversely impact our operating results. Similar disasters occurring at our vendors’
manufacturing facilities could impact our reputation and our consumers’ perception of our brands.
Security
breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing
critical information or expose us to liability, which could adversely affect our business and our reputation.
We
utilize information technology systems and networks to process, transmit and store electronic information in connection with our business
activities. As the use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized
access to computer systems and networks and divert financial resources, have increased in frequency and sophistication. These threats
pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data, all of which
are vital to our operations and business strategy. There can be no assurance we will succeed in preventing cyber-attacks or successfully
mitigating their effects.
Despite
implementing security measures, any of the internal computer systems belonging to us or our suppliers are vulnerable to damage from computer
viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failure. Any system failure, accident,
security breach or data breach that causes interruptions could result in a material disruption of our product development programs. Further,
our information technology and other internal infrastructure systems, including firewalls, servers, leased lines and connection to the
Internet, face the risk of systemic failure, which could disrupt our operations. If any disruption or security breach results in a loss
or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we may incur resulting
liability, and competitive position may be adversely affected, and the further development of our products may be delayed. Furthermore,
we may incur additional costs to remedy the damage caused by these disruptions or security breaches.
Risks
Related to Our Common Stock and Market
The
market price of our common stock could become volatile, or our trading volume become weak, either of which could lead to the price of
our stock being depressed at a time when you may want to sell.
Our
common stock is being traded on The NASDAQ Capital Market under the symbol “FLUX.” We cannot predict the extent to which
investor interest in our common stock will lead to the development of an active trading market on that stock exchange or any other exchange
in the future. An active market for our common stock may never develop. We cannot assure you that the volume of trading in shares of
our common stock will increase in the future. The trading price of our common stock has experienced volatility and is likely to continue
to be highly volatile in response to numerous factors, many of which are beyond our control, including, without limitation, the following:
|
● |
our
earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the
expectations of financial market analysts and investors; |
|
|
|
|
● |
changes
in financial estimates by securities analysts, if any, who might cover our stock; |
|
|
|
|
● |
speculation
about our business in the press or the investment community; |
|
|
|
|
● |
significant
developments relating to our relationships with our customers or suppliers; |
|
|
|
|
● |
stock
market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry; |
|
|
|
|
● |
customer
demand for our products; |
|
|
|
|
● |
investor
perceptions of our industry in general and our Company in particular; |
|
|
|
|
● |
general
economic conditions and trends; |
|
|
|
|
● |
announcements
by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; |
|
|
|
|
● |
changes
in accounting standards, policies, guidance, interpretation or principles; |
|
|
|
|
● |
loss
of external funding sources; |
|
|
|
|
● |
sales
of our common stock, including sales by our directors, officers or significant stockholders; and |
|
|
|
|
● |
additions
or departures of key personnel. |
The
trading price and volume of our common stock may impact your ability to sell your shares of common stock, causing you to lose all or
part of your investment.
The
ownership of our stock is highly concentrated in our management, and we have one controlling stockholder.
As
of September 12, 2022, our directors and executive officers, and their respective affiliates beneficially owned approximately 29% of
our outstanding common stock, including common stock underlying options, and warrants that were exercisable or convertible or which would
become exercisable or convertible within 60 days. Michael Johnson, our director and beneficial owner of Esenjay, beneficially owns approximately
28% of such outstanding common stock. As a result of their ownership, our directors and executive officers and their respective affiliates
collectively, and Esenjay, individually, are able to significantly influence all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control.
We
do not intend to pay dividends on shares of our common stock for the foreseeable future.
We
have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings to fund the operation
and expansion of our business and, therefore, we do not anticipate paying cash dividends on shares of our common stock in the foreseeable
future.
Although
our common stock is listed on The NASDAQ Capital Market, there can be no assurance that we will be able to comply with continued listing
standards of The NASDAQ Capital Market.
Although
our common stock is listed on The NASDAQ Capital Market, we cannot assure you that we will be able to continue to comply with the minimum
bid price requirement, stockholder equity requirement and the other standards that we are required to meet in order to maintain a listing
of our common stock on The NASDAQ Capital Market. Our failure to continue to meet these requirements may result in our common stock being
delisted from The NASDAQ Capital Market. There can be no assurance that our common stock will continue to trade on The Nasdaq Capital
Market or trade on the over-the counter markets or any public market in the future. In the event our common stock is delisted, our stock
price and market liquidity of our stock will be adversely affected which will impact your ability to sell your securities in the market.
Preferred
Stock may be issued under our Articles of Incorporation which may have superior rights to our common stock.
Our
Articles of Incorporation authorize the issuance of up to 500,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance. These terms may include voting rights including the right
to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking
fund provisions. In addition, these voting, conversion and exchange rights of preferred stock could negatively affect the voting power
or other rights of our common stockholders. The issuance of any preferred stock could diminish the rights of holders of our common stock,
or delay or prevent a change of control of our Company, and therefore could reduce the value of such common stock.
ITEM
1B - UNRESOLVED STAFF COMMENTS
None.
ITEM
2 - PROPERTIES
Our
corporate headquarters and production facility totals approximately 63,200 square feet and is located in Vista, California. Our production
facility is ISO 9001 certified. We lease this property. Rent during the year ended June 30, 2022 was approximately $62,000 per month,
and our annual rent will escalate approximately 3% per year through the end of the lease term on November 20, 2026. Total rent expense
was approximately $867,000 and $841,000 for the years ended June 30, 2022 and 2021, respectively.
We
believe that our leased property is in good condition and suitable for the conduct of our business.
ITEM
3 - LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may
harm our business. To the best knowledge of management, there are no material legal proceedings pending against us.
ITEM
4 - MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors,
Executive Officers and Significant Employees
The
following table and text set forth the names and ages of our current directors, executive officers and significant employees as of September
12, 2022. Our Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders
or until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family
relationships among any of the directors and executive officers. From time to time, our directors have received compensation in the form
of cash and equity grant for their services on the Board.
Name
|
|
Age
|
|
Position |
Ronald
F. Dutt |
|
75
|
|
Director,
Chief Executive Officer and President |
Charles
A. Scheiwe |
|
56
|
|
Chief
Financial Officer and Secretary |
Michael
Johnson |
|
74
|
|
Director |
Lisa
Walters-Hoffert(1)(2) |
|
64
|
|
Director |
Dale
Robinette(1)(3) |
|
58
|
|
Director |
Cheemin
Bo-Linn (1)(4) |
|
68
|
|
Director |
(1) |
Independent
Director |
(2) |
Chairperson
of the Audit Committee, Member of Compensation Committee and Governance Committee |
(3) |
Lead
Independent Director, Chairperson of the Compensation Committee, Member of Audit Committee and Governance Committee |
(4) |
Ms.
Bo-Linn was appointed to the Board on January 14, 2022. Ms. Bo-Linn is the Chairperson of the Nominating and Corporate Governance
Committee (“Governance Committee”) and a Member of the Audit Committee and Compensation Committee. |
There
are no arrangements or understandings between our directors and executive officers and any other person pursuant to which any director
or officer was or is to be selected as a director or officer.
Business
Experience
Ronald
F. Dutt. Chairman, Chief Executive Officer, President, and Director. Mr. Dutt has been our chief executive officer, former
interim chief financial officer and director since March 19, 2014. He became our chairman on June 28, 2019. On September 19, 2017, he
was also appointed as our president, chief financial officer and corporate secretary. He resigned as chief financial officer and corporate
secretary as of December 16, 2018. 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. Prior to Flux
Power, Mr. Dutt provided chief financial officer and chief operating officer consulting services during 2008 through 2012. In this capacity
Mr. Dutt provided financial consulting, including strategic business modeling and managed operations. Prior to 2008, Mr. Dutt served
in several capacities as executive vice president, chief financial officer and treasurer for various public and private companies including
SOLA International, Directed Electronics, Fritz Companies, DHL Americas, Aptera Motors, Inc., and Visa International. Mr. Dutt holds
an MBA in Finance from University of Washington and an undergraduate degree in Chemistry from the University of North Carolina. Additionally,
Mr. Dutt served in the United States Navy and received an honorable discharge as a Lieutenant.
Charles
A. Scheiwe, Chief Financial Officer and Secretary. Mr. Scheiwe joined the Company in July of 2018 and has been acting as the Company’s
Controller since July 9, 2018. He was appointed as our chief financial officer and secretary on December 17, 2018. Prior to joining the
Company, Mr. Scheiwe was the controller of Senstay, Inc. and provided financial and accounting consulting services to start-up companies
from 2016 to 2018. From 2006 to 2016, Mr. Scheiwe was the vice president of finance and controller for GreatCall, Inc. Mr. Scheiwe’s
experience in accounting, financial planning and analysis, business intelligence, cash management, and equity management has prepared
and qualified him for the position of chief financial officer and secretary of the Company. Mr. Scheiwe has a Bachelor of Science degree
in Business Management, with emphasis in Accounting, from the University of Colorado. Mr. Scheiwe also holds a CPA certificate.
Michael
Johnson, Director. Mr. Johnson has been our director since July 12, 2012. Mr. Johnson has been a director of Flux Power since it
was incorporated. Since 2002, Mr. Johnson has been a director and the chief executive officer of Esenjay Petroleum Corporation (Esenjay
Petroleum), a Delaware company located in Corpus Christi, Texas, which is engaged in the business oil exploration and production. Mr.
Johnson’s primary responsibility at Esenjay Petroleum is to manage the business and company as chief executive officer. Mr. Johnson
is a director and beneficial owner of Esenjay Investments LLC, a Delaware limited liability company engaged in the business of investing
in companies, and an affiliate of the Company owning approximately 28.0% of our outstanding shares, including common stock underlying
options, and warrants that were exercisable or convertible or which would become exercisable or convertible within sixty (60) days. As
a result of Mr. Johnson’s leadership and business experience, he is an industry expert in the natural gas exploration industry
and brings a wealth of management and successful company building experience to the board. Mr. Johnson received a Bachelor of Science
degree in mechanical engineering from the University of Southwestern Louisiana.
Lisa
Walters-Hoffert, Director. Ms. Walters-Hoffert was appointed to our Board on June 28, 2019. Ms. Walters-Hoffert was a co-founder
of Daré Bioscience, Inc. and following the company’s merger with Cerulean Pharma, Inc. in July of 2017, became Chief Financial
Officer of the surviving public company (NASDAQ: DARE). For over twenty-five (25) years, Ms. Walters-Hoffert was an investment banker
focused on small-cap public companies in the technology and life science sectors. From 2003 to 2015, Ms. Walters-Hoffert worked at Roth
Capital Partners as Managing Director in the Investment Banking Division. Ms. Walters-Hoffert has held various positions in the corporate
finance and investment banking divisions of Citicorp Securities in San José, Costa Rica and Oppenheimer & Co, Inc. in New
York City, New York. Ms. Walters-Hoffert has served as a member of the Board of Directors of the San Diego Venture Group, as Past Chair
of the UCSD Librarian’s Advisory Board, and as Past Chair of the Board of Directors of Planned Parenthood of the Pacific Southwest.
Ms. Walters-Hoffert currently serves as a member of the Board of Directors of The Elementary Institute of Science in San Diego. Ms. Walters-Hoffert
graduated magna cum laude from Duke University with a B.S. in Management Sciences. As a senior financial executive with over twenty-five
years of experience in investment banking and corporate finance and based on Ms. Walters-Hoffert’s expertise in audit, compliance,
valuation, equity finance, mergers, and corporate strategy, the Company believes Ms. Walters-Hoffert is qualified to be on the Board.
Dale
T. Robinette, Director. Mr. Robinette was appointed to our Board on June 28, 2019 and our lead independent director on September
10, 2021. Mr. Robinette has been a CEO Coach and Master Chair since 2013 as an independent contractor to Vistage Worldwide, Inc., an
executive coaching company. In addition, since 2013 Mr. Robinette has been providing business consulting related to top-line growth and
bottom-line improvement through his company EPIQ Development. From 2013 to 2019, Mr. Robinette was the Founder and CEO of EPIQ Space,
a marketing website for the satellite industry, a member-based community of suppliers promoting their offerings. Mr. Robinette was with
Peregrine Semiconductor, Inc., a manufacturer of high-performance RF CMOS integrated circuits, from 2007 to 2013 in two roles as a Director
of Worldwide Sales as well as the Director of the High Reliability Business Unit. Mr. Robinette started his career from 1991 to 2007
at Tyco Electronics Ltd. (known today as TE Connectivity Ltd.), a passive electronics manufacturer, in various sales, sales leadership
and product development leadership roles. Mr. Robinette received a Bachelor of Science degree in Business Administration, Marketing from
San Diego State University. Based on the above qualifications, the Company believes Mr. Robinette is qualified to be on the Board.
