Flux Power Holdings, Inc. 10-K

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion gives effects to the restatement of our consolidated financial statements for the fiscal years ended June 30, 2023, and 2022, discussed in Note 15 – Restatement of Previously Issued Financial Statements to the consolidated financial statements of this Annual Report, and should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. 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. Restatement The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement adjustments made to the previously reported consolidated financial statements for the fiscal years ended June 30, 2023, and 2022. For additional information and a detailed discussion of the restatement, see Note15 – Restatement of Previously Issued Financial Statements in the notes to our consolidated financial statements included in this Annual Report. 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”). We believe our mobile 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 energy storage solutions 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 energy storage solutions 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 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 improving production 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 energy storage solutions. 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 mobile energy storage systems, 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. 26 Table of Contents The following table summarizes the new orders, shipments, and backlog activities for the following fiscal quarters: Fiscal Quarter Ended Beginning Backlog New Orders Shipments Ending Backlog Restated Restated Restated March 31, 2023 $ 30,352,000 $ 9,751,000 $ 15,087,000 $ 25,016,000 June 30, 2023 $ 25,016,000 $ 19,780,000 $ 16,403,000 $ 28,393,000 September 30, 2023 $ 28,393,000 $ 8,102,000 $ 14,787,000 $ 21,708,000 December 31, 2023 $ 21,708,000 $ 26,552,000 $ 18,203,000 $ 30,057,000 March 31, 2024 $ 30,057,000 $ 4,030,000 $ 14,457,000 $ 19,630,000 June 30, 2024 $ 19,630,000 $ 11,614,000 $ 13,377,000 $ 17,867,000 “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 December 31, 2024, our order backlog was approximately $17.5 million. Business Updates We have recently experienced some delays in new orders of our energy storage solutions due to corresponding deferrals of new forklift purchases mainly caused by lower capital spending in the market sector that we serve and interest rate variability affecting selected large customer fleets. While we have had very few cancellations of existing purchase orders, some customers have revised their order terms to fiscal 2025. Causal rationale for delays is speculative and not definitive, but some customer feedback indicates concerns over the economy and the uncertainty of interest rates, as well as broader geopolitical uncertainty. The impact of order deferrals has required additional selling strategies to support our targeted sales trajectory. We have seen improvements in our sourcing and purchasing activity, reflecting our efforts to expand and optimize our vendor strategy. Additional improvements include more secondary sources to minimize stock-outs, lower costs from increasing sources, and controlled delivery times, as reflected in our current inventory levels. With strategic supply chain and profitability improvement initiatives, lower costs and higher volume purchasing, we are targeting gross margin improvement to continue. We are highly focused on expanding sales and marketing initiatives to secure new customer relationships and support continued migration to lithium of current customers. We recently have added our second tier one OEM private label battery program to supplement our strong OEM relationships and approvals. This collaboration marks a a significant milestone for our S-Series line, which now includes products with the UL Type EE certification, which provides added safety and durability capabilities. We are also working with our distribution network to expand customer acquisition with direct-to-customer initiatives. We also announced a new partnership aimed at enhancing the recycling process for end-of-life lithium-ion batteries with the largest critical battery components recycling company in the U.S. This collaboration represents a significant step forward in our ongoing commitment to environmental responsibility. Management Update On November 20, 2024, Ronald F. Dutt, our chairman and Chief Executive Officer, notified the Company’s Board of Directors of his intention to retire from his positions upon the appointment of a new Chief Executive Officer. The Board has commenced a search for a new Chief Executive Officer and Mr. Dutt will remain with the Company through the search and transition period.  