Flux Power Holdings, Inc. 10-K

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 electrification of a range of industrial and 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 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 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 energy storage needs. We have established selling relationships 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 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 our customers. We have filed three new patents on advanced technology related to lithium-ion battery packs. The technology behind these pending patents is 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. 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. The following table summarizes the new orders, shipments, and backlog activities for the last six (6) fiscal quarters: Fiscal Quarter Ended Beginning Backlog New Orders Shipments Ending Backlog March 31, 2022 $ 31,415,000 $ 20,495,000 $ 13,317,000 $ 38,593,000 June 30, 2022 $ 38,593,000 $ 11,622,000 $ 15,195,000 $ 35,020,000 September 30, 2022 $ 35,020,000 $ 9,678,000 $ 17,840,000 $ 26,858,000 December 31, 2022 $ 26,858,000 $ 20,652,000 $ 17,158,000 $ 30,352,000 March 31, 2023 $ 30,352,000 $ 9,751,000 $ 15,087,000 $ 25,016,000 June 30, 2023 $ 25,016,000 $ 19,780,000 $ 16,252,000 $ 28,544,000 24 “Backlog” represents the amount of anticipated revenues we may recognize in the future from existing contractual orders with customers that are in progress and have not yet shipped. Backlog values may not be indicative of future operating results as orders may be cancelled, modified or otherwise altered by customers. In addition, our ability to realize revenue from our backlog will be dependent on the delivery of key parts from our suppliers and our ability to manufacture and ship our products to customers in a timely manner. There can be no assurance that outstanding customer orders will be fulfilled as expected and that our backlog will result in future revenues. As of September 8, 2023, our order backlog was approximately $27.2 million. Business Updates Many of the disruptions from the COVID-19 pandemic over the past several years have largely abated. During the pandemic, we, like others in the industry, experienced supply chain challenges such as delays of purchased components and the shortage of components. We have addressed these supply chain challenges with improved vendor selection, and improved supply chain internal practices. However, we have experienced shipment delays of battery packs for some forklift models that have experienced production delays. We have seen recent improvements in shipment timing. The price increases during the pandemic for steel and domestic freight have lessened but still remain higher than pre-pandemic. Price recovery of increased pandemic-related costs have now begun to be realized in shipments during the latter part of Fiscal 2023. 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. Lead times for forklifts and GSE Equipment have been extended for certain model lines of major OEMs. These extended lead times have resulted in some shipment deferrals and delays in receiving anticipated orders. Not all product lines are impacted but the impact has required additional selling efforts to maintain our sales trajectory. ○ 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. 25 Overview of 2023 Financing Activities 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 an “At-The-Market” offering 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”). In Fiscal 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. In Fiscal 2022, we sold an additional 190,782 shares of common stock at average price of $8.70 per share for gross proceeds of approximately $1.7 million in the ATM Offering, prior to deducting commissions and other offering related expenses. In Fiscal 2023, we sold an additional 355,309 shares of common stock at average price of $4.54 per share for gross proceeds of approximately $1.6 million in the ATM Offering, prior to deducting commissions and other offering related expenses. As of June 30, 2023, approximately $4.1 million remained available under the ATM Offering for future sales of our common stock. Gibraltar Credit Facility On July 28, 2023, we entered into a certain Loan and Security Agreement (the “Agreement”) with Gibraltar Business Capital, LLC, a Delaware limited liability company (“GBC”). The Agreement provides us with a senior secured revolving loan facility (the “GBC Credit Facility”) for up to $15 million (the “Revolving Loan Commitment”). The revolving amount available under the GBC Credit Facility is equal to the lesser of the Revolving Loan Commitment and the borrowing base amount (as defined in the Agreement). The GBC Credit Facility is evidenced by a revolving note, which matures on July 28, 2025 (the “Maturity Date”), unless extended, modified or renewed (the “Revolving Note”). Provided that there is no event of default, the Maturity Date can automatically be extended for one (1) year period upon payment of a renewal fee for each such extension