Cheemin
Bo-Linn, Director. Ms. Bo-Linn was appointed to our board January 14, 2022. Ms. Bo-Linn is
currently a director of Data I/O Corp (Nasdaq: DAIO), a company in advanced security and data deployment, since
December 2021, as a director KORE Group Holdings, Inc. (NYSE: KORE), an Internet of Things (“IoT”) solutions and connectivity-as-a-service
company since October 2021, and as a director of Blackline Safety Corp. (TSX: BLN), a Canadian public company specializing in
advanced security and data deployment, since November 2020. In addition, Ms. Bo-Linn was
the Chief Executive Officer of Peritus Partners, Inc., a valuation accelerator and information technology operations and consulting company,
from 2013 to 2022. Ms. Bo-Linn experience include 20+ years in multiple senior executive roles with International Business Machines Corporation
(NYSE: IBM), including leading global teams as IBM’s Vice-President, and has also held C-suite roles or board positions at small
to midcap public and private companies. Ms. Bo-Linn holds a Doctorate in Education in “Computer-based Management Information Systems
and Organizational Change” from the University of Houston. The Board believes that Dr. Bo-Linn’s extensive executive management
and board experience in private and public companies qualifies her to serve on the Board of Directors.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following:
(1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree,
not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodities Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Board
Leadership Structure and Role in Risk Oversight
Our
Board of Directors (“Board”) recognizes that one of its key responsibilities is to evaluate and determine its optimal leadership
structure to provide independent oversight of management. Our Board is currently led by a Chairman of the Board who also serves as our
Chief Executive Officer. The Board understands that the right Board leadership structure may vary depending on the circumstances, and
our independent directors periodically assess these roles and the Board leadership to ensure the leadership structure best serves the
interests of the Company and stockholders.
On
September 10, 2021, the Board adopted the Lead Independent Director Guidelines (“Guidelines.). The Guidelines provide that when
the positions of Chief Executive Officer and Chairman of the Board are combined or the Chairman is not an independent director, the independent
directors will appoint a lead independent director to serve with the authority and responsibility described in such Guidelines, and as
the Board and/or the independent directors may determine from time to time. The Guidelines are available on our website at www.fluxpower.com.
Mr.
Dutt currently holds the Chairman and Chief Executive Officer roles. Mr. Robinette currently serves as the Lead Independent Director
elected by the majority of the Board on September 10, 2021.
The
responsibilities of the Lead Independent Director include, among others: (i) serving as primary intermediary between non-employee directors
and management; (ii) working with the Chairman of the Board to approve the agenda and meeting schedules for the Board; (iii) working
with the Chairman of the Board as to the quality, quantity and timeliness of the information provided to directors; (iv) in consultation
with the Nominating and Governance Committee, reviewing and reporting on the results of the Board and Committee performance self-evaluations;
(v) calling additional meetings of independent directors; and (vi) serving as liaison for consultation and communication with stockholders.
We
believe the current leadership structure, with combined Chairman and Chief Executive Officer roles and a Lead Independent Director, best
serves the Company and its stockholders at this time. Mr. Robinette possesses understanding and knowledge of the business and affairs
of the Company and has the ability to devote a substantial amount of time to serve in this capacity. In addition, we believe having one
leader serving as both the Chairman and Chief Executive Officer provides decisive, consistent and effective leadership, as well as clear
accountability to our stockholders and customers. This enhances our ability to communicate our message and strategy clearly and consistently
to our stockholders, employees, customers and suppliers. The Board believes the appointment of a strong Lead Independent Director and
the use of regular executive sessions of the non-management directors, along with a majority the Board being composed of independent
directors, allow it to maintain effective oversight of management. We believe that the combination of the Chairman and Chief Executive
Officer roles is appropriate in the current circumstances and, based on the relevant facts and circumstances, separation of these offices
would not serve our best interests and the best interests of our stockholders at this time.
In
addition, our Board as a whole has responsibility for risk oversight. Our Board exercises this risk oversight responsibility directly
and through its committees. The risk oversight responsibility of our Board and its committees is informed by reports from our management
teams to provide visibility to our Board about the identification, assessment and management of key risks, and our management’s
risk mitigation strategies. Our Board has primary responsibility for evaluating strategic and operational risk, including related to
significant transactions. Our audit committee has primary responsibility for overseeing our major financial and accounting risk exposures,
and, among other things, discusses guidelines and policies with respect to assessing and managing risk with management and our independent
auditor. Our compensation committee has responsibility for evaluating risks arising from our compensation and people policies and practices.
Our nominating and corporate governance committee has responsibility for evaluating risks relating to our corporate governance practices.
Our committees and management provide reports to our Board on these matters.
In
its governance role, and particularly in exercising its duty of care and diligence, our Board is responsible for ensuring that appropriate
risk management policies and procedures are in place to protect the Company’s assets and business. Our Board has broad and ultimate
oversight responsibility for our risk management processes and programs and executive management is responsible for the day-to-day evaluation
and management of risks to the Company.
Board
Composition, Committees and Independence
Under
the rules of NASDAQ, “independent” directors must make up a majority of a listed company’s Board of Directors. In addition,
applicable NASDAQ rules require that, subject to specified exceptions, each member of a listed company’s audit and compensation
committees be independent within the meaning of the applicable NASDAQ rules. Audit committee members must also satisfy the independence
criteria set forth in Rule 10A-3 under the Exchange Act.
Our
Board has undertaken a review of the independence of each director and considered whether any director has a material relationship with
us that could compromise the director’s ability to exercise independent judgment in carrying out his or her responsibilities. As
a result of this review, our Board determined that Ms. Walters-Hoffert, Ms. Bo-Linn and Mr. Robinette are independent directors as defined
in the listing standards of NASDAQ and SEC rules and regulations. A majority of our directors are independent, as required under applicable
NASDAQ rules. As required under applicable NASDAQ rules, our independent directors will meet in regularly scheduled executive sessions
at which only independent directors are present.
Board
Committees
Our
Board has established an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee. The composition and responsibilities
of each of the committees is described below.
Audit
Committee
The
Audit Committee of the Board of Directors currently consists of three independent directors of which at least one, the Chairman of the
Audit Committee, qualifies as a qualified financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Ms. Walters-Hoffert is
the Chairperson of the Audit Committee and financial expert, and Mr. Robinette and Ms. Bo-Linn are the other directors who are members
of the Audit Committee. The Audit Committee’s duties are to recommend to our Board of Directors the engagement of the independent
registered public accounting firm to audit our consolidated financial statements and to review our accounting and auditing principles.
The Audit Committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by any internal
auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls.
The Audit Committee will at all times be composed exclusively of directors who are, in the opinion of our Board of Directors, free from
any relationship that would interfere with the exercise of independent judgment as a committee member and who possess an understanding
of consolidated financial statements and generally accepted accounting principles. Our Audit Committee operates under a written charter,
which is available on our website at www.fluxpower.com.
Compensation
Committee
The
Compensation Committee establishes our executive compensation policy, determines the salary and bonuses of our executive officers and
recommends to the Board stock option grants or other incentive equity awards for our executive officers. Mr. Robinette is the Chairperson
of the Compensation Committee, and Ms. Walters-Hoffert and Ms. Bo-Linn are members of the Compensation Committee. Each of the members
of our Compensation Committee are independent under NASDAQ’s independence standards for compensation committee members. Our chief
executive officer often makes recommendations to the Compensation Committee and the Board concerning compensation of other executive
officers. The Compensation Committee seeks input on certain compensation policies from the chief executive officer. Our Compensation
Committee operates under a written charter, which is available on our website at www.fluxpower.com.
Nominating
and Governance Committee
The
Nominating and Governance Committee is responsible for matters relating to the corporate governance of our Company and the nomination
of members of the Board and committees of the Board. Ms. Bo-Linn is Chairperson of the Nominating and Governance Committee, and Ms. Walters-Hoffert
and Mr. Robinette are members. Each of the members of our Nominating and Governance Committee is independent under NASDAQ’s independence
standards. The Nominating and Governance Committee operates under a written charter, which was amended on January 14, 2022. The Amended
Nominating and Corporate Governance Committee Charter is available on our website at www.fluxpower.com.
We
seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our
business. We seek directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing
to engage management and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment
to devote significant time and energy to serve on the Board and its committees. We believe that all of our directors meet the foregoing
qualifications. We do not have a formal policy with respect to diversity.
Code
of Business Conduct and Ethics
Our
Board has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of our directors, officers, and
employees. Any waivers of any provision of this Code for our directors or officers may be granted only by the Board or a committee appointed
by the Board. Any waivers of any provisions of this Code for an employee or a representative may be granted only by our chief executive
officer or principal accounting officer. We have filed a copy of the Code with the SEC and have made it available on our website at https://www.fluxpower.com/corporate-governance.
In addition, we will provide any person, without charge, a copy of this Code. Requests for a copy of the Code may be made by writing
to the Company at is c/o Flux Power Holdings, Inc., 2685 S. Melrose Drive, Vista, California 92081.
Indemnification
Agreements
We
executed a standard form of indemnification agreement (“Indemnification Agreement”) with each of our Board members and executive
officers (each, an “Indemnitee”).
Pursuant
to and subject to the terms, conditions and limitations set forth in the Indemnification Agreement, we agreed to indemnify each Indemnitee,
against any and all expenses incurred in connection with the Indemnitee’s service as our officer, director and or agent, or is
or was serving at our request as a director, officer, employee, agent or advisor of another corporation, partnership, joint venture,
trust, limited liability company, or other entity or enterprise but only if the Indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to our best interest, and in the case of a criminal proceeding, had no reasonable cause to believe that
his conduct was unlawful. In addition, the indemnification provided in the indemnification agreement is applicable whether or not negligence
or gross negligence of the Indemnitee is alleged or proven. Additionally, the Indemnification Agreement establishes processes and procedures
for indemnification claims, advancement of expenses and costs and contribution obligations.
ITEM
11 - EXECUTIVE COMPENSATION
Compensation
for our Named Executive Officers
The
following table sets forth information concerning all forms of compensation earned by our named executive officers during Fiscal 2022
and Fiscal 2021 for services provided to the Company and its subsidiary.
Name
and Principal Position | |
Year | |
Salary
($) | | |
Bonus
($) | | |
Stock
Awards(1)
($) | | |
Option
Awards(2)
($) | | |
Non-Equity
Incentive Plan Compensation
($) | | |
All
Other Compensation ($) | | |
Total
($) | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Ronald
F. Dutt, Chief Executive | |
2022 | |
$ | 275,000 | | |
$ | 55,055 | | |
$ | 138,702 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 468,757 | |
Officer,
President, and Chairman | |
2021 | |
$ | 242,288 | | |
$ | 133,525 | | |
$ | 234,681 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 610,494 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Charles
A. Scheiwe | |
2022 | |
$ | 205,200 | | |
$ | 28,757 | | |
$ | 72,450 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 306,407 | |
Chief
Financial Officer and Corporate Secretary | |
2021 | |
$ | 187,635 | | |
$ | 77,055 | | |
$ | 124,853 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 389,543 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jonathan
A. Berry | |
2022 | |
$ | 205,200 | | |
$ | - | | |
$ | 72,450 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 277,650 | |
Former
Chief Operating Officer(3) | |
2021 | |
$ | 188,077 | | |
$ | 77,055 | | |
$ | 124,853 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 389,985 | |
(1) |
Represent
the fair value of the RSUs granted on grant date. |
(2) |
The
grant date fair value was determined in accordance with the provisions of FASB ASC Topic No. 718 using the Black-Scholes valuation
model with assumptions described in more detail in the notes to our audited financial statements included in this report. |
(3) |
Mr.
Berry separated from the Company on August 12, 2022. |
Benefit
Plans
We
do not have any profit sharing plan or similar plans for the benefit of our officers, directors or employees. However, we may establish
such plan in the future.
Equity
Compensation Plan Information
In
connection with the reverse acquisition of Flux Power, Inc. in 2012, we assumed the 2010 Plan. As of June 30, 2022, the number of options
outstanding to purchase common stock under the 2010 Plan was 21,944. No additional options to purchase common stock may be granted under
the 2010 Plan.
On
February 17, 2015, our shareholders approved our 2014 Equity Incentive Plan (“2014 Plan”), which was amended on July 23,
2018 and on November 5, 2020. The 2014 Plan authorizes the issuance of awards for up to 1,000,000 shares of our common stock in the form
of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units, restricted stock awards and
unrestricted stock awards to officers, directors and employees of, and consultants and advisors to, the Company or its affiliates. No
options were granted during Fiscal 2022 and 2021. We granted 250,786 and 153,177 restricted stock units under the 2014 Plan during Fiscal
2022 and 2021, respectively.
On
April 29, 2021, at the Company’s annual stockholders meeting, the 2021 Equity Incentive Plan (the “2021 Plan”) was
approved by our stockholders. The 2021 Plan authorizes the issuance of awards for up to 2,000,000 shares of our common stock in the form
of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units, restricted stock awards and
unrestricted stock awards to officers, directors and employees of, and consultants and advisors to, the Company or its affiliates. No
awards were granted under the 2021 Plan during Fiscal 2022 and 2021.”
As
of June 30, 2022, we had 503,433 options outstanding and exercisable under the 2014 Plan and the 2010 Plan. In addition, as of June 30,
2022, we had 304,221 RSUs outstanding under the 2014 Plan. There were no options or RSUs issued or outstanding under the 2021 Plan as
of June 30, 2022.