27 Table of Contents Overview of 2024 Financing Activities Gibraltar Credit Facility On July 28, 2023, we entered into a Loan and Security Agreement (the “Agreement”) with GBC. The Agreement provides us with a senior secured revolving loan facility for up to $15.0 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, 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 $1,000,000, and (b) the total increases do not exceed $5,000,000 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 due monthly on the last day of the month. In the event of default, the amounts due under the Agreement bear 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, we are 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. On November 2, 2023, we entered into the First Amendment to Loan and Security Agreement (the “First Amendment”) with Gibraltar Business Capital, LLC (“GBC”), which amended certain definition of the Subordinated Debt referenced in the Loan and Security Agreement dated July 28, 2023 as Subordinated Debt owed by Borrower to Cleveland Capital L.P. pursuant to that certain Subordinated Unsecured Promissory Note, dated as of November 1, 2023, in the aggregate principal amount of $2,000,000. On January 30, 2024, we entered into the Second Amendment to Loan and Security Agreement (the “Second Amendment”) with GBC, which amended certain terms of the Loan and Security Agreement dated July 28, 2023, including but not limited to, (i) increasing the commitment amount from $15 million to $16 million, (ii) adding an additional non-refundable closing fee in the amount of $7,500 in cash for the increase in the commitment amount to $16 million, (iii) amending the definition of “Eligible Accounts;” and (iv) amending the EBITDA Minimum financial covenant. In consideration for the Second Amendment, we agreed to pay GBC a non-refundable amendment fee of $10,000 in cash, in addition to the $7,500 non-refundable closing fee paid. Our loans and other obligations under the GBC Credit Facility are secured by substantially all of our tangible and intangible assets (including, without limitation, intellectual property) pursuant to the terms of the Agreement and the Intellectual Property Security Agreement entered into by GBC and us on July 28, 2023. During the year ended June 30, 2024, we had multiple drawdowns under the GBC Credit Facility totaling $65.8 million, inclusive of the full repayment of the SVB Credit Facility and made multiple repayments totaling $52.0 million. As of June 30, 2024, the outstanding balance under the GBC Credit Facility was approximately $13.8 million. 28 Table of Contents In April 2024, we notified GBC of a certain event of default with respect to our anticipated failure to maintain the EBITDA covenant for the trailing three (3) month period ended April 30, 2024, (the “Default”). On May 8, 2024, we received a waiver of the Default from GBC (the “Waiver”), subject to satisfaction of the following conditions: (i) receipt of a counterpart of the Waiver duly executed by us; (ii) receipt of a fee of $20,000; (iii) receipt of the representations and warranties from us that after giving effect to the Waiver, the representations and warranties contained in the Agreement, the Waiver and the other Loan Documents shall be true and correct; and (iv) after giving effect to the Waiver, no additional event of default shall have occurred and be continuing on and as of the effective date of the Waiver. On May 31, 2024, we entered into the Third Amendment to Loan and Security Agreement (the “Third Amendment”) with GBC which amended certain terms of the Loan and Security Agreement dated July 28, 2023, including but not limited to amending the EBITDA Minimum financial covenant. In consideration for the Third Amendment, we agreed to pay GBC a non-refundable amendment fee of $50,000 in cash. Under the Agreement, upon an occurrence of an event of default, GBC may, at its option, declare its commitments to us to be terminated and all obligations to be immediately due and payable, all without demand, notice or further action of any kind required on the part of GBC, and/or exercise other remedies available to it among other things including its rights as a secured party. On August 30, 2024, GBC agreed to waive our non-compliance with, and the effects of our non-compliance under, various representations, financial covenants and non-financial covenants relating to our financial restatements (the “August Waiver”). On January 17, 2025, GBC agreed to waive our non-compliance with, and the effects of our non-compliance under, various representations, financial covenants and non-financial covenants relating to our financial restatements and our failure to maintain the EBITDA Minimum for certain financial periods (the “January Waiver”). As a result of the August Waiver and January Waiver, the Company expects that its revolving credit facility remains available subject to meeting certain lending criteria under the Loan Agreement. On January 22, 2025, we entered into Amendment No. 4 to Loan and Security Agreement (the “Fourth Amendment”) with GBC which amended certain terms of the Loan and Security Agreement dated July 28, 2023, as amended, relating to the EBITDA Minimum financial covenant of the Company. In consideration for the Fourth Amendment, the Company agreed to pay GBC a non-refundable amendment fee of $50,000 in cash, as follows: (i) $25,000 shall be due and