Flux Power Holdings, Inc. 10-K

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for Common Stock Our common stock is traded on The NASDAQ Capital Market under the symbol “FLUX.” Holders of Record of Common Stock As of September 10, 2021, we had approximately 1,454 stockholders of record for our common stock. The foregoing number of stockholders of record does not include an unknown number of stockholders who hold their stock in “street name.” Dividend Policy We have never declared or paid cash dividends on our common stock. We presently do not expect to declare or pay such dividends in the foreseeable future and expect to reinvest all undistributed earnings to expand our operations, which the management believes would be of the most benefit to our stockholders. The declaration of dividends, if any, will be subject to the discretion of our Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others. Recent Sales of Unregistered Securities Unregistered securities sold by the Company during the period covered by this report have been previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K. Purchases of Equity Securities None. 20 Equity Compensation Plan Information The following table provides certain information with respect to our equity compensation plans in effect as of June 30, 2021: Number of securities to be issued upon exercise of outstanding options, and settlement of RSUs (a) Weighted-average exercise price of outstanding options, and issuance price of RSUs (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c) Equity compensation plans approved by security holders (1) 508,669 $ 11.04 328,670 Equity compensation plans approved by security holders (2) - - 2,000,000 Equity compensation plans not approved by security holders (3) 22,536 $ 10.55 - Total 531,205 $ 11.02 2,328,670 (1) 211,800 incentive stock options (“ISO”) and 80,700 non-qualified stock options (“NQSO”) of our common stock were granted under the 2014 Option Plan during the year ended June 30, 2018. We granted 147,411 incentive stock options and 97,616 non-qualified stock options under the 2014 Option Plan during Fiscal 2019. We granted 15,324 incentive stock options and 3,948 non-qualified stock options under the 2014 Option Plan during Fiscal 2020. We granted 153,177 restricted stock units under the 2014 Option Plan during Fiscal 2021. The 2014 Option Plan was approved February 17, 2015, and was amended on October 25, 2017. (2) Consists of 2,000,000 shares of common stock reserved for issuance under the 2021 Equity Incentive Plan which was approved by our shareholders on April 29, 2021. (3) Consists of 7,200 options granted under the 2010 Stock Option Plan (“2010 Option Plan”) and assumed by us in the reverse acquisition. An additional 30,700 non-qualified options were issued. At June 30, 2021, there was 22 ,536 options outstanding. ITEM 6 - SELECTED FINANCIAL DATA As a smaller reporting company as defined by Rule12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item. 21 ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this Annual Report on Form 10-K. Some of the statements contained in the following discussion of the Company’s financial condition and results of operations refer to future expectations or include other “forward-looking” information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated, including, but not limited to, those discussed in Part I, Item 1A of this report under the heading “Risk Factors,” which are incorporated herein by reference. See “Special Note regarding Forward-Looking Statements” included in this Report on Form 10-K for a discussion of factors to be considered when evaluating forward-looking information detailed below. These factors could cause our actual results to differ materially from the forward-looking statements. Business Overview We design, develop, manufacture, and sell a portfolio of advanced lithium-ion energy storage solutions for the material handling sector which includes lift trucks, airport ground support equipment (“GSE”), and other industrial and commercial applications. 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 (“SkyBMS”) 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 in the material handling sector continues to drive our current revenue growth. 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 fleets of forklifts and GSEs as a priority. We intend to reach this goal by investing in research and development to expand our product mix, and by expanding our sales and marketing efforts, improving our customer support efforts and continuing our efforts to improve production capacity and efficiencies. Our research and development efforts will continue to focus on providing adaptable, reliable and cost effective energy storage solutions for customers. We recently 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 (“AI”) to predictively balance the cells for optimal performance. We currently focus on 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. Applications of our modular packs for other industrial and commercial uses, such as solar energy storage, provide further growth 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. Our recent business growth reflects our expanded product line, additional OEM relationships and supply contracts, production capacity increases, and an expanded nation-wide service footprint. Our strategy for sales growth places a high priority on growing relationships with the national account sales forces of the equipment OEMs, expanding relationships with major equipment dealers and distributors, and leveraging our brand reputation of trust and reliability. To achieve our long-term strategy, we will need to manage our growth in a thoughtful manner, improve the profitability of our business and continue to take steps to enhance our financial strength. 