The
following table sets forth certain information concerning unexercised options, stock that has not vested, and equity compensation plan
awards outstanding as of June 30, 2022 for the named executive officers below:
|
|
Option
Awards (1) |
|
|
Stock
Awards |
|
Name |
|
Award
Grant Date |
|
|
Number
of Securities Underlying Unexercised Options Exercisable |
|
|
Number
of Securities Underlying Unexercised Options Unexercisable |
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options |
|
|
Option
Exercise Price ($) |
|
|
Option
Expiration Date |
|
|
Number
of Shares or Units of Stock That Have Not Vested |
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($) |
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested |
|
|
Equity
Incentive Plan: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
|
Ronald
Dutt |
|
|
3/15/2019
|
|
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
|
$ |
13.60 |
|
|
|
3/15/2029 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
7/25/2018
|
|
|
|
33,527 |
|
|
|
- |
|
|
|
- |
|
|
|
19.80 |
|
|
|
7/25/2028 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
6/29/2018
|
|
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
|
|
14.40 |
|
|
|
6/29/2028 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
10/26/2017
|
|
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
|
|
4.60 |
|
|
|
10/26/2027 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
12/22/2015
|
|
|
|
19,000 |
|
|
|
- |
|
|
|
- |
|
|
|
5.00 |
|
|
|
12/22/2025 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
7/30/2013
|
|
|
|
17,500 |
|
|
|
- |
|
|
|
- |
|
|
|
10.00 |
|
|
|
7/29/2023 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
6,607 |
|
|
$ |
58,670 |
|
|
|
6,607 |
|
|
$ |
58,670 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
6,607 |
|
|
$ |
58,670 |
|
|
|
6,607 |
|
|
$ |
58,670 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
13,214 |
|
|
$ |
117,340 |
|
|
|
13,214 |
|
|
$ |
117,340 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
12,061 |
|
|
$ |
69,350 |
|
|
|
12,061 |
|
|
$ |
69,350 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
12,061 |
|
|
$ |
69,350 |
|
|
|
12,061 |
|
|
$ |
69,350 |
|
Charles
Scheiwe |
|
|
3/15/2019
|
|
|
|
30,000 |
|
|
|
- |
|
|
|
- |
|
|
|
13.60 |
|
|
|
3/15/2029 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
7,030 |
|
|
$ |
62,426 |
|
|
|
7,030 |
|
|
$ |
62,426 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
Jonathan
Berry(2) |
|
|
3/15/2019
|
|
|
|
24,375 |
|
|
|
5,625 |
|
|
|
5,625 |
|
|
|
13.60 |
|
|
|
3/15/2029 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
6/29/2018
|
|
|
|
45,500 |
|
|
|
- |
|
|
|
- |
|
|
|
14.40 |
|
|
|
6/29/2028 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
10/26/2017 |
|
|
|
22,500 |
|
|
|
- |
|
|
|
- |
|
|
|
4.60 |
|
|
|
10/26/2027 |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
3,515 |
|
|
$ |
31,213 |
|
|
|
|
11/12/2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11/11/2030 |
|
|
|
7,030 |
|
|
$ |
62,426 |
|
|
|
7,030 |
|
|
$ |
62,426 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
|
10/29/2021 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10/29/2031 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
|
|
6,300 |
|
|
$ |
36,224 |
|
(1) |
The
fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility
is calculated based on the historical volatility of the Company’s stock. The risk free interest rate is based on the U.S. Treasury
yield for a term equal to the expected life of the options at the time of grant. The fair value of each restricted stock unit is
the fair value of the Company’s common stock on the grant date. |
(2) |
Mr.
Berry separated from the Company on August 12, 2022. |
Aggregated
Option/Stock Appreciation Right (“SAR”) exercised and Fiscal year-end Option/SAR value table
Neither
our executive officers nor the other individuals listed in the tables above, exercised options or SARs during Fiscal 2022.
Employment
Agreements with Executive Officers
On
February 12, 2021, we entered into an Amended and Restated Employment Agreement with the Company’s president and chief executive
officer, Ronald F. Dutt (the “Dutt Employment Agreement”), which amends and restates the Employment Agreement effective December
11, 2012, as amended (the “Prior Agreement”). In addition to the inclusion of terms relating to change in control, termination,
severance, benefits and the acceleration of vesting of options and restricted stock units upon certain events, the Dutt Employment Agreement
memorialized Mr. Dutt’s continued services as the president and chief executive officer of the Company and its wholly-owned subsidiary,
Flux Power, Inc. (“Flux Power”), and the terms pursuant to which he would provide such services. Pursuant to the terms of
the Dutt Employment Agreement, Mr. Dutt’s current annual base salary is $275,000.
On
February 12, 2021, we entered into an Employment Agreement with the Company’s chief financial officer, treasurer and secretary,
Charles A. Scheiwe (the “Scheiwe Employment Agreement”). In addition to the inclusion of terms relating to change in control,
termination, severance, benefits and the acceleration of vesting of options and restricted stock units upon certain events, the Employment
Agreement memorialized Mr. Scheiwe’s continued services as the chief financial officer and secretary of the Company, and as chief
financial officer/treasurer and secretary of Flux Power. Pursuant to the terms of the Scheiwe Employment Agreement, Mr. Scheiwe’s
current annual base salary is $205,200.
Under
their respective employment agreement, Messrs. Dutt and Scheiwe, among other things, are (i) eligible for annual target cash bonus and
awards of restricted stock units or other equity-based incentive compensation consistent with his position as determined by the Board
of Directors (the “Board”) and the Compensation Committee; (ii) entitled to reimbursement for all reasonable business expenses
incurred in performing services; and (iii) entitled to certain severance and change of control benefits contingent upon such employee’s
agreement to a general release of claims in favor of the Company following termination of employment. Messrs. Dutt and Scheiwe and are
also eligible to participate in all customary employee benefit plans or programs generally made available to the senior executive officers.
Messrs. Dutt and Scheiwe have each agreed to observe the terms of a standard confidentiality and non-compete agreement for a restricted
period of two (2) years. Each of Messrs. Dutt and Scheiwe employment is “at-will” and may be terminated at any time for any
reason.
Separation
Agreement
On
August 12, 2022, Jonathan Berry, the Company’s Chief Operating Officer, separated from the Company and entered into an Employee
Separation and Release dated August 24, 2022 (“Separation Agreement”). Under the Separation Agreement, the Company agreed
to provide Mr. Berry with certain payments and benefits comprising of: (i) a separation payment of two hundred five thousand two hundred
dollars, less required withholdings, (ii) twenty-eight thousand nine hundred seven and 52/100 dollars, less require holdings, to defray
costs for COBRA coverage, and (iii) reimbursement for an amount equal to twelve months for life insurance continuation (collectively,
the “Separation Benefits”). In exchange for the Separation Benefits, among other things as set forth in the Separation Agreement,
Mr. Berry agreed to a release of claims and waivers in favor of the Company and to certain restrictive covenant obligations, and also
reaffirmed his commitment to comply with his existing restrictive covenant obligations.
Annual
Bonus Plan
On
November 5, 2020, the Board approved an annual cash bonus plan (the “Annual Bonus Plan”) which allows the Compensation Committee
and/or the Board of the Company to set the amount of bonus each fiscal year and the performance criteria. Executive officers and all
employees (other than part-time employees and temporary employees) are eligible to participate in the Annual Bonus Plan (“Participants”)
as long as the Participant remains an active regular employee of the Company. The Annual Bonus Plan was effective for Fiscal 2021 and
is effective each fiscal year thereafter (the “Plan Year”). For each Plan Year, the Compensation Committee establishes an
aggregate amount of allocable Bonus under the Annual Bonus Plan and determines the performance goals applicable to a bonus during a Plan
Year (the “Participation Criteria”). The Participation Criteria may differ from Participant to Participant and from bonus
to bonus. The Participation Criteria for each Plan Year is based on the Company achieving certain performance targets based on annual
revenue, gross margin, operating expense and new business development. All of the Company’s executive officers are eligible to
participate in the Annual Bonus Plan.
Fiscal
2021
On
November 5, 2020, the Board approved target cash bonuses under the Annual Bonus Plan for Fiscal 2021 (“2021 Bonus Grant”)
to the following executive officers, which target bonus was calculated based on percentage of the executive’s current base salary:
Name | |
Position | |
Current
Base Salary | | |
Percentage of
Salary | | |
Target
Cash Bonus | |
Ronald
F. Dutt | |
Chief
Executive Officer | |
$ | 250,000 | | |
| 50 | % | |
$ | 125,000 | |
Charles
Scheiwe | |
Chief
Financial Officer | |
$ | 190,000 | | |
| 35 | % | |
$ | 66,500 | |
Jonathan
Berry | |
Chief
Operating Officer | |
$ | 190,000 | | |
| 35 | % | |
$ | 66,500 | |
Under
the 2021 Bonus Grant, the Company’s executives are eligible to receive cash incentive bonus payments based on the target cash bonus
amount and on the achievement of financial targets and corporate objectives as follows:
Achievements | |
Minimum | | |
Target | | |
Maximum | |
Bonus
payments based on Target Cash Bonus Amount | |
| 70 | % | |
| 100 | % | |
| 150 | % |
On
June 30, 2021, the Compensation Committee of the Company amended the performance goals for the 2021 plan year (from July 1, 2020 through
June 30, 2021) (the “2021 Plan Year”), under the Annual Cash Bonus Plan, which was previously approved by the Compensation
Committee on November 5, 2020. The performance goals for the 2021 Plan Year were amended to the Company achieving certain performance
targets measured by annual revenue, gross margin and new business development. The Compensation Committee made the equitable adjustment
to better align the objectives and activities of the Company’s executives and employees with the goals of the Company during a
very challenging 2021 Plan Year.
On
June 30, 2021, the Compensation Committee approved an addendum to the Performance Restricted Stock Unit Award under the 2014 Equity Incentive
Plan approved by the Compensation Committee on November 5, 2020 to provide clarification for the calculation of vesting
Fiscal
2022
For
the Company’s fiscal year ending on June 30, 2022, or Fiscal 2022, the performance goals applicable to a bonus are based on the
Company achieving certain targets based on the Company’s annual revenue, gross margin, EBITDAS (earnings before interest expense
(excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with U.S. GAAP), new strategic
customers, demonstrated direct cost reduction and working capital and inventory turnover (the “Financial Targets”) and additional
bonus amounts if the Company’s financial results exceeds certain thresholds of the Financial Targets.
On
October 29, 2021, the Compensation Committee approved target cash bonuses under the Annual Cash Bonus Plan for Fiscal 2022 to the following
executive officers, which target bonus was calculated based on percentage of the executive’s current base salary:
Name | |
Position | |
Current
Base Salary | | |
Percentage
of Salary | | |
Target
Cash Bonus (“TCB”) | | |
Maximum
Payout(1) | |
Ronald
F. Dutt | |
Chief
Executive Officer | |
$ | 275,000 | | |
50 | % | |
$ | 137,500 | | |
$ | 165,000 | |
Charles
Scheiwe | |
Chief
Financial Officer | |
$ | 205,200 | | |
35 | % | |
$ | 71,820 | | |
$ | 86,184 | |
Jonathan
Berry | |
Chief
Operating Officer | |
$ | 205,200 | | |
35 | % | |
$ | 71,820 | | |
$ | 86,184 | |
(1) |
There
are no bonus caps for achieving above set revenue target and gross margin target. If actual results exceed 100% of revenue target
and/or gross margin target, every 1% of revenue target and/or gross margin target would result in an increase in bonus equal to 0.2%
of the TCB for such executive officers. |
Amendment
to 2014 Plan
On
November 5, 2020, the Board approved an amendment to the 2014 Plan as amended to include the right to grant Restricted Stock Units (“RSUs”).
All of the Company’s executive officers are eligible to participate in the 2014 Plan.
Restricted
Stock Unit Grants
Fiscal
2021 Grants
On
November 5, 2020, the Board approved the grant of RSUs under the 2014 Option Plan to certain employees of the Company. The RSUs are subject
to the terms and conditions provided in (i) the form of Restricted Stock Unit Award Agreement which is time based (“Time Based
Awards”), and (ii) the form of Performance Restricted Stock Unit Award Agreement which is performance based (“Performance
Based Awards”). In addition, the Compensation Committee approved the grant of one-time retention based RSUs pursuant to the form
of the Restricted Stock Unit Award Agreement (“Retention Awards”).