payable on March 1, 2025, and (ii) $25,000 shall be due and payable on April 1, 2025. We rely on our credit facility with GBC to meet our anticipated capital resources and to fund our operations. The availability of the GBC Credit Facility is subject to satisfaction of certain affirmative covenants and financial covenants including maintaining minimum tangible net worth, and certain limitations on dispositions of assets. The Agreement also contains usual and customary events of default (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default, payment of all amounts payable under the GBC Credit Facility may be accelerated and/or GBC’s commitment may be terminated by GBC without any action by GBC. Due to our inability to satisfy certain financial covenants and other covenants under the agreement with GBC in the past, we have had to obtain waivers from GBC. In the event we are unable to comply with terms of the Agreement or to obtain waivers from GBC for failure to comply, then funds will be unavailable to us under the GBC Credit Facility and our operations, financial condition and business will be materially and adversely affected. Segment and Related Information We operate as a single reportable segment. Adopted Accounting Pronouncements The Company did not adopt any new accounting pronouncements during the year ended June 30, 2024. Recently Issued Accounting Pronouncements Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements. In December 2023, the FASB issued Accounting Standards Update 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures , which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for our fiscal year ending June 30, 2026, with early adoption permitted. The Company is evaluating the disclosure requirements related to the new standard. In November 2023, the FASB issued ASU 2023-07, “ Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ” (“ASU 2023-07”), which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The standard is effective annually for our fiscal year ending June 30, 2025 and interim periods thereafter. Early adoption is permitted. The Company is evaluating the disclosure requirements related to the new standard. 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. We have not experienced significant issues related to the collection of our accounts receivable. As of June 30, 2024, we had an allowance for credit losses of $55,000. We did not record an allowance for credit losses during the years ended June 30, 2023 and 2022. 29 Table of Contents 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. We evaluate 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. We recorded an adjustment related to obsolete inventory in the amount of approximately $490,00, $690,000 and $665,000 during the years ended June 30, 2024, 2023 and 2022, respectively. Revenue Recognition We recognize revenue in accordance to the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all contracts. We derive our revenue from the sale of products to customers. We sell our products primarily through a distribution network of equipment dealers, OEMs and battery distributors in primarily North America. We recognize 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 us 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 a customer receives delivery of our products. Our customers do have a right to return product, but our returns have historically been minimal. Product Warranties We evaluate our 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, 2024, 2023 and 2022, we carried warranty liability of approximately $3,018,000, $1,600,000 and $1,012,000, respectively, which is included in accrued expenses on our consolidated balance sheets. Stock-based Compensation Pursuant to the provisions of the Financial Accounting Standards Board (“FASB”) 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. Results of Operations Comparison of Results of Operations of the Fiscal Years Ended June 30, 2024 and 2023 (restated) The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this Annual Report. 30 Table of Contents The following table represents our statement of operations for the fiscal years ended June 30, 2024 (“fiscal 2024”) and June 30, 2023 (“fiscal 2023”). Year ended June 30, 2024 Year ended June 30, 2023 Amount % of Revenues Amount % of Revenues Restated Revenues $ 60,824,000 100 % $ 66,488,000 100 % Cost of sales 43,591,000 72 50,598,000 76 Gross profit 17,233,000 28 15,890,000 24 Operating expenses: Selling and administrative 18,932,000 31 17,620,000 27 Research and development 4,916,000 8 4,682,000 7 Total operating expenses 23,848,000 39 22,302,000 34 Operating loss (6,615,000 ) (11 ) (6,412,000 ) (10 ) Other income (expense): Other income - - 8,000 - Interest expense (1,718,000 ) (3 ) (1,339,000 ) (2 ) Net loss $ (8,333,000 ) (14 )% $ (7,743,000 ) (12 )% Revenues Historically our product focus has been on material handling 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. The launch of larger packs over the past two years has shifted our portfolio mix to include packs with higher average 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 