in the amount of three-quarters of one percent (0.75%) of the Revolving Loan Commitment, which fee will be due and payable on or before the applicable Maturity Date. In addition, subject to conditions and terms set forth in the Agreement, the we may request an increase in the Revolving Loan Commitment from time to time upon not less than 30 days’ notice to GBC which increase may be made at the sole discretion of GBC, as long as: (a) the requested increase is in a minimum amount of $1.0 million, and (b) the total increases do not exceed $5.0 million and no more than five (5) increases are made. Outstanding principal under the GBC Credit Facility accrues interest at Secured Overnight Financing Rate (“SOFR”, as defined in the Agreement) plus five and one half of one percent (5.50%) per annum with such interest payment is due monthly on the last day of the month. In the event of default, the amounts due under the Agreement bears interest at a rate per annum equal to three percent (3.0%) above the rate that is otherwise applicable to such amounts. We paid GBC a non-refundable closing fee for the GBC Credit Facility of $112,500 upon the execution of the Agreement. In addition, the Company is required to pay a monthly unused line fee equal to one-half of one percent (0.50%) per annum on the difference between the Revolving Loan Commitment and the average outstanding principal balance of the revolving loan(s) for such month. The obligations under the GBC Credit Facility may be prepaid in whole or in part at any time upon an exit fee of (a) two percent (2.00%) of the Revolving Loan Commitment if the obligations are paid in full during the first year after the closing date, or (b) one percent (1.00%) of the Revolving Loan Commitment if the obligations are paid in full one year after the closing date, provided, that, the exit fee will be waived if such prepayment occurs in connection with the refinancing of the obligations with Bank of America, N.A., as lender. Termination of Silicon Valley Bank LOC In connection with the entry into the Agreement (as described above) and the repayment in full of the principal amount outstanding under SVB Credit Facility together with total accrued and unpaid interest and related fees with a portion of the funds from the GBC Credit Facility on July 28, 2023, we terminated the Loan and Security Agreement, dated as of November 9, 2020, as amended , by and among SVB and the Company. Segment and Related Information We operate as a single reportable segment. 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. 26 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: Accounts Receivable Accounts receivable are carried at their estimated collectible amounts. The Company has not experienced issues related to the collection of its accounts receivable and has not recorded an allowance for doubtful accounts during the fiscal years ended June 30, 2023 and 2022. 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 $354,000 and $111,000 during the year ended June 30, 2023 and 2022, respectively. 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, 2023 and 2022, the Company carried warranty liability of approximately $1,600,000 and $1,012,000, respectively, which is included in accrued expenses on the Company’s consolidated balance sheets. 27 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. Recently Adopted Accounting Pronouncements The Company did not adopt any new accounting pronouncements for the year ended June 30, 2023. Results of Operations Comparison of Results of Operations of the Fiscal Years Ended June 30, 2023 and 2022 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 fiscal years ended June 30, 2023 (“Fiscal 2023”) and June 30, 2022 (“Fiscal 2022”). Year Ended June 30, 2023 Year Ended June 30, 2022 $ % of Revenues $ % of Revenues Revenues $ 66,337,000 100 % $ 42,333,000 100 % Cost of sales 49,237,000 74 % 35,034,000 83 % Gross profit 17,100,000 26 % 7,299,000 17 % Operating expenses: Selling and administrative 17,620,000 28 % 15,515,000 37 % Research and development 4,890,000 7 % 7,141,000 17 % Total operating expenses 22,510,000 35 % 22,656,000 54 % Operating loss (5,410,000 ) -8 % (15,357,000 ) -36 % Other income (expense): Other income 8,000 - % - - % Interest expense (1,339,000 ) -2 % (252,000 ) -1 % Net loss $ (6,741,000 ) -10 % $ (15,609,000 ) -37 % 28 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. 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. 