The
following named executive officers of the Company were granted RSUs under the 2014 Option Plan in the amounts and according to the vesting
schedule indicated below:
Time
Based Awards:
Name | |
Position | |
No.
of RSUs | | |
Vesting
Schedule |
Ronald
F. Dutt | |
Chief
Executive Officer | |
| 6,607 | | |
Three
Years from Award’s grant date |
Charles
Scheiwe | |
Chief
Financial Officer | |
| 3,515 | | |
Three
Years from Award’s grant date |
Jonathan
Berry | |
Chief
Operating Officer | |
| 3,515 | | |
Three
Years from Award’s grant date |
Performance
Based Awards:
Name | |
Position | |
No.
of RSUs Maximum
Grant | | |
Vesting
Schedule |
Ronald
F. Dutt | |
Chief
Executive Officer | |
| 9,910 | | |
Vest
in installments of up to one-third annually based on target performance goals |
Charles
Scheiwe | |
Chief
Financial Officer | |
| 5,272 | | |
Vest
in installments of up to one-third annually based on target performance goals |
Jonathan
Berry | |
Chief
Operating Officer | |
| 5,272 | | |
Vest
in installments of up to one-third annually based on target performance goals |
Retention
Awards:
Name | |
Position | |
No.
of RSUs | | |
Vesting
Schedule |
Ronald
F. Dutt | |
Chief
Executive Officer | |
| 13,214 | | |
Four
Years from Award’s grant date |
Charles
Scheiwe | |
Chief
Financial Officer | |
| 7,030 | | |
Four
Years from Award’s grant date |
Jonathan
Berry | |
Chief
Operating Officer | |
| 7,030 | | |
Four
Years from Award’s grant date |
Fiscal
2022 Grants
On
October 29, 2021, the Compensation Committee approved the grant of Restricted Stock Units (“RSUs”) under the Company’s
2014 Equity Incentive Plan (the “2014 Plan”) to certain employees of the Company or its subsidiary, Flux Power, Inc. The
RSUs are subject to the terms and conditions provided in (i) the form of Restricted Stock Unit Award Agreement which is time based (“Time
Based Awards”), and (ii) the form of Performance Restricted Stock Unit Award Agreement which is performance based (“Performance
Based Awards”). The following named executive officers of the Company were granted RSUs under the 2014 Plan in the amounts and
according to the vesting schedule indicated below:
Time
Based Awards:
Name | |
Position | |
No.
of RSUs | | |
Vesting
Schedule |
Ronald
F. Dutt | |
Chief
Executive Officer | |
| 12,061 | | |
Vest
annually over 3 years with the first vest date on October 27, 2022 |
Charles
Scheiwe | |
Chief
Financial Officer | |
| 6,300 | | |
Vest
annually over 3 years with the first vest date on October 27, 2022 |
Jonathan
Berry | |
Chief
Operating Officer | |
| 6,300 | | |
Vest
annually over 3 years with the first vest date on October 27, 2022 |
Performance
Based Awards:
Name | |
Position | |
No.
of RSUs Maximum
Grant | | |
Vesting
Schedule |
Ronald
F. Dutt | |
Chief
Executive Officer | |
| 18,092 | | |
Three
years from grant upon meeting performance target* |
Charles
Scheiwe | |
Chief
Financial Officer | |
| 9,450 | | |
Three
years from grant upon meeting performance target * |
Jonathan
Berry | |
Chief
Operating Officer | |
| 9,450 | | |
Three
years from grant upon meeting performance target * |
*
The performance target for the RSU to be based on EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation,
amortization and stock compensation expense in accordance with U.S. GAAP) for the second half of the Company’s fiscal year ending
June 30, 2022.
Incentive
Plans
Management,
the Committee and the Board will continue to explore and evaluate different long-term and short-term incentives to help attract, retain
and motivate our employees to align their interest to our business and financial success through the use of equity award and cash bonuses.
Compensation
of Non-Executive Directors
In
December 2020, pursuant to the recommendation and advice of the Committee, the Board approved the annual compensation package for non-executive
directors of the Company for calendar year 2021 as follows:
| |
Independent Non-Executive
Director | |
Position | |
Base Retainer | | |
Chair
Fee | | |
Total Comp | |
| |
| |
| |
| | |
| | |
| |
Lisa
Walters-Hoffert | |
X | |
Audit
Chair | |
$ | 50,000 | | |
$ | 7,500 | | |
$ | 57,500 | |
Dale
Robinette | |
X | |
Compensation
Chair | |
$ | 50,000 | | |
$ | 5,000 | | |
$ | 55,000 | |
John
A. Cosentino Jr.(1) | |
X | |
Governance
Chair | |
$ | 50,000 | | |
$ | 5,000 | | |
$ | 55,000 | |
Michael
Johnson | |
| |
Board
Member | |
$ | 50,000 | | |
$ | - | | |
$ | 50,000 | |
(1)
Former director
On
January 14, 2022, pursuant to the recommendation and advice of the Compensation Committee of the Board of the Company, the Board approved
the following annual compensation package for non-executive directors of the Company for calendar year 2022, as follows:
Name | |
Independent Non-Executive
Director | |
Position | |
Base
Retainer (cash) | | |
Chair
Fee (cash) | | |
Lead Independent
Director (cash) | |
| |
| |
| |
| | |
| | |
| |
Lisa
Walters-Hoffert | |
X | |
Audit
Chair | |
$ | 50,000 | | |
$ | 7,500 | | |
$ | - | |
Dale
Robinette | |
X | |
Compensation
Chair | |
$ | 50,000 | | |
$ | 5,000 | | |
$ | 20,000 | |
John
A. Cosentino Jr.(1) | |
X | |
Governance
Chair | |
$ | 50,000 | | |
$ | 5,000 | (1) | |
$ | - | |
Cheemin
Bo-Linn (2) | |
X | |
Board
Member | |
$ | 50,000 | | |
$ | - | | |
$ | - | |
Michael
Johnson | |
| |
Board
Member | |
$ | 50,000 | | |
$ | - | | |
$ | - | |
(1)
Mr. Cosentino resigned as our director on March 1, 2022. As appreciation for Mr. Cosentino’s board services, the Board approved
to (i) accelerate the vesting of the following securities the Board granted in connection with his board services: 435 unvested options
and 4,578 restricted stock awards, and (iii) pay his board fees for 3rd quarter of Fiscal 2022.
(2)
Dr. Bo-Linn was appointed as Chairperson of the Governance Committee on March 3, 2022. For Dr. Bo-Linn’s services as Chairperson,
she is entitled to a Chair Fee of $5,000 for calendar year 2022.
Equity
Component of Non-Executive Director Compensation
In
addition, our directors are eligible to receive an annual equity grant of RSUs. Pursuant to grants approved by our Board at the recommendation
of the Compensation Committee in April 2021 and 2022, our non-executive directors were granted RSUs under the 2014 Plan. The number of
RSUs granted to each non-executive director was equal to the amount of $50,000 divided by the fair market value of the RSUs, with all
RSUs subject to vesting restrictions. The fair market value of the RSUs was determined by applying a 10-day volume weighted average stock
price prior to the grant issuance date.
In
April 2021, each of our non-executive directors were granted 4,578 RSUs, of which 1/3 of the RSUs vested on April 29, 2022, and each
subsequent 1/3 to vest every twelve (12) months thereafter until fully vested. In April 2022, each of our non-executive directors were
granted 17,793 RSUs which are subject to fully vest on April 28, 2023. In addition, in August 2022, as compensation for board services
provided during the last quarter of Fiscal 2022, Ms. Bo-Linn was granted 5,034 RSUs, of which 1/3 vested immediately, each of the remaining
1/3 of the RSUs will vest on April 29, 2023, and April 29, 2024. Ms. Bo-Linn’s s grant was consistent with the standard equity
component of Non-Executive Director Compensation Package as approved by the Board.
Director
Compensation Table
Below
is summary of compensation accrued or paid to our non-executive directors during Fiscal 2022 and Fiscal 2021. Mr. Dutt, our chief executive
officer and president, received no compensation for his service as a director and is not included in the table. The compensation Mr.
Dutt receives as an employee of the Company is included in the section titled “Executive Compensation.”
Name | |
Year | | |
Fees
Earned or Paid
in Cash ($) | | |
Stock
Awards(2) ($) | | |
Option
Awards(3) ($)
| | |
All
Other Compensation ($) | | |
Total
($) | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Lisa
Walters-Hoffert | |
| 2022 | | |
$ | 57,500 | | |
| 50,000 | | |
$ | - | | |
| - | | |
$ | 107,500 | |
| |
| 2021 | | |
| 58,125 | | |
| 50,000 | | |
| - | | |
| - | | |
| 108,125 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Dale
Robinette | |
| 2022 | | |
$ | 65,000 | | |
| 50,000 | | |
$ | - | | |
| - | | |
$ | 115,000 | |
| |
| 2021 | | |
| 55,625 | | |
| 50,000 | | |
| - | | |
| - | | |
| 105,625 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
John
A. Cosentino Jr.(1) | |
| 2022 | | |
$ | 41,250 | | |
| - | | |
$ | - | | |
| - | | |
$ | 41,250 | |
| |
| 2021 | | |
| 55,000 | | |
| 50,000 | | |
| - | | |
| - | | |
| 105,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael
Johnson | |
| 2022 | | |
$ | 50,000 | | |
| 50,000 | | |
$ | - | | |
| - | | |
$ | 100,000 | |
| |
| 2021 | | |
| 42,500 | | |
| 50,000 | | |
| - | | |
| - | | |
| 92,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cheemin
Bo-Linn (4) | |
| 2022 | | |
$ | 26,667 | | |
| 50,000 | | |
$ | - | | |
| - | | |
$ | 76,667 | |
(1) |
Mr.
Cosentino resigned as our director on March 1, 2022. |
(2) |
Represent
the fair value of the RSUs granted using the volume weighted average price of the ten days of trading prior to grant date. |
(3) |
The
amounts shown in this column represent the full grant date fair value of the award granted, excluding any as computed in accordance
with Financial Accounting Standards Board (“FASB”). |
(4) |
Ms.
Bo-Linn joined our board of director on January 14, 2022. |
The
following table shows the aggregate number of vested stock options held by our non-employee directors as of June 30, 2022 and June 30,
2021:
Name | |
Year | | |
Vested
Stock Options | |
| |
| | |
| |
Lisa
Walters-Hoffert | |
| 2022 | | |
| 3,948 | |
| |
| 2021 | | |
| 2,467 | |
| |
| | | |
| | |
Dale
Robinette | |
| 2022 | | |
| 3,948 | |
| |
| 2021 | | |
| 2,467 | |
| |
| | | |
| | |
Cheemin
Bo-Linn (1) | |
| 2022 | | |
| - | |
| |
| | | |
| | |
Michael
Johnson | |
| 2022 | | |
| 12,948 | |
| |
| 2021 | | |
| 10,904 | |
| |
| | | |
| | |
John
A. Cosentino Jr. (2) | |
| 2022 | | |
| - | |
| |
| 2021 | | |
| - | |
|
(1) |
Ms.
Bo-Linn joined our board of director on January 14, 2022. |
|
(2) |
Mr.
Cosentino resigned as our director on March 1, 2022. |
ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
BENEFICIAL
OWNERSHIP
Security
Ownership of Principal Stockholders and Management
As
used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Exchange Act, as consisting
of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship
or otherwise, subject to community property laws where applicable. As of September 12, 2022, we had a total of 15,998,336 shares of common
stock issued and outstanding.
The
following table sets forth, as of September 12, 2022, information concerning the beneficial ownership of shares of our common stock held
by our directors, our named executive officers, our directors and executive officers as a group, and each person known by us to be a
beneficial owner of more than five percent (5%) of our outstanding common stock. Unless otherwise indicated, the business address of
each of our directors, executive officers and beneficial owners of more than five percent (5%) of our outstanding common stock is c/o
Flux Power Holdings, Inc., 2685 S. Melrose Drive, Vista, California 92081. Each person has sole voting and investment power with respect
to the shares of our common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of
common stock, except as otherwise indicated.
Name
and Address of Beneficial Owner (1) | |
Shares Beneficially Owned | | |
%
of Ownership | |
Officers
and Directors | |
| | | |
| | |
Michael
Johnson, Director | |
| 4,478,703 | (2) | |
| 28.0 | % |
Ronald
Dutt, Chief Executive Officer, President, and Director | |
| 250,408 | (3) | |
| 1.5 | % |
Charles
A Scheiwe, Chief Financial Officer and Secretary | |
| 40,118 | (4) | |
| * | |
Cheemin
Bo-Linn, Director | |
| 1,678 | (5) | |
| * | |
Lisa
Walters-Hoffert, Director | |
| 5,474 | (6) | |
| * | |
Dale
Robinette, Director | |
| 5,474 | (7) | |
| * | |
All
Officers and Directors as a group (6 people) | |
| 4,781,855 | | |
| 29.4 | % |
| |
| | | |
| | |
5%
Stockholders | |
| | | |
| | |
Cleveland
Capital Management L.L.C. 1250 Linda Street, Suite 304 Rocky River, OH 44116 | |
| 811,419 | (8) | |
| 5.1 | % |
*
Represents less than 1% of shares outstanding.
(1)
|
All
addresses above are 2685 S. Melrose Drive, Vista, California 92081, unless otherwise stated. |
(2)
|
Includes
4,465,755 shares of common stock held by Esenjay Investments, LLC, of which Mr. Johnson is the sole director and beneficial owner,
and (ii) 12,948 shares of common stock issuable to Mr. Johnson upon exercise of stock options. |
(3)
|
Includes
26,360 shares of common stock and 224,048 shares of common stock issuable upon exercise of stock options and settlement of vested
RSUs. |
(4)
|
Includes
8,018 shares of common stock and 32,100 shares of common stock issuable upon exercise of stock options and settlement of vested RSUs. |
(5) |
Includes
1,678 shares of common stock. |
(6)
|
Includes
1,526 shares of common stock and 3,948 shares of common stock issuable upon exercise of stock options. |
(7)
|
Includes
1,526 shares of common stock and 3,948 shares of common stock issuable upon exercise of stock options. |
(8)
|
Based
on Amendment No. 5 to Schedule 13G filed jointly by Cleveland, Wade Massad and Cleveland Capital Management, L.L.C. with the SEC
on February 14, 2022. Reflects 811,419 shares of common stock beneficially owned by certain private funds managed by Cleveland Capital
Management, L.L.C., or by its principals. |
*
Represents less than 1% of shares outstanding.