energy storage solution 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 energy storage solutions directly to other accounts including industrial equipment manufacturers and end users. Revenues for fiscal 2024 decreased $5,664,000 or 9%, to $60,824,000, compared to $66,488,000 for fiscal 2023. The decrease in revenues was primarily in GSE reflecting a delay in shipments to a large customer. Material Handling revenue also declined year-over-year as our OEM customers experienced double digit declines in sales. In both cases the decrease in sales volume was partially offset by shifts to higher priced products as well as certain pricing increases. Cost of Sales Cost of sales for fiscal 2024 decreased $7,007,000, or 14%, to $43,591,000, compared to $50,598,000 for fiscal 2023. The decrease in cost of sales was directly associated with lower 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 2024 was 72%, a decrease of four percentage points, compared to 76% for fiscal 2023. 31 Table of Contents Gross Profit Gross profit for fiscal 2024 increased $1,343,000 or 8%, to $17,233,000, compared to $15,890,000 for fiscal 2023. The increase in profitability reflects sales of higher margin products and the impact of cost savings initiatives more than offsetting the effect of the decline in GSE unit sales. Gross profit margin (gross profit expressed as a percentage of revenues) increased to 28% for fiscal 2024 compared to 24% for fiscal 2023. The 400 basis point improvement in gross profit margin reflects the shift to higher margin products and the effect of cost control and reduction initiatives. Selling and Administrative Selling and administrative expenses for fiscal 2024 increased $1,312,000 or 7%, to $18,932,000, compared to $17,620,000 for fiscal 2023. Such expenses consist primarily of salaries and personnel-related expenses, sales force commissions, consulting fees, facilities-related expenses, outbound shipping costs, insurance premiums, marketing expenses, travel expenses, public relations expenses and bad debt expenses. The increase in selling and administrative expense was primarily attributable to increases in stock-based compensation, new hires in sales, sales force commissions, professional service fees and depreciation, which were partially offset by reductions in bonus expenses and insurance premiums. Research and Development Research and development expenses for fiscal 2024 increased $234,000 or 5%, to $4,916,000, compared to $4,682,000 for fiscal 2023. Such expenses consist 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 increase in research and development expenses was primarily attributable to increased payroll and related benefits and stock-based compensation, which were partially offset by reductions in materials and testing related to development of new products, equipment rentals and bonuses. Interest Expense Interest expense for fiscal 2024 increased $379,000 or 28%, to $1,718,000, compared to $1,339,000 for fiscal 2023. The increase in interest expense was due to higher average balances outstanding on our GBC Credit Facility and higher interest rates, as well as the amortization of approximately $230,000 of debt issuance costs related to our existing lines of credit. Net Loss Net loss during fiscal 2024 increased $590,000 or 8%, to $8,333,000 compared to $7,743,000 for fiscal 2023. The higher net loss for fiscal 2024 was primarily attributable to the increase in gross profit being more than offset by greater sales and marketing personnel expenses and commissions as well as the increase in interest expense due to higher levels of borrowing at higher interest rates during the year. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is calculated taking net loss 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 $3,999,000 for fiscal 2024 compared to a loss of $4,707,000 for fiscal 2023. 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 loss, as determined in accordance with GAAP, for the purpose of analyzing our operating performance or financial position. 32 Table of Contents A reconciliation of our net loss to Adjusted EBITDA is included in the table below. Year ended June 30, 2024 2023 Restated Net loss $ (8,333,000 ) $ (7,743,000 ) Add/Subtract: Interest, net 1,718,000 1,339,000 Income tax provision - - Depreciation and amortization 1,045,000 899,000 EBITDA (5,570,000 ) (5,505,000 ) Add/Subtract: Stock-based compensation 1,571,000 798,000 Adjusted EBITDA $ (3,999,000 ) $ (4,707,000 ) Comparison of Results of Operations of the Fiscal Years Ended June 30, 2023 (restated) and 2022 (restated) 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”), as restated Year ended June 30, 2023 Year ended June 30, 2022 Amount % of Revenues Amount % of Revenues Restated Restated Revenues $ 66,488,000 100 % $ 42,333,000 100 % Cost of sales 50,598,000 76 36,726,000 87 Gross profit 15,890,000 24 5,607,000 13 Operating expenses: Selling and administrative 17,620,000 27 15,515,000 36 Research and development 4,682,000 7 6,313,000 15 Total operating expenses 22,302,000 34 21,828,000 51 Operating loss (6,412,000 ) (10 ) (16,221,000 ) (38 ) Other income (expense): Other income 8,000 - - - Interest expense (1,339,000 ) (2 ) (252,000 ) (1 ) Net loss $ (7,743,000 ) (12 )% $ (16,473,000 ) (39 )% Revenues Revenues for fiscal 2023 increased $24,155,000 or 57%, to $66,488,000, 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 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. 