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 telemetry based “SkyBMS” product offering. We sell our products through several 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 2023 increased $24,004,000 or 57%, to $66,337,000, compared to $42,333,000 for Fiscal 2022. The increase in revenues was due to sales of energy storage solutions with higher average selling prices and a higher volume of units sold, driven by significant increases in GSE sales. The increase in revenues included both greater sales to existing and new Material Handling customers as well as an increase in GSE sales. Additionally, we further diversified our sales channels, and saw considerable volume and price improvement in GSE sales as domestic airlines resumed operations with a reinvigorated focus on sustainably scaling their own operations with our environmentally friendly and cost-effective solutions. Cost of Sales Cost of sales for Fiscal 2023 increased $14,203,000 or 41%, to $49,237,000, compared to $35,034,000 for Fiscal 2022. The increase in cost of sales was directly associated with higher sales of energy storage solutions, partially offset by lower average cost of sales per unit achieved during the current year as a result of our gross margin improvement initiatives, including design enhancements to lower cost, improve serviceability, simplify bill of materials and supply chain initiatives to improve inventory turns and create part commonality across multiple product line. Cost of sales as a percentage of revenues for Fiscal 2023 was 74%, a decrease of 9 percentage points, compared to 83% for the Fiscal 2022. Gross Profit Gross profit for Fiscal 2023 increased $9,801,000 or 134%, to $17,100,000, compared to $7,299,000 for the Fiscal 2022. The gross profit margin (gross profit expressed as a percentage of revenues) increased to 26% for Fiscal 2023 compared to 17% for Fiscal 2022. Gross profit improved by 9 percentage points as a result of a higher volume of units sold with a higher selling price and lower cost of sales as a result of the gross margin improvement initiatives as noted above. Selling and Administrative Selling and administrative expenses for Fiscal 2023 increased $2,105,000 or 14%, to $17,620,000, compared to $15,515,000 for Fiscal 2022. The increase was primarily attributable to increases in personnel expenses related to new hires and temporary labor, severance expenses incurred, and recruiting costs, and increases in depreciation expense, outbound shipping costs, insurance premiums, travel expenses, marketing expenses, and facilities related costs, partially offset by decreases in commissions, bad debt expenses, consulting fees, public relations expenses, and stock-based compensation. Research and Development Research and development expenses for Fiscal 2023 decreased $2,251,000 or 32%, to $4,890,000, compared to $7,141,000 for Fiscal 2022. Such expenses consisted primarily of materials, supplies, salaries and personnel related expenses, product testing, consulting, and other expenses associated with revisions to existing product designs and new product development. The decrease in research and development expenses was primarily due to lower staff related expenses and expenses related to development of new products. 29 Interest Expense Interest expense for Fiscal 2023 increased $1,087,000 or 431%, to $1,339,000, compared to $252,000 for Fiscal 2022. The increase in interest expense was due to higher average balances outstanding of our SVB Credit Facility and higher interest rates, as well as recording of approximately $482,000 of debt issuance costs amortization related to our existing lines of credit. Net Loss Net loss during Fiscal 2023 decreased $8,868,000 or 57%, to $6,741,000 compared to $15,609,000 for Fiscal 2022. The lower net loss for Fiscal 2023 was primarily attributable to increased gross profit, partially offset by increased operating expenses and higher interest expense. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is calculated taking net income and adding back the expenses related to interest, income taxes, depreciation, amortization, and stock-based compensation, each of which has been calculated in accordance with GAAP. Adjusted EBITDA was a loss of approximately $3,705,000 for the Fiscal 2023 compared to a loss of $14,071,000 for the Fiscal 2022. 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 additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team. As Adjusted EBITDA is a non-GAAP financial measure, it should not be construed as superior to or a substitute for Net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position. A reconciliation of our Adjusted EBITDA to Net loss is included in the table below: Years Ended June 30, 2023 2022 Net loss $ (6,741,000 ) $ (15,609,000 ) Interest, net 1,339,000 252,000 Income tax provision - - Depreciation and amortization 899,000 575,000 EBITDA (4,503,000 ) (14,782,000 ) Stock-based compensation 798,000 711,000 Adjusted EBITDA $ (3,705,000 ) $ (14,071,000 ) Liquidity and Capital Resources Overview As of June 30, 2023, we had a cash balance of $2.4 million and an accumulated deficit of $88.6 million. For the year ended June 30, 2023, we had negative cash from operations of $3.6 million. Historically our business has not generated sufficient cash to fund our operations. However, based on our existing backlog and customer orders, we anticipate increased revenues, together with the planned improvements in our gross margin, will move us closer to profitability. Our planned gross margin improvement tasks include, but are not limited to, a plan to drive bill of material costs down while increasing price of our products for new orders. We have received new orders in Fiscal 2023, of approximately $59.9 million and believe through conversations with our customers that our anticipation of continued increase of new orders is reasonable. 