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following includes a summary of certain relationships and transactions, including transactions since July 1, 2020 to September 12, 2022
and any currently proposed transactions, to which we were or are to be a participant, in which (1) the amount involved exceeded or will
exceed the lesser of (i) $120,000 or (ii) one percent (1%) of the average of our total assets for the last two completed fiscal years,
and (2) any of our directors, executive officers or holders of more than five percent (5%) of our capital stock, or any affiliate or
member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest other than compensation
and other arrangements that are described under the section titled “Executive Compensation.”
Pursuant
to the Audit Committee’s written charter, our Audit Committee has the responsibility to review, approve and oversee transactions
between the Company and any related person (as defined in Item 404 of Regulation S-K) and any potential conflict of interest situations
on an ongoing basis, in accordance with our policies and procedures, and to develop policies and procedures for the Audit Committee’s
approval of related party transactions.
Subordinated
Line of Credit Facility
On
May 11, 2022, we entered into a Credit Facility Agreement (the “Subordinated LOC”) with Cleveland Capital, L.P. (“Cleveland”),
Herndon Plant Oakley, Ltd., (“HPO”), and other lenders (together with Cleveland and HPO, the “Lenders”). The
Subordinated LOC provides us with a short-term line of credit (the “LOC”) not less than $3,000,000 and not more than $5,000,000,
the proceeds of which shall be used by us for working capital purposes. As of June 30, 2022, the Lenders committed an aggregate of $4,000,000.
In
connection with entry into the Subordinated LOC, we paid to each Lender a one-time committee fee in cash equal to 3.5% of such Lender’s
Commitment Amount. In addition, in consideration of the Lenders’ commitment to provide the Advances to us, we issued the Lenders
five-year warrants to purchase an aggregate of 128,000 shares of common stock at an exercise price of $2.53 per share that are, subject
to certain ownership limitations, exercisable immediately.
Pursuant
to a selling agreement, dated as of May 11, 2022, the Company retained HPO as its placement agent in connection with the Subordinated
LOC. As compensation for services rendered in conjunction with the Subordinated LOC, the Company paid HPO a finder fee equal to 3% of
the commitment amount from each such Lender placed by HPO in cash.
2020
Private Placement
From
April 2020 to July 2020, pursuant to private placement offerings, we sold and issued an aggregate of 1,141,250 shares of common stock,
at $4.00 per share, for an aggregate purchase price of $4,565,000 in cash to twenty-seven (27) accredited investors. Esenjay, our major
stockholder and an entity controlled by our director, Mr. Johnson, participated in the offering in the amount of $300,000. In addition,
Mr. Cosentino, a former director, also participated in the offering in the amount of $250,000.
Esenjay
Loan
On
March 9, 2020, the Company and Esenjay Investments, LLC (“Esenjay”) entered into a certain convertible promissory note (“Original
Esenjay Note”) pursuant to which Esenjay provided the Company with a loan in the principal amount of $750,000 (the “Esenjay
Loan”). On June 2, 2020, the Original Esenjay Note was amended and restated to (i) extend the maturity date from June 30, 2020
to September 30, 2020, and (ii) to increase the principal amount outstanding under the Original Esenjay Note to $1,400,000 (the “Esenjay
Note”).
Between
June 26, 2020 and July 22, 2020, Esenjay assigned a total of $900,000 of the Esenjay Note to three (3) accredited investors and the $900,000
note balance was converted into shares of common stock at $4.00 per share, which was the cash price per share, and resulted in the issuance
of 225,000 shares of common stock.
On
August 31, 2020, the Company entered into the Third Amended and Restated Credit Facility Agreement and pursuant to which the Company
further amended the Esenjay Note to, among other items, transfer all remaining principal and accrued interest outstanding of approximately
$564,000 into the amended Credit Facility Agreement. (See “Credit Facility” below).
Credit
Facility
On
March 22, 2018, we entered into a credit facility agreement with Esenjay with a maximum borrowing amount of $5,000,000 (the “Original
Agreement”). The Original Agreement was amended multiple times to allow for, among other things, an increase in the maximum principal
amount available under line of credit (“LOC”) to $12,000,000, the inclusion of additional lenders and extension of the maturity
date to September 30, 2021.
In
August 2020, we paid down an aggregate principal amount of approximately $1,402,000 of the outstanding balance under the LOC. On August
31, 2020, we entered into the Third Amended and Restated Credit Facility Agreement (“Third Amended and Restated Facility Agreement”)
pursuant to which we (i) extended the maturity date to September 30, 2021, and (ii) allowed for the transfer of outstanding obligations
under the Esenjay Note of approximately $564,000 into the LOC as noted above. In November 2020, lenders holding an aggregate of approximately
$2,161,000 in principal and accrued interest elected to convert their notes into 540,347 shares of common stock at a price of $4.00 per
share. In January and March 2021, the lenders holding an aggregate of approximately $2,632,000 in principal and accrued interest elected
to convert their notes into 658,103 shares of common stock at a price of $4.00 per share of which approximately $1,045,000 was held by
Esenjay and converted to 261,133 shares of common stock.
On
June 10, 2021, we repaid all obligations in full and without additional fees or termination penalties, and the Third Amended and Restated
Credit Facility Agreement and the related Second Amended and Restated Security Agreement were terminated.
Cleveland
Loan
On
July 3, 2019, we entered into a loan agreement with Cleveland, pursuant to which Cleveland agreed to loan the Company $1,000,000 (the
“Cleveland Loan”) and issued Cleveland an unsecured short-term promissory note in the amount of $1,000,000 (the “Unsecured
Promissory Note”). The Unsecured Promissory Note had an interest rate of 15.0% per annum and was originally due on September 1,
2019, unless repaid earlier from a percentage of proceeds from certain identified accounts receivable. In connection with the Cleveland
Loan, we issued Cleveland a three-year warrant (the “Cleveland Warrant”) to purchase the Company’s common stock in
a number equal to 0.5% of the number of shares of common stock outstanding after giving effect to the shares of common stock sold in
a contemplated public offering and with an exercise price equal to the per share price of the common stock sold in the public offering.
On
September 1, 2019, we entered into the First Amendment to the Unsecured Promissory Note pursuant to which the maturity date was extended
to December 1, 2019 (the “First Amendment”) and the Cleveland Warrant terms were amended (the “Amended Warrant”).
The Amended Warrant increased the warrant coverage from 0.5% to 1% of the number of shares of common stock outstanding after giving effect
to the shares of common stock sold in the next private or public offering and with an exercise price equal to the per share price of
common stock sold in such private or public offering, as the case may be.
On
July 9, 2020, we made a payment to Cleveland in the amount of $200,000 as a partial payment of the Cleveland Loan. On July 27, 2020,
in connection with the outstanding loan from Cleveland to us in the principal amount of $957,000, we entered into the Eighth Amendment
to the Unsecured Promissory Note which extended the maturity date from July 31, 2020 to August 31, 2020, and capitalized all accrued
and unpaid interest as of July 27, 2020 to the principal amount. On August 19, 2020, we paid Cleveland the entire remaining principal
balance due under the Cleveland Loan, together with all accrued interest payable as of August 19, 2020, in an aggregate amount of approximately
$978,000.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent
Auditor
For
the fiscal years ended June 30, 2022 and 2021, the Company’s independent public accounting firm was Baker Tilly US, LLP (formerly
Squar Milner LLP, which, effective as of November 1, 2020, merged with Baker Tilly US, LLP).
Fees
Paid to Principal Independent Registered Public Accounting Firm
The
aggregate fees billed by our Independent Registered Public Accounting Firm, for the fiscal years ended June 30, 2022 and 2021 are as
follows:
| |
2022 | | |
2021 | |
Audit
fees(1) | |
$ |
131,000 | | |
$ | 107,000 | |
Audit
related fees(2) | |
|
22,000 | | |
| 103,000 | |
Tax fees(3) | |
|
- | | |
| - | |
All
other fees(4) | |
|
- | | |
| - | |
Total | |
$ |
153,000 | | |
$ | 210,000 | |
(1) |
Audit
fees represent fees for professional services provided in connection with the audit of our annual financial statements and the review
of our quarterly financial statements and those services normally provided in connection with statutory or regulatory filings or
engagements including comfort letters, consents and other services related to SEC matters. This information is presented as of the
latest practicable date for this annual report. |
|
|
(2) |
Audit-related
fees represent fees for assurance and related services that are reasonably related to the performance of the audit or review of our
financial statements and not reported above under “Audit Fees.” |
|
|
(3) |
Baker
Tilly US, LLP did not provide us with tax compliance, tax advice or tax planning services. |
|
|
(4) |
All
other fees include fees billed by our independent auditors for products or services other than as described in the immediately preceding
three categories. No such fees were incurred during the fiscal years ended June 30, 2022 or 2021. |
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
Our
audit committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent registered
public accounting firm, the scope of services provided by our independent registered public accounting firm and the fees for the services
to be performed. These services may include audit services, audit-related services, tax services and other services. Pre-approval is
detailed as to the particular service or category of services and is generally subject to a specific budget.
Our
independent registered public accounting firm and management are required to periodically report to the audit committee regarding the
extent of services provided by our independent registered public accounting firm in accordance with this preapproval, and the fees for
the services performed to date.
All
of the services relating to the fees described in the table above were approved by our audit committee.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 and 2021
NOTE
1 - NATURE OF BUSINESS
Nature
of Business
Flux
Power Holdings, Inc. (“Flux”) was incorporated in 2008 in the State of Nevada, and Flux’s operations are conducted
through its wholly owned subsidiary, Flux Power, Inc. (“Flux Power”), a California corporation (collectively, the “Company”).
We
design, develop, manufacture, and sell a portfolio of advanced lithium-ion energy storage solutions for electrification of a range of
industrial commercial sectors which include material handling, airport ground support equipment (“GSE”), and stationary energy
storage. We believe our mobile and stationary energy storage solutions provide customers with a reliable, high performing, cost effective,
and more environmentally friendly alternative as compared to traditional lead acid and propane-based solutions. Our modular and scalable
design allows different configurations of lithium-ion battery packs to be paired with our proprietary wireless battery management system
to provide the level of energy storage required and “state of the art” real time monitoring of pack performance. We believe
that the increasing demand for lithium-ion battery packs and more environmentally friendly energy storage solutions in the material handling
sector should continue to drive our revenue growth.
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 - 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.
Liquidity
Considerations
The
accompanying financial statements and notes have been prepared assuming the Company will continue as a going concern. For the year ended
June 30, 2022, the Company generated negative cash flows from operations of $23.9
million and had an accumulated deficit of $81.8
million. Management has evaluated the Company’s expected
cash requirements over the next twelve (12) months, including investments in additional sales and marketing and research and development,
capital expenditures, and working capital requirements. Management believes the Company’s existing cash and funding available under
the SVB Credit Facility and the Subordinated LOC, along with the forecasted gross margin will be sufficient to meet the Company’s
anticipated capital resources to fund planned operations for the next twelve (12) months.
Historically
the Company has not generated sufficient cash to fund its operations. Based on the Company’s ability to recognize revenue from
its existing backlog, management anticipates increased revenues along with the planned improvements in its gross margin over the next
twelve (12) months. The planned gross margin improvement tasks include, but is not limited to, a plan to drive bill of material costs
down while increasing price of our products for new orders. The Company has received new orders in fiscal year ended June 30, 2022, of
approximately $65 million
and believes through conversations with customers that its anticipation of continued new order increases is probable.
As
of September 12, 2022, $3.2
million remained available under the SVB Credit Facility and $4.0
million was available for future draws under the Subordinated
LOC. As of September 12, 2022, $5.7
million remained available under the Company’s ATM agreement
that could be utilized if necessary. In addition, to support our operations and anticipated growth, we intend to explore additional sources
of capital as needed. We also continue to execute our cost reduction, sourcing, pricing recovery initiatives in efforts to increase our
gross margins and improve cash flow from operations. Any, unforeseen factors in the general economy beyond management’s control
could potentially have negative impact on the planned gross margin improvement plan.
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 inventory and deferred
tax assets. 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, 2022 and June 30, 2021, cash was approximately $485,000
and $4,713,000,
respectively. Cash consisted 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, 2022 and 2021.
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.
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 years ended June 30, 2022 and 2021.
Inventories
Inventories
consist primarily of battery management systems and the related subcomponents and are stated at the lower of cost or net realizable value.
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 recorded
adjustments to inventory reserve related to obsolete and slow moving inventory in the amount of approximately $61,000
and $195,000
during the years ended June 30, 2022 and 2021,
respectively.
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 in accordance to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers (“ASC 606”) for all contracts. The Company derives its revenue from the sale of products to customers. The
Company sells its products primarily through a distribution network of equipment dealers, OEMs and battery distributors in primarily
North America. The Company recognizes revenue for the products when all significant risks and rewards have been transferred to the customer,
there is no continuing managerial involvement associated with ownership of the goods sold is retained, no effective control over the
goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the
transactions will flow to the Company and the costs incurred or to be incurred with respect to the transaction can be measured reliably.
Product
revenue is recognized as a distinct single performance obligation which for the Company’s three major customers represents the
point in time that they receive delivery of the products, and for all other customers represents the point in time that the Company ships
the products. Our customers do have a right to return product but our returns have historically been minimal.
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 separate agreement. As of June 30, 2022 and 2021, the Company carried warranty
liability of approximately $1,012,000 and
$895,000,
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, 2022 and 2021.