22 Financing Activities During fiscal 2021, we directed our efforts to reduce our outstanding debt through a combination of debt service and debt conversion to equity. During the quarter ended March 31, 2021, the remaining outstanding balance of approximately $2,632,000 in principal and accrued interest under the Credit Facility was converted into 658,103 shares of common stock, which resulted in elimination of the entire outstanding debt by end of Fiscal 2021.Accordingly, on June 10, 2021, the Third Amended and Restated Credit Facility Agreement and the related Second Amended and Restated Security Agreement dated August 31, 2020 by and among the Company and the Lenders (the “Security Agreement”) were terminated. Under the Credit Facility, the Company could borrow up to $12 million under a revolving line of credit, with such advance subject to discretion of the Lenders. Pursuant to the Security Agreement, advances and obligations under the Credit Facility were secured by a security interest in collateral of the Company. As of the termination date, all payments due under the related notes have been made in full and all obligations under such notes and the Credit Facility have been paid or discharged in full. In addition, the Company did not incur any early termination penalties in connection with the termination of the Third Amended and Restated Credit Agreement or Security Agreement. On August 18, 2020, we closed an underwritten public offering of our common stock at a public offering and issued 3,099,250 shares of our common stock at $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. Concurrent with the announcement of our public offering, on August 14, 2020, our common stock commenced trading on The NASDAQ Capital Market under the symbol “FLUX.” At-The-Market Offering On October 16, 2020, we filed a shelf registration on Form S-3 for up to $50 million to support our ability to raise capital to support our business growth. In connection with the shelf registration statement, in December 2020, we entered into a Sales Agreement with H.C. Wainwright & Co., LLC enabling us to sell shares of our common stock in “At-The-Market” offerings from time to time. On May 27, 2021 we filed an amendment to the prospectus supplement dated December 21, 2020 allowing us to sell up to $20 million of shares under the “at-the-market offering” program (“ATM Offering”). From December 2020 to June 30, 2021, we sold an aggregate of 978,782 shares of common stock at an average price of $12.93 per share for gross proceeds of approximately $12.7 million in the ATM Offering, prior to deducting commissions and other offering related expenses. Borrowing under the Revolving Line of Credit We also put in place a revolving line of credit for up to $4 million with Silicon Valley Bank (“SVB”). On November 9, 2020, we entered into a certain Loan and Security Agreement (“Agreement”) with SVB for a senior secured revolving credit facility for up to $4.0 million available on a revolving basis (“SVB Credit Facility”). The Company has utilized the SVB Credit Facility from-time-to-time, however as of June 30, 2021, the outstanding balance of the line of credit was $0 and the entire $4.0 million of the facility is available for future draws through November 8, 2021, unless the credit facility is renewed and its term is extended prior to its expiration. Recent Accounting Pronouncements Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements, and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and estimates affect the preparation of our financial statements: 23 Accounts Receivable Accounts receivable are carried at their estimated collectible amounts. The Company has not experienced collections issues related to its accounts receivable and has not recorded an allowance for doubtful accounts during the years ended June 30, 2021 and 2020. Inventories Inventories consist primarily of battery management systems and the related subcomponents, and are stated at the lower of cost (first-in, first-out) or 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 an adjustment related to obsolete inventory in the amount of approximately $15,000 during the year ended June 30, 2020. The Company has no adjustment related to obsolete inventory during the year ended June 30, 2021. 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 represents the point in time that our customer receives delivery of 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, 2021 and 2020, the Company carried warranty liability of approximately $895,000 and $726,000, respectively, which is included in accrued expenses on the Company’s consolidated balance sheets. 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. Segment and Related Information We operate as a single reportable segment. 24 Comparison of Results of Operations of the Years ended June 30, 2021 and 2020 The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this Annual Report. The following table represents our statement of operations for the years ended June 30, 2021 (“Fiscal 2021”) and June 30, 2020 (“Fiscal 2020”). Year Ended June 30, 2021 Year Ended June 30, 2020 $ % of Revenues $ % of Revenues Revenues $ 26,257,000 100 % $ 16,842,000 100 % Cost of sales 20,467,000 78 % 14,656,000 87 % Gross profit 5,790,000 22 % 2,186,000 13 % Operating expenses: Selling and administrative 12,599,000 48 % 9,761,000 58 % Research and development 6,669,000 25 % 4,973,000 29 % Total operating expenses 19,268,000 73 % 14,734,000 87 % Operating loss (13,478,000 ) -51 % (12,548,000 ) -74 % Other income (expense): Other income 1,307,000 4 % - - % Interest expense (622,000 ) -2 % (1,788,000 ) -11 % Net loss $ (12,793,000 ) -49 % $ (14,336,000 ) -85 % Revenues Historically our product focus has been on lift equipment, reflecting a mix of walkie pallet jacks and higher capacity packs for Class 1, 2, and 3 forklifts. Over the past two years, we expanded our product offering into adjacent applications, including airport GSE,stationary energy storage and other solutions for industrial and commercial applications. We believe that we are well positioned to address the needs of many segments within the material handling sector in light of our modular and scalable battery pack design coupled with our proprietary battery management system that can be coupled with our “SkyBMS” product offering. 