30 We believe that our existing cash, together with $4.0 million that currently remains available under our $15.0 million revolving line of credit with Gibraltar Business Capital (“GBC Credit Facility”), and $4.0 million available under the subordinated line of credit (“Subordinated LOC”) as of September 8 , 2023, will be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve (12) months. See “Future Liquidity Needs” below. Cash Flow Summary Year Ended June 30, 2023 2022 Net cash used in operating activities $ (3,574,000 ) $ (23,893,000 ) Net cash used in investing activities (1,024,000 ) (797,000 ) Net cash provided by financing activities 6,492,000 20,462,000 Net change in cash $ 1,894,000 $ (4,228,000 ) Operating Activities Net cash used in operating activities was $3,574,000 for Fiscal 2023, compared to net cash used in operating activities of $23,893,000 for Fiscal 2022. The primary usages of cash for the Fiscal 2023 were the net loss of $6,741,000 and increases in inventory, office lease payable, customer deposits, and other assets, that were partially offset by non-cash operating costs, and increases in accounts payable and accrued expenses. The primary usages of cash for the Fiscal 2022 were the net loss of $15,609,000, increases in accounts receivable, inventory, and other assets, and decreases in accounts payable, accrued expenses and office lease payable, that were partially offset by increases in customer deposits, deferred revenue and non-cash operating costs. Investing Activities Net cash used in investing activities for Fiscal 2023 was $1,024,000 and consisted primarily of the costs of purchase of furniture and office equipment, warehouse equipment and other related costs. Net cash used in investing activities for Fiscal 2022 was $797,000 and consisted primarily of the costs of purchases of furniture and office equipment, computer software, warehouse equipment and other related costs. Financing Activities Net cash provided by financing activities was $6,492,000 for Fiscal 2023, which primarily consisted of $5,023,000 in net borrowings under the SVB Credit Facility, and $1,556,000 in net proceeds from sales of common stock under our ATM offering. Net cash provided by financing activities was $20,462,000 for Fiscal 2022, and primarily consisted of $13,971,000 in net proceeds from the issuance of common stock in a registered offering completed in September 2021, $4,889,000 in net borrowings under the SVB Credit Facility, and $1,602,000 in net proceeds from sales of common stock under our ATM Offering. Future Liquidity Needs We have evaluated our expected cash requirements over the next twelve (12) months, which include, but are not limited to, investments in additional sales and marketing and research and development, capital expenditures, and working capital requirements. As of September 8, 2023, we believe that our existing cash of $1.8 million, cash from our future operations, funding available under our $15.0 million GBC Credit Facility, under which $4.0 million is currently available, funds available under our Subordinated LOC of up to $4.0 million, along with the forecasted improvement in the gross margin will enable us to fund our planned operations for at least the next twelve (12) months. As of September 8, 2023, $4.1 million remained available under our existing ATM Offering that may be utilized subject to the volume of trading of our shares, the price of our stock, market conditions, and effectiveness of the registration statement. In addition, to support our operations and anticipated growth, we intend to continue to explore alternatives to secure additional capital from a variety of current and new sources including, but not limited to, sales of our equity securities. We also continue to execute our cost reduction, sourcing, and pricing recovery initiatives in efforts to increase our gross margin and improve cash flow from operations. 31 Although management believes that our existing cash and the additional funding sources currently available to us under the lines of credit are sufficient to fund planned operations for the next twelve (12) months, this is dependent our ability to successfully maintain and draw on our credit facilities. Our ability to draw funds from the GBC Credit Facility are subject to certain restrictions and covenants. In addition, should there be any delays in the receipts of key component parts, due in part to supply chain disruptions, our ability to fulfill 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 funds by issuing equity or convertible debt securities. 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. In addition, any unforeseen factors in the general economy beyond management’s control could potentially have negative impact on the planned gross margin improvement plan. 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. 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