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, 2022 or June 30, 2021, 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 years ended June 30, 2022 and 2021, basic and diluted weighted-average common shares outstanding were 15,439,530
and 11,796,217,
respectively. The Company incurred a net loss for the years ended June 30, 2022 and 2021, and therefore, basic and diluted loss per share
for each fiscal year were the same because potential common share equivalent would have been anti-dilutive. The total potentially dilutive
common shares outstanding at June 30, 2022 and 2021 that were excluded from diluted weighted-average common shares outstanding represent
shares underlying outstanding convertible debt, stock options, RSUs, and warrants, and totaled 2,262,773
and 877,740,
respectively.
New
Accounting Standards
Recently
Adopted Accounting Pronouncements
The
Company did not adopt any new accounting pronouncements for the year ended June 30, 2022 and 2021.
Management
has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements.
NOTE
3 - INVENTORIES
Inventories
consist of the following:
SCHEDULE
OF INVENTORIES
| |
June
30, 2022 | | |
June
30, 2021 | |
Raw
materials | |
$ | 12,989,000 | | |
$ | 8,185,000 | |
Work
in process | |
| 927,000 | | |
| 918,000 | |
Finished
goods | |
| 2,346,000 | | |
| 1,410,000 | |
Total
Inventories | |
$ | 16,262,000 | | |
$ | 10,513,000 | |
Inventories
consist primarily of our energy storage systems and the related subcomponents, and are stated at the lower of cost or net realizable
value.
NOTE
4 – OTHER CURRENT ASSETS
Other
current assets consist of the following:
SCHEDULE
OF OTHER CURRENT ASSETS
| |
June
30, 2022 | | |
June
30, 2021 | |
Prepaid
insurance | |
$ | 478,000 | | |
$ | 249,000 | |
Prepaid
inventory | |
| 14,000 | | |
| 73,000 | |
Debt
issuance costs | |
| 426,000 | | |
| - | |
Prepaid
expenses | |
| 343,000 | | |
| 95,000 | |
Total
other current assets | |
$ | 1,261,000 | | |
$ | 417,000 | |
NOTE
5 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
SCHEDULE
OF ACCRUED EXPENSES
| |
June
30, 2022 | | |
June
30, 2021 | |
Payroll
and bonus accrual | |
$ | 767,000 | | |
$ | 1,271,000 | |
PTO
accrual | |
| 430,000 | | |
| 417,000 | |
Warranty
liability | |
| 1,012,000 | | |
| 895,000 | |
Total
accrued expenses | |
$ | 2,209,000 | | |
$ | 2,583,000 | |
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consist of the following:
SCHEDULE
OF PROPERTY PLANT AND EQUIPMENT NET
| |
June
30, 2022 | | |
June
30, 2021 | |
Vehicles | |
$ | 20,000 | | |
$ | 20,000 | |
Machinery
and equipment | |
| 808,000 | | |
| 593,000 | |
Office
equipment | |
| 1,574,000 | | |
| 1,027,000 | |
Furniture
and Equipment | |
| 256,000 | | |
| 220,000 | |
Leasehold
improvements | |
| 56,000 | | |
| 56,000 | |
Property,
plant and equipment, gross | |
| 2,714,000 | | |
| 1,916,000 | |
Less:
Accumulated depreciation | |
| (1,136,000 | ) | |
| (560,000 | ) |
Total
property, plant and equipment, net | |
$ | 1,578,000 | | |
$ | 1,356,000 | |
Depreciation
expense was approximately $575,000 and
$274,000,
for the years ended June 30, 2022 and 2021, respectively, and is included in selling and administrative expenses in the accompanying
consolidated statements of operations.
NOTE
7 – Notes Payable
Paycheck
Protection Program Loan
On
May 1, 2020, the Company applied for and received a loan from the Bank of America, NA (the “BOA”) in the aggregate principal
amount of approximately $1,297,000
(the “PPP Loan”) pursuant to the
Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan was evidenced by a promissory note dated May 1, 2020, issued by Flux Power to the BOA (the “PPP Note”). The
PPP Loan had a two-year
term and bore interest at a rate of 1.0%
per annum. Monthly principal and interest payments were deferred for six months after the date of disbursement. The Company received
the funds on May 4, 2020. On February 9, 2021, the Company was notified that the Small Business Administration (“SBA”) had
forgiven repayment of the entire PPP Loan of approximately $1,297,000
in principal, together with all accrued interest
of approximately $10,000.
The Company recorded the entire forgiven principal and accrued interest amount of approximately $1,307,000
as other income in its statement of operations
on February 9, 2021. As of June 30, 2022, the outstanding balance of the PPP Loan was $0.
The
SBA reserves the right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. In accordance
with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP loan was forgiven
or repaid in full and to provide that documentation to the SBA upon request.
Revolving
Line of Credit
On
November 9, 2020, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”).
On October 29, 2021, the Company entered into a First Amendment to Loan and Security Agreement (“First Amendment”) with SVB
which amended certain terms of the Loan Agreement including, but not limited to, increasing the amount of the revolving line of credit
from $4.0
million to $6.0
million, and extending the maturity date to November
7, 2022. The First Amendment provided the Company
with a senior secured credit facility for up to $6.0
million available on a revolving basis (“Revolving
LOC”). Outstanding principal under the Revolving LOC accrued interest at a floating rate per annum equal to the greater of (i)
Prime Rate plus two and a half percent (2.50%), or (ii) five and three-quarters percent (5.75%). The Company paid a non-refundable commitment
fee of $15,000
upon execution of the Loan Agreement and an additional non-refundable commitment fee of $22,500 in connection with the First Amendment On
June 23, 2022, the Company entered into a Second Amendment to Loan and Security Agreement (“Second Amendment” and together
with the Loan Agreement and First Amendment the “Amended Loan Agreement”) with Silicon Valley Bank (“SVB”), which
amended certain terms of the Loan and Security Agreement dated November 9, 2020, as amended on October 29, 2021, including but not limited
to, (i) to increase the amount of the revolving line of credit to $8.0 million, (ii) to change the financial covenants of the Company
from tangible net worth of the Company to adjusted EBITDA (as defined in the Second Amendment) on a trailing six (6) month basis and
liquidity ratio certified as of the end of each month pursuant to the calculations set forth therein, and (iii) to allow for the assignment
and transfer by SVB of all of its obligations, rights and benefits under the Agreement and Loan Documents (as defined in the Agreement
and except for the Warrants).
In
addition, under the Second Amendment, the interest rate terms for the outstanding principal under the Revolving LOC was amended to accrue
interest at a floating per annum rate equal to the greater of either (A)
Prime Rate plus three and one-half of one percent (3.50%) or (B) seven and one-half of one percent (7.50%). Interest payment is due monthly
on the last day of the month. In addition, the Company is required to pay a quarterly unused facility fee equal to one-quarter of one
percent (0.25%) per annum of the average daily unused portion of the $6.0 million commitment under the Revolving LOC, depending upon
availability of borrowings under the Revolving LOC.
Pursuant to the Second Amendment, the Company agreed to pay SVB a non-refundable amendment fee of Five Thousand Dollars ($5,000.00)
and SVB’s legal fees and expenses incurred in connection with the Second Amendment.
In
connection with the Second Amendment, the Company issued a twelve-year
warrant to SVB and its designee, SVB Financial
Group, to purchase up to 40,806
shares of common stock of the Company at an exercise
price of $2.23
per share pursuant to the terms set forth therein.
Amounts
outstanding under the Revolving LOC are secured by substantially all of the tangible and intangible assets of the Company (including,
without limitation, intellectual property) pursuant to the terms of the Amended Loan Agreement and the Intellectual Property Security
Agreement dated as of October 29, 2021. As of June 30, 2022 the outstanding balance under the Revolving LOC was approximately $4,889,000,
with approximately $3,111,000
remained available for future draws through November
7, 2022, unless the credit facility is renewed and its term is extended prior to its expiration.
NOTE
8 - RELATED PARTY DEBT AGREEMENTS
Subordinated
Line of Credit Facility
On
May 11, 2022, the Company entered into a Credit Facility Agreement (the “Subordinated LOC”) with Cleveland Capital, L.P.,
a Delaware limited partnership (“Cleveland”), Herndon Plant Oakley, Ltd., (“HPO”), and other lenders (together
with Cleveland and HPO, the “Lenders”). The Subordinated LOC provides the Company with a short-term line of credit (the “LOC”)
not less than $3,000,000
and not more than $5,000,000,
the proceeds of which shall be used by the Company for working capital purposes. In connection with the LOC, the Company issued a separate
subordinated unsecured promissory note in favor of each respective Lender (each promissory note, a “Note”) for each Lender’s
commitment amount (each such commitment amount, a “Commitment Amount”). As of June 30, 2022, the Lenders committed an aggregate
of $4,000,000.
Pursuant
to the terms of the Subordinated LOC, each Lender severally agrees to make loans (each such loan, an “Advance”) up to such
Lender’s Commitment Amount to the Company from time to time, until December 31, 2022 (the “Due Date”). The Company
may, from time to time, prior to the Due Date, draw down, repay, and re-borrow on the Note, by giving notice to the Lenders of the amount
to be requested to be drawn down.
Each
Note bears an interest rate of 15.0%
per annum on each Advance from and after the date of disbursement of such Advance and is payable on (i) the Due Date in cash or shares
of common stock of the Company (the “Common Stock”) at the sole election of the Company, unless such Due Date extended pursuant
to the Note, or (ii) on occurrence of an event of Default (as defined in the Note). The Due Date may be extended (i) at the sole election
of the Company for one (1) additional year period from the Due Date upon the payment of a commitment fee equal to two percent (2%)
of the Commitment Amount to the Lender within thirty (30) days prior to the original Due Date, or (ii) by the Lender in writing. In addition,
each Lender signed a Subordination Agreement by and between the Lenders and Silicon Valley Bank, a California corporation (“SVB”),
dated as of May 11, 2022 (the “Subordination Agreement”) for the purposes of subordinating the right to payment under the
Note to SVB’s indebtedness by the Company now outstanding or hereinafter incurred.
The
Subordinated LOC includes customary representations, warranties and covenants by the Company and the Lenders. The Company has also agreed
to pay the legal fees of Cleveland’s counsel in an amount up to $10,000.
In addition, each Note also provides that, upon the occurrence of a Default, at the option of the Lender, the entire outstanding principal
balance, all accrued but unpaid interest and/or Late Charges (as defined in the Note) at once will become due and payable upon written
notice to the Company by the Lender.
In
connection with entry into the Subordinated LOC, the Company paid to each Lender a one-time committee fee in cash equal to 3.5%
of such Lender’s Commitment Amount. In addition, in consideration of the Lenders’ commitment to provide the Advances to the
Company, the Company issued the Lenders five-year warrants to purchase an aggregate of 128,000
shares of common stock at an exercise price of
$2.53
per share that are, subject to certain ownership
limitations, exercisable immediately (the “Warrants”) (the
number of warrants issued to each Lender is equal to the product of (i) 160,000 shares of common stock multiplied by (ii) the ratio represented
by each Lender’s Commitment Amount divided by the $5,000,000).
Pursuant
to a selling agreement, dated as of May 11, 2022, the Company retained HPO as its placement agent in connection with the Subordinated
LOC. As compensation for services rendered in conjunction with the Subordinated LOC, the Company paid HPO a finder fee equal to 3%
of the Commitment Amount from each such Lender placed by HPO in cash.
Esenjay
Loan
On
March 9, 2020, the Company and Esenjay Investments, LLC (“Esenjay”) entered into a certain convertible promissory note (“Original
Esenjay Note”) pursuant to which Esenjay provided the Company with a loan in the principal amount of $750,000
(the “Esenjay Loan”). On June 2,
2020, the Original Esenjay Note was amended and restated to (i) extend the maturity date from June
30, 2020 to September
30, 2020, and (ii) to increase the principal
amount outstanding under the Original Esenjay Note to $1,400,000
(the “Esenjay Note”).
Between
June 26, 2020 and July 22, 2020, Esenjay assigned a total of $900,000
of the Esenjay Note to three (3) accredited investors
and the $900,000
note balance was converted into shares of common
stock at $4.00
per share, which was the cash price per share,
and resulted in the issuance of 225,000
shares of common stock.
On
August 31, 2020, the Company entered into the Third Amended and Restated Credit Facility Agreement and pursuant to which the Company
further amended the Esenjay Note to, among other items, transfer all remaining principal and accrued interest outstanding of approximately
$564,000
into the amended Credit Facility Agreement. (See
“Credit Facility” below).
Cleveland
Loan
On
July 3, 2019, the Company entered into a loan agreement with Cleveland, pursuant to which Cleveland agreed to loan the Company $1,000,000
(the “Cleveland Loan”) and issued
Cleveland an unsecured short-term promissory note in the amount of $1,000,000
(the “Unsecured Promissory Note”).
The Unsecured Promissory Note had an interest rate of 15.0%
per annum and was originally due on September
1, 2019, unless repaid earlier from a percentage
of proceeds from certain identified accounts receivable. In connection with the Cleveland Loan, the Company issued Cleveland a three-year
warrant (the “Cleveland Warrant”) to purchase the Company’s common stock in a number equal to 0.5% of the number of
shares of common stock outstanding after giving effect to the shares of common stock sold in a contemplated public offering and with
an exercise price equal to the per share price of the common stock sold in the public offering.