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, primarily in North America. The channels sell principally to large company, national accounts. We sell certain battery packs directly to other accounts including industrial equipment manufacturers and end users. Revenues for Fiscal 2021 increased $9,415,000 or 56%, to $26,257,000, compared to $16,842,000 for Fiscal 2020. The increase in revenues was due to an increase in our average selling price and a higher number of energy solutions sold. The launch of larger packs over the past two years has shifted our portfolio mix to include packs with higher selling prices as compared to our historical mix. The increase in revenues included both higher sales to existing customers as well as sales to new customers. Cost of Sales Cost of sales for Fiscal 2021 increased $5,811,000 or 40%, to $20,467,000, compared to $14,656,000 for Fiscal 2020. The increase in cost of sales was due to higher sales of energy solutions, partially offset by improved cost of sales efficiencies. Cost of sales as a percentage of revenues for Fiscal 2021 was 78%, an improvement of 9% over 87% for the Fiscal 2020. The principal drivers of improved cost of sales efficiencies were simplified component designs, reduced material costs, reduced warranty related expenses, and lower personnel related costs. 25 Gross Profit Gross profit for Fiscal 2021 increased $3,604,000 or 165%, to $5,790,000, compared to $2,186,000 for the Fiscal 2020. Gross profit as a percentage of revenues increased to 22% for Fiscal 2021 as compared to 13% for Fiscal 2020. Improvement in the gross profit margin was primarily attributable to higher sales to both new and existing customers, and cost of sales efficiencies. Selling and Administrative Selling and administrative expenses for Fiscal 2021 increased $2,838,000 or 29%, to $12,599,000, compared to $9,761,000 for Fiscal 2020. The increase was primarily attributable to increases in personnel expenses of $1,911,000 related to new hires and temporary labor, an increase in insurance premiums of $498,000, and higher accounting and legal expenses of $489,000 due in part to our financing activities, partially offset primarily by a decrease in stock-based compensation of $969,000. Research and Development Research and development expenses for Fiscal 2021 increased $1,696,000 or 34%, to $6,669,000, compared to $4,973,000 for Fiscal 2020. Such expenses consisted primarily of materials, supplies, salaries and personnel related expenses, product testing, consulting, and other expenses associated with product development. The increase in research and development expenses was primarily due to new product development activities including expenses related to UL certifications of $1,113,000, staff/labor related expenses including temporary labor of $506,000, and facility costs including equipment rental of $110,000. Other Income Other income for Fiscal 2021 represented the forgiveness of the entire PPP Loan of approximately $1,297,000 in principal, together with all accrued interest of approximately $10,000. The Small Business Administration notified us that our loan and accrued interest had been forgiven on February 9, 2021. Interest Expense Interest expense for Fiscal 2021 decreased $1,166,000 or 65%, to $622,000, compared to $1,788,000 for Fiscal 2020. During Fiscal 2021, interest expense was primarily related to our outstanding lines of credit and convertible promissory note and also included approximately $174,000 related to the amortization of a debt discount related to a promissory note that was paid in full in August 2020. Interest expense decreased in Fiscal 2021 due to a lower average outstanding debt balance during the year, partially offset by $174,000 of debt discount amortization. Net Loss Net loss during Fiscal 2021 decreased $1,543,000 or 11%, to $12,793,000 compared to $14,336,000 for Fiscal 2020. The decrease was primarily attributable to an increase in gross profit and other income, and lower interest expense, partially offset by an increase in operating expenses. Adjusted EBITDA Earnings or loss before interest, income taxes, depreciation and amortization (“EBITDA”) as adjusted to remove the effect of stock-based compensation expense is referred to as Adjusted EBITDA. For the years ended June 30, 2021 and 2020, Adjusted EBITDA was a loss of approximately $11,100,000 and $10,604,000, respectively. Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides an additional metric to assess the performance of our business. Adjusted EBITDA is a non-GAAP financial measure. We calculate adjusted EBITDA by taking net income, and adding back the expenses related to interest, income taxes, depreciation, amortization, and stock-based compensation expense, and as each of those elements are calculated in accordance with GAAP. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP. 26 A reconciliation of our adjusted EBITDA to net loss is included in the table below: Years Ended June 30, 2021 2020 Net loss $ (12,793,000 ) $ (14,336,000 ) Interest, net 622,000 1,788,000 Income tax provision - - Depreciation and amortization 274,000 141,000 EBITDA (11,897,000 ) (12,407,000 ) Stock-based compensation 797,000 1,803,000 Adjusted EBITDA $ (11,100,000 ) $ (10,604,000 ) Liquidity and Capital Resources Overview / Going Concern As of June 30, 2021, we had a cash balance of $4,713,000 and an accumulated deficit of $66,205,000. Our business has not generated sufficient cash to fund our planned operations, and we will need to raise additional cash and capital resources. We believe our existing cash, additional funding available under our revolving line of credit for up to $4.0 million with Silicon Valley Bank, net proceeds of approximately $14.0 million raised during September 2021 through a registered direct offering, and potential sales of our common stock under our ATM Offering, will be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve months. See “Future Liquidity Needs” below. Cash Flow Summary Year Ended June 30, 2021 2020 Net cash used in operating activities $ (18,358,000 ) $ (8,344,000 ) Net cash used in investing activities (1,102,000 ) (323,000 ) Net cash provided by financing activities 23,447,000 9,291,000 Net change in cash $ 3,987,000 $ 624,000 Operating Activities Net cash used in operating activities was $18,358,000 for Fiscal 2021, compared to net cash used in operating activities of $8,344,000 for Fiscal 2020. The net cash used in operating activities for Fiscal 2021 reflects the net loss of $12,793,000 for the period offset primarily by non-cash items including depreciation, stock-based compensation, PPP loan forgiveness, non-cash interest expense, non-cash facility lease expense, amortization of prepaid offering costs, as well as, increases in accounts payable, accrued expenses, and deferred revenue, partially offset by increases in accounts receivable, inventory, other current assets, and decreases in customer deposits, drawdowns from factoring facility, accrued interest, office lease payable. We intend to improve our working capital efficiency by improving vendor terms, reducing inventory levels, implementing additional cost saving initiatives, and decreasing our receivables days outstanding. Net cash used in operating activities for Fiscal 2020 reflects the net loss of $14,336,000 for the period offset primarily by non-cash items including depreciation, stock-based compensation, non-cash interest expense, non-cash facility lease expense, allowance for inventory reserve, and stock issued for services, as well as increases in accounts payable and accrued expense, customer deposits, and drawdowns from factoring facility, partially offset by increases in accounts receivable, inventory, other current assets, and office lease payable. Investing Activities Net cash used in investing activities for Fiscal 2021 was $1,102,000 and consisted primarily of the costs of internally developed software and purchase of furniture and equipment and warehouse equipment. 27 Net cash used in investing activities for Fiscal 2020 was $323,000 and consisted primarily of the purchase of leasehold improvements and warehouse equipment. Financing Activities Net cash provided by financing activities was $23,447,000 for Fiscal 2021, which primarily consisted of $26,000,000 in net proceeds from the issuance of common stock in a public offering, a private placement of common stock, sales of common stock under our ATM Offering, and $55,000 from stock and warrant exercises, which were partially offset by $2,580,000 used to repay outstanding debt, and $28,000 in payment of financing lease payable. We occasionally used our bank revolving line of credit during the Fiscal 2021, but the balance was zero at June 30, 2021. Net cash provided by financing activities was $9,291,000 for Fiscal 2020, which primarily consisted of proceeds from the issuance of common stock in a private placement of common stock, borrowings under the Company’s Amended and Restated Credit Facility Agreement, proceeds from the Paycheck Protection Program loan, and short-term loans. As of June 30, 2021, approximately $7.3 million remained available under our $20.0 million ATM Offering for future sales of our common stock for financing activities. Future Liquidity Needs We have evaluated our expected cash requirements over the next twelve months, which include, but are not limited to, investments in additional sales and marketing and research and development, capital expenditures, and working capital requirements. We believe our existing cash, additional funding available under our revolving line of credit for up to $4.0 million with Silicon Valley Bank, net proceeds of approximately $14.0 million raised during September 2021 through a registered direct offering, and potential sales of our common stock under our ATM Offering, will be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve months.. In addition, to support our operations and anticipated growth, we intend to continue our efforts to secure additional capital from a variety of current and new sources including, but not limited to, a working capital line of credit facility, and sales of our equity securities. 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. In the event the Company required to obtain additional funds, there is no guarantee that the Company will be able to raise or obtain the additional funds or that the funds will be available on favorable terms to the Company. Off-Balance Sheet Arrangements As of June 30, 2021, we had no off-balance sheet arrangements. New Accounting Standards Recently Adopted Accounting Pronouncements The Company did not adopt any new accounting pronouncements for the year ended June 30, 2021. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item begin on page F-1 with the index to financial statements followed by the financial statements. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 28