On
September 1, 2019, the Company entered into the First Amendment to the Unsecured Promissory Note pursuant to which the maturity date
was extended to December
1, 2019 (the “First Amendment”) and
the Cleveland Warrant terms were amended (the “Amended Warrant”). The Amended Warrant increased the warrant coverage from
0.5%
to 1%
of the number of shares of common stock outstanding after giving effect to the shares of common stock sold in the next private or public
offering and with an exercise price equal to the per share price of common stock sold in such private or public offering, as the case
may be.
On
July 9, 2020, the Company made a payment to Cleveland in the amount of $200,000
as a partial payment of the Cleveland Loan. On
July 27, 2020, in connection with the outstanding loan from Cleveland to the Company in the principal amount of $957,000,
the Company entered into the Eighth Amendment to the Unsecured Promissory Note which extended the maturity date from July
31, 2020 to August
31, 2020, and capitalized all accrued and unpaid
interest as of July 27, 2020 to the principal amount. On August 19, 2020, the Company paid Cleveland the entire remaining principal balance
due under the Cleveland Loan, together with all accrued interest payable as of August 19, 2020, in an aggregate amount of approximately
$978,000.
Credit
Facility
On
March 22, 2018, Flux Power entered into a credit facility agreement with Esenjay with a maximum borrowing amount of $5,000,000
(the “Original Agreement”). The Original
Agreement was amended multiple times to allow for, among other things, an increase in the maximum principal amount available under line
of credit (“LOC”) to $12,000,000,
the inclusion of additional lenders and extension of the maturity date to September
30, 2021.
In
August 2020, the Company paid down an aggregate principal amount of approximately $1,402,000
of the outstanding balance under the LOC. On
August 31, 2020, the Company entered into the Third Amended and Restated Credit Facility Agreement (“Third Amended and Restated
Facility Agreement”) pursuant to which the Company (i) extended the maturity date to September
30, 2021, and (ii) allowed for the transfer of
outstanding obligations under the Esenjay Note of approximately $564,000
into the LOC as noted above. In November 2020,
lenders holding an aggregate of approximately $2,161,000
in principal and accrued interest elected to
convert their notes into 540,347
shares of common stock at a price of $4.00
per share. In January and March 2021, the lenders
holding an aggregate of approximately $2,632,000
in principal and accrued interest elected to
convert their notes into 658,103
shares of common stock at a price of $4.00
per share of which approximately $1,045,000
was held by Esenjay and converted to 261,133
shares of common stock.
On
June 10, 2021, the Company repaid all obligations in full and without additional fees or termination penalties, and the Third Amended
and Restated Credit Facility Agreement and the related Second Amended and Restated Security Agreement were terminated.
NOTE
9 - STOCKHOLDERS’ EQUITY
At-The-Market
(“ATM”) Offering
On
December 21, 2020 the Company entered into a Sales Agreement (the “Sales Agreement”) with H.C. Wainwright & Co., LLC
(“HCW”) to sell shares of its common stock, par value $0.001
(the “Common Stock”) from time to
time, through an “at-the-market offering” program (the “ATM Offering”).
The
Company agreed to pay HCW a commission in an amount equal to 3.0%
of the gross sales proceeds of the shares sold under the Sales Agreement. In
addition, the Company agreed to reimburse HCW for certain legal and other expenses incurred up to a maximum of $50,000 to establish the
ATM Offering, and $2,500 per quarter thereafter to maintain such program under the Sales Agreement. The
Company has also agreed pursuant to the Sales Agreement to indemnify and provide contribution to HCW against certain liabilities, including
liabilities under the Securities Act.
On
May 27, 2021, the Company filed Amendment No. 1 (the “Amendment”) to the prospectus supplement dated December 21, 2020 (the
“Prospectus Supplement”) to increase the size of the ATM Offering from an aggregate offering price of up to $10
million in the Prospectus Supplement to an amended
maximum aggregate offering price of up to $20
million of shares of the Company’s common
stock (the “Shares”) (which amount includes the value of shares the Company has already sold prior to the date of the Amendment)
pursuant to the base prospectus dated October 26, 2020, the Prospectus Supplement, and the Amendment (collectively, the “Prospectus”).
From
December 21, 2020 through June 30, 2022, the Company sold an aggregate of 1,169,564
shares of common stock at an average price of
$12.24
per share for gross proceeds of approximately
$14.3
million under the ATM Offering. The Company received
net proceeds of approximately $13.7
million, net of commissions and other offering
related expenses.
The
Shares was registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company’s
Registration Statement on Form S-3 (File No. 333-249521), declared effective by the Securities and Exchange Commission (the “Commission”)
on October 26, 2020, and the Prospectus. Sales of the Shares, if any, may be made by any method permitted by law deemed to be an “at-the-market
offering” as defined in Rule 415(a)(4) of the Securities Act. The Company or the HCW may, upon written notice to the other party
in accordance with the terms of the Sales Agreement, suspend offers and sales of the Shares. The Company and HCW each have the right,
in its sole discretion, to terminate the Sales Agreement at any time upon prior written notice pursuant to the terms and subject to the
conditions set forth in the Sales Agreement.
Public
Offering
Registered
Direct Offering
On
September 27, 2021, the Company closed a registered direct offering, priced at-the-market under Nasdaq rules (“RDO”) for
the sale of 2,142,860
shares of common stock and warrants to purchase
up to an aggregate of 1,071,430
shares of common stock, at an offering price
of $7.00
per share and associated warrant for gross proceeds
of approximately $15.0
million prior to deducting offering expenses
totaling approximately $1.0
million. The associated warrants have an exercise
price equal to $7.00
per share and are exercisable upon issuance and
expire in five years. HCW acted as the exclusive placement agent for the registered direct offering.
The
securities sold in the RDO were sold pursuant to a “shelf” registration statement on Form S-3 (File No. 333-249521), including
a base prospectus, previously filed with the Securities and Exchange Commission (the “SEC”) on October 16, 2020 and declared
effective by the SEC on October 26, 2020. The registered direct offering of the securities was made by means of a prospectus supplement
dated September 22, 2021 and filed with the SEC, that forms a part of the effective registration statement.
2020
Public Offering and NASDAQ Capital Market Uplisting
In
August 2020, the Company closed an underwritten public offering of its common stock at a public offering price of $4.00
per share for gross proceeds of approximately
$12.4
million, which included the full exercise of
the underwriters’ over-allotment option to purchase additional shares, prior to deducting underwriting discounts and commissions
and offering expenses totaling approximately $1.7
million. A total of 3,099,250
shares of common stock were issued by the Company
in the offering, including the full exercise of the over-allotment option. The securities were offered pursuant to a registration statement
on Form S-1 (File No. 333-231766), which was declared effective by the SEC on August 12, 2020. Concurrent with the announcement of the
public offering, on August 14, 2020, the Company’s common stock commenced trading on The NASDAQ Capital Market under the symbol
“FLUX.”
Private
Placements
2020
Private Placement
On
April 22, 2020, the Company sold an aggregate of 66,250
shares of common stock, at $4.00
per share, for an aggregate purchase price of
$265,000
in cash to two (2) accredited investors. On June
30, 2020, the Company sold an additional 275,000
shares of common stock at $4.00
per share in its June closing of the offering,
for an aggregate purchase price of $1,100,000
to six (6) accredited investors (“June
Closing:”). Esenjay and Mr. Dutt, the Company’s president and chief executive officer, participated in the June Closing in
the amount of $300,000
and $50,000,
respectively. On July 24, 2020, the Company sold an aggregate of 800,000
shares under the 2020 Private Placement at $4.00
per share, for an aggregate purchase price of
$3,200,000
in cash to accredited investors, including Mr.
Cosentino, a former director, who participated in the offering in the amount of $250,000.
The
shares offered and sold in the private placement offerings described above were sold to accredited investors in reliance upon exemptions
from registration pursuant to Rule 506(b) of Regulation D promulgated under Section 4(a)(2) under the Securities Act. Such shares were
not registered under the Securities Act of 1933, as amended (“Securities Act”), and could not be offered or sold in the United
States absent registration or an applicable exemption from the registration requirements of the Securities Act. Pursuant to a registration
statement on Form S-3 filed with the SEC on October 16, 2020, which became effective on October 26, 2020, such shares were registered.
Debt
Conversion
LOC
Conversion
On
June 30, 2020, there was a partial conversion of $7,383,000
in principal and accrued interest outstanding
under the secured promissory notes at a conversion price of $4.00
per share that resulted in the issuance of 1,845,830
shares of common stock.
On
November 6, 2020, there was a partial conversion of $2,161,000
in principal and accrued interest outstanding
under the secured promissory notes at $4.00
per share that resulted in the issuance of 540,347
shares of common stock.
In
January and March 2021, there were conversions of the remaining balance of approximately $2,632,000
in principal and accrued interest outstanding
under the secured promissory notes that resulted in the issuance of 658,103
shares of common stock.
All
conversions were at the option of the lenders, and all outstanding secured promissory notes were converted into shares of common stock.
Esenjay
Note Conversion
On
June 30, 2020, two (2) accredited individuals, who had been assigned $500,000
of the Esenjay Note, converted all principal
into 125,000
shares of common stock at $4.00
per share. On July 22, 2020, one accredited individual,
who had been assigned $400,000
of the Esenjay Note converted all principal into
100,000
shares of common stock at $4.00
per share.
Warrants
On
July 3, 2019, the Company issued a three-year
warrant to Cleveland Capital, L.P. (“Cleveland
Warrant”) to purchase our common stock in a number equal to one-half percent (0.5%)
of the number of shares of common stock outstanding after giving effect to the total number of shares of common stock sold in a public
offering at an exercise price equal to the per share public offering price. On September 1, 2019, the Cleveland Warrant was amended and
restated to change the warrant coverage from 0.5%
to 1%
of the number of shares of common stock outstanding after giving effect to the total number of shares of common stock sold in the next
private or public offering (“Offering”) at an exercise price equal the per share price of common stock sold in the Offering.
The closing of a private offering constituting the Offering occurred on July 24, 2020. Upon such closing, the number and the exercise
price of the Cleveland Warrant became determinable, and represented as a right to purchase up to 83,205
shares of common stock at $4.00
per share and had a fair value of approximately
$174,000.
As of June 30, 2021, all 83,205
warrants remained outstanding and exercisable.
In
August 2020 and in conjunction with the Company’s public offering, the Company issued five-year
warrants to the underwriters to purchase up to
185,955
shares of the Company’s common stock at
an exercise price of $4.80
per share and had a fair value of approximately
$513,000.
The underwriters’ warrants became exercisable on February 8, 2021.
In
connection with the Company’s RDO, in September 2021 the Company issued five-year
warrants to the RDO investors to purchase up
to 1,071,430
shares of the Company’s common stock at
an exercise price of $7.00
per share and were estimated to have a fair value
of approximately $3,874,000.
The warrants were exercisable immediately and are limited to beneficial ownership of 4.99%
at any point in time in accordance with the warrant agreement.
In
May 2022 and in conjunction with entry into a credit facility with Cleveland Capital, L.P. (“Cleveland”), Herndon Plant Oakley,
Ltd. (“HPO”), and other lenders (together with Cleveland and HPO, the “Lenders”), the Company issued five-year
warrants to the Lenders to purchase up to 128,000
shares of the Company’s common stock at
an exercise price of $2.53
per share and had a fair value of approximately
$173,000.
In
June 2022 and in conjunction with the entry into the Second Amendment to Loan and Security Agreement with Silicon Valley Bank (“SVB”),
the Company issued twelve-year
warrants to SVB and its designee, SVB Financial
Group, to purchase up to 40,806
shares of the Company’s common stock at
an exercise price of $2.23
per share and had a fair value of approximately
$80,000.
Warrant
detail for the year ended June 30, 2022 is reflected below:
SCHEDULE
OF STOCK WARRANT ACTIVITY
| |
Number
of Warrants | | |
Weighted Average Exercise Price
Per Warrant | | |
Remaining Contract Term
(# years) | |
Warrants
outstanding and exercisable at June 30, 2021 | |
| 214,883 | | |
$ | 4.49 | | |
| | |
Warrants
issued | |
| 1,240,236 | | |
$ | 6.38 | | |
| | |
Warrants
outstanding and exercisable at June 30, 2022 | |
| 1,455,119 | | |
$ | 6.10 | | |
| 4.17 | |
Warrant
detail for the year ended June 30, 2021 is reflected below:
| |
Number
of Warrants | | |
Weighted Average Exercise Price
Per Warrant | | |
Remaining Contract Term
(# years) | |
Warrants
outstanding and exercisable at June 30, 2020 | |
| 83,205 | | |
$ | 4.00 | | |
| | |
Warrants
issued | |
| 185,955 | | |
$ | 4.80 | | |
| | |
Warrants
exercised | |
| (40,993 | ) | |
$ | 4.80 | | |
| | |
Warrants
forfeited | |
| (13,284 | ) | |
$ | 4.80 | | |
| | |
Warrants
outstanding and exercisable at June 30, 2021 | |
| 214,883 | | |
$ | 4.49 | | |
| 2.92 | |
Stock
Options
In
connection with the reverse acquisition of Flux Power, Inc in 2012, the Company assumed the 2010 Plan. As of June 30, 2022, there were
21,944
options to purchase common stock outstanding
under the 2010 Plan. No additional options may be granted under the 2010 Plan.
On
February 17, 2015 the Company’s stockholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan
offers certain employees, directors, and consultants the opportunity to acquire the Company’s common stock subject to vesting requirements,
and serves to encourage such persons to remain employed by the Company and to attract new employees. The 2014 Plan allows for the award
of the Company’s common stock and options, up to 1,000,000
shares of the Company’s common stock. As
of June 30, 2022, 170,725
shares of the Company’s common stock were
available for future grants under the 2014 Plan.
On
April 29, 2021, the Company’s stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan
authorizes the issuance of awards for up to 2,000,000
shares of common stock in the form of incentive
stock options, non-statutory stock options, stock appreciation rights, restricted stock units, restricted stock awards and unrestricted
stock awards to officers, directors and employees of, and consultants and advisors to, the Company or its affiliates. As of June 30,
2022, no awards had been granted under the 2021 Plan.
Activity
in stock options during the year ended June 30, 2022 and related balances outstanding as of that date are reflected below:
SCHEDULE
OF STOCK OPTIONS ACTIVITY
| |
Number
of Shares | | |
Weighted Average Exercise
Price | | |
Weighted Average Remaining Contract Term
(# years) | |
Outstanding
at June 30, 2021 | |
| 531,205 | | |
$ | 11.02 | | |
| | |
Exercised | |
| (3,400 | ) | |
$ | 4.65 | | |
| | |
Forfeited
and cancelled | |
| (24,372 | ) | |
$ | 11.65 | | |
| | |
Outstanding
and exercisable at June 30, 2022 | |
| 503,433 | | |
$ | 11.03 | | |
| 5.66 | |
Activity
in stock options during the year ended June 30, 2021 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, 2020 | |
| 579,584 | | |
$ | 11.00 | | |
| | |
Exercised | |
| (22,760 | ) | |
$ | 6.16 | | |
| | |
Forfeited
and cancelled | |
| (25,619 | ) | |
$ | 14.62 | | |
| | |
Outstanding
at June 30, 2021 | |
| 531,205 | | |
$ | 11.02 | | |
| 6.73 | |
Exercisable
at June 30, 2021 | |
| 490,323 | | |
$ | 10.87 | | |
| 6.64 | |
Restricted
Stock Units
On
November 5, 2020, the Company’s Board of Directors approved an amendment to the 2014 Plan, to allow grants of Restricted Stock
Units (“RSUs”). Subject to vesting requirements set forth in the RSU Award Agreement, one share of common stock is issuable
for one vested RSU. On November 5, 2020, the Board of Directors authorized the following RSUs to be granted under the amended 2014 Plan:
(i) a total of 43,527
RSUs to certain executive officers as one-time
retention incentive awards, and (ii) a total of 91,338
RSUs to certain key employees as annual equity
compensation of which 45,652
were performance-based RSUs and 45,686
were time-based RSUs. On April 29, 2021, an additional
18,312
time-based RSUs were authorized by the Company’s
Board of Directors to be granted under the amended 2014 Plan. On October 29, 2021, the Board of Directors authorized the following RSUs
to be granted under the amended 2014 Plan: (i) a total of 97,828
RSUs to certain executive officers of which 48,914
were performance-based RSUs and 48,914
were time-based RSUs, and (ii) a total of 81,786
time-based RSUs to certain other key employees.
The RSUs are subject to the terms and conditions provided in (i) the Restricted Stock Unit Award Agreement for time-based awards (“Time-based
Award Agreement”), and (ii) the Performance Restricted Stock Unit Award Agreement for performance-based awards (“Performance-based
Award Agreement”).
Activity
in RSUs during the year ended June 30, 2022 and related balances outstanding as of that date are reflected below:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number
of Shares | | |
Weighted
Average Grant date Fair Value | | |
Weighted
Average Remaining Contract Term (#
years) | |
Outstanding
at June 30, 2021 | |
| 131,652 | | |
$ | 9.25 | | |
| | |
Granted | |
| 250,786 | | |
$ | 4.82 | | |
| | |
Vested/Settled | |
| (9,156 | ) | |
$ | 11.56 | | |
| | |
Forfeited
and cancelled | |
| (69,061 | ) | |
$ | 6.93 | | |
| | |
Outstanding
at June 30, 2022 | |
| 304,221 | | |
$ | 6.06 | | |
| 1.82 | |
Activity
in RSUs during the year ended June 30, 2021 and related balances outstanding as of that date are reflected below:
| |
Number
of Shares | | |
Weighted
Average Grant date Fair Value | | |
Weighted
Average Remaining Contract Term (#
years) | |
Outstanding at June
30, 2020 | |
| - | | |
$ | - | | |
| | |
Granted | |
| 153,177 | | |
$ | 9.20 | | |
| | |
Forfeited
and cancelled | |
| (21,525 | ) | |
$ | 8.88 | | |
| | |
Outstanding
at June 30, 2021 | |
| 131,652 | | |
$ | 9.25 | | |
| 2.72 | |
Stock-based
Compensation
Stock-based
compensation expense for the years ended June 30, 2022 and 2021 represents the estimated fair value of stock options and RSUs at the
time of grant amortized under the straight-line method over the expected vesting period and reduced for estimated forfeitures of options
and RSUs. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from original estimates. At June 30, 2022, the aggregate intrinsic value of exercisable options was $0.
The
following table summarizes stock-based compensation expense for employee and non-employee option and RSU grants:
SCHEDULE
OF STOCK-BASED COMPENSATION EXPENSES
| |
| | | |
| | |
Years
ended June 30, | |
2022 | | |
2021 | |
Research
and development | |
$ | 144,000 | | |
$ | 178,000 | |
Selling
and administrative | |
| 567,000 | | |
| 619,000 | |
Total
stock-based compensation expense | |
$ | 711,000 | | |
$ | 797,000 | |
At
June 30, 2022, the unamortized stock-based compensation expense relating to outstanding stock options and RSUs was approximately $0
and $983,000,
respectively. The unamortized amount related to RSUs is expected to be expensed over the weighted-average remaining recognition period
of 1.82
years.
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. A valuation allowance of approximately $22,951,000
and $18,839,000
has been established to offset the net deferred
tax assets as of June 30, 2022 and 2021, 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).
The
Company has incurred losses since inception, so no current income tax provision or benefit has been recorded. Significant components
of the Company’s net deferred tax assets are shown in the table below.
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
| | | |
| | |
| |
Year
Ended June 30, | |
| |
2022 | | |
2021 | |
Deferred
Tax Assets: | |
| | | |
| | |
Net
operating loss carryforwards | |
$ | 20,654,000 | | |
$ | 16,111,000 | |
Research
& development credit carryforward | |
| 27,000 | | |
| 27,000 | |
Stock
compensation | |
| 1,636,000 | | |
| 1,696,000 | |
Interest
expense Sec. 163 | |
| - | | |
| 366,000 | |
Lease
liability | |
| 802,000 | | |
| 924,000 | |
Other,
net | |
| 559,000 | | |
| 564,000 | |
Gross
deferred tax assets | |
| 23,678,000 | | |
| 19,688,000 | |
Valuation
allowance for deferred tax assets | |
| (22,951,000 | ) | |
| (18,839,000 | ) |
Total
deferred tax assets | |
$ | 727,000 | | |
$ | 849,000 | |
| |
| | | |
| | |
Deferred
Tax Liabilities: | |
| | | |
| | |
Right
of use asset | |
$ | (727,000 | ) | |
$ | (849,000 | ) |
Total
deferred tax liabilities | |
| (727,000 | ) | |
| (849,000 | ) |
Net
deferred tax liabilities | |
$ | - | | |
$ | - | |
At
June 30, 2022, the Company had unused net operating loss (“NOL”) carryovers of approximately $74,150,000
and $72,776,000
that are available to offset future federal and
state taxable income, respectively. Federal NOL carryforwards arising after 2017 of approximately $51,742,000
do not expire. Federal NOL carryforwards arising
before 2018 of approximately $22,408,000
and all of the state NOL carryforward begin to
expire in 2030.
The
provision for income taxes on earnings subject to income taxes differs from the statutory federal rate at June 30, 2022 and 2021, due
to the following:
SCHEDULE
OF EFFECTIVE INCOME TAX RATE RECONCILIATION
| |
| | | |
| | |
| |
Year
Ended June 30, | |
| |
2022 | | |
2021 | |
Federal
income taxes at 21% | |
$ | (3,278,000 | ) | |
$ | (2,686,000 | ) |
State
income taxes, net | |
| (1,090,000 | ) | |
| (894,000 | ) |
Permanent
differences and other | |
| 102,000 | | |
| (58,000 | ) |
Other
true ups, if any | |
| 154,000 | | |
| (27,000 | ) |
Change
in valuation allowance | |
| (4,112,000 | ) | |
| (3,665,000 | ) |
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, 2022 and 2021.
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, 2022 or June 30, 2021.
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 California commercial bank. Our cash balance at this institution
is secured by the Federal Deposit Insurance Corporation up to $250,000.
As of June 30, 2022 and 2021, cash was approximately $485,000,
and $4,713,000 respectively,
which consisted 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, 2022, the Company had four (4) major customers that each represented more than 10% of its revenues, on an individual
basis, and together represented approximately $29,254,000
or 69%
of its total revenues.
During
the year ended June 30, 2021, the Company had three (3) major customers that each represented more than 10% of its revenues, on an individual
basis, and together represented approximately $16,004,000
or 61%
of its total revenues.
Suppliers/Vendor
Concentrations
The
Company obtains a limited number of components and supplies included in its products from a small group of suppliers. During the year
ended June 30, 2022 the Company had one (1) supplier who accounted for more than 10%
of its total purchases which represented approximately $13,884,000
or 28%
of its total purchases.
During
the year ended June 30, 2021 the Company had two (2) suppliers who accounted for more than 10%
of its total purchases, on an individual basis, and together represented approximately $9,260,000
or 27%
of its total purchases.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time
that may harm our business. To the best knowledge of management, there are no material legal proceedings pending against the Company.
Operating
Leases
On
April 25, 2019 the Company signed a Standard Industrial/Commercial Multi-Tenant Lease (“Lease”) with Accutek to rent approximately
45,600
square feet of industrial space at 2685 S. Melrose Drive, Vista,
California. The
Lease has an initial term of seven years and four months, commencing on or about June 28, 2019. The
lease contains an option to extend the term for two periods of 24 months, and the right of first refusal to lease an additional approximate
15,300 square feet. The monthly rental rate was $42,400
for the first 12 months, escalating at 3%
each year.
On
February 26, 2020, the Company entered into the First Amendment to Standard Industrial/Commercial Multi-Tenant Lease dated April 25,
2019 (the “Amendment”) with Accutek to rent an additional 16,309
rentable square feet of space plus a residential
unit of approximately 1,230
rentable square feet (for a total of approximately
17,539
rentable square feet). The
lease for the additional space commenced 30 days following the occupancy date of the additional space, and terminates concurrently with
the term for the lease of the original lease, which expires on November
20, 2026.
The base rent for the additional space is the same rate as the space rented under the terms of the original lease, $0.93
per
rentable square (subject to 3% annual increase). Rent
during the year ended June 30, 2022 was approximately $62,000
per month. In connection with the Amendment,
the Company purchased certain existing office furniture for a total purchase price of $8,300.
Total
rent expense was approximately $867,000 and
$841,000 for
the years ended June 30, 2022 and 2021, respectively.
The
Future Minimum Lease Payments are:
SCHEDULE
OF FUTURE MINIMUM LEASE PAYMENTS
| |
| | |
2023 | |
$ | 768,000 | |
2024 | |
| 791,000 | |
2025 | |
| 815,000 | |
2026 | |
| 840,000 | |
Thereafter | |
| 359,000 | |
Total
Future Minimum Lease Payments | |
| 3,573,000 | |
Less:
discount | |
| (708,000 | ) |
Total
lease liability | |
$ | 2,865,000 | |
NOTE
13 - SUBSEQUENT EVENTS
Separation
Agreement
On
August 12, 2022, Jonathan Berry, the Company’s Chief Operating Officer, separated from the Company and entered into an Employee
Separation and Release agreement dated August 24, 2022 (“Separation Agreement”). Under the Separation Agreement, the Company
agreed to provide Mr. Berry with certain payments and benefits comprising of: (i) a separation payment of two hundred five thousand two
hundred dollars, less required payroll withholdings, (ii) twenty-eight thousand nine hundred seven and 52/100 dollars, less required
payroll withholdings, to defray costs for COBRA coverage, and (iii) reimbursement for an amount equal to twelve months for life insurance
continuation (collectively, the “Separation Benefits”). In exchange for the Separation Benefits, among other things as set
forth in the Separation Agreement, Mr. Berry agreed to a release of claims and waivers in favor of the Company and to certain restrictive
covenant obligations, and also reaffirmed his commitment to comply with his existing restrictive covenant obligations.
RSU
Grants
On
August 26, 2022, as compensation for board services provided during the last quarter of Fiscal 2022, Ms. Bo-Linn, a director of the Company,
was granted 5,034
RSUs, of
which 1/3 vested immediately, each of the remaining 1/3 of the RSUs will vest on April 29, 2023, and April 29, 2024.
Ms. Bo-Linn’s grant was consistent with the standard equity component of Non-Executive Director Compensation Package as approved
by the Board.