33 Table of Contents Cost of Sales Cost of sales for fiscal 2023 increased $13,872,000 or 38%, to $50,598,000, compared to $36,726,000 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 76%, a decrease of 11 percentage points, compared to 87% for fiscal 2022. Gross Profit Gross profit for fiscal 2023 increased $10,283,000 or 183%, to $15,890,000, compared to $5,607,000 for fiscal 2022. The gross profit margin (gross profit expressed as a percentage of revenues) increased to 24% for fiscal 2023 compared to 13% for fiscal 2022. Gross profit improved by 11 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, sales force commissions, bonus expenses, depreciation, insurance premiums, travel expenses and marketing expenses, which were partially offset by decreases in third-party agent commissions and stock-based compensation. Research and Development Research and development expenses for fiscal 2023 decreased $1,631,000 or 26%, to $4,682,000, compared to $6,313,000 for fiscal 2022. Such expenses consisted primarily of materials, supplies, salaries and personnel related expenses, product testing, consulting fees and other expenses associated with revisions to existing product designs and for 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. 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 $8,730,000 or 53%, to $7,743,000 compared to $16,473,000 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 was a loss of approximately $4,707,000 during fiscal 2023 compared to a loss of $14,935,000 during fiscal 2022. 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. 34 Table of Contents A reconciliation of our adjusted EBITDA to net loss is included in the table below. Year ended June 30, 2023 2022 Restated Restated Net loss $ (7,743,000 ) $ (16,473,000 ) Add/Subtract: Interest, net 1,339,000 252,000 Income tax provision - - Depreciation and amortization 899,000 575,000 EBITDA (5,505,000 ) (15,646,000 ) Add/Subtract: Stock-based compensation 798,000 711,000 Adjusted EBITDA $ (4,707,000 ) $ (14,935,000 ) Liquidity and Capital Resources Overview For fiscal 2024, we generated negative cash flows from operations of $4.8 million. As of June 30, 2024, we had an accumulated deficit of $99.7 million. To date, our business has not generated sufficient cash to fund our operations. However, given our existing backlog, we anticipate that revenue growth coupled with improvement in our gross margin and lower operating expenses will move us closer to profitability and improve our cash flow. Our gross margin improvement plan includes, but is not limited to, efforts to reduce product costs while increasing the price of our products for new orders. We received new orders during fiscal 2024 of approximately $50.3 million. As of June 30, 2024, we had an existing cash balance of $0.6 million, $2.2 million remaining available under our $16.0 million GBC Credit Facility subject to borrowing base limitations, and $2.0 million was available from Cleveland Capital under our 2023 Subordinated LOC. However, if the Company were to experience an event of default, as defined by the loan agreements, as amended, such additional funds may not be made available. In April 2024 we notified GBC of a certain event of default with respect to our failure to maintain the EBITDA covenant for the trailing three (3) month period ended April 30, 2024, (the “Default”). On May 8, 2024, we received a waiver, which waived the Default, subject to satisfaction of certain conditions, which have been met. On May 31, 2024, we entered into the Third Amendment to Loan and Security Agreement (the “Third Amendment”) with GBC which amended certain terms of the Loan and Security Agreement dated July 28, 2023, including but not limited to amending the EBITDA Minimum financial covenant. In consideration for the Third Amendment, we agreed to pay GBC a non-refundable amendment fee of $50,000 in cash (See Note 8 – Notes Payable). On August 30, 2024, GBC agreed to waive our non-compliance with, and the effects of our non-compliance under, various representations, financial covenants and non-financial covenants relating to our financial restatements (the “August Waiver”). On January 17, 2025, GBC agreed to waive our non-compliance with, and the effects of our non-compliance under, various representations, financial covenants and non-financial covenants relating to our financial restatements and our failure to maintain the EBITDA Minimum for certain financial periods (the “January Waiver”). As a result of the August Waiver and January Waiver, we expect that our revolving credit facility remains available subject to meeting certain lending criteria under the Loan Agreement. On January 22, 2025, we entered into Amendment No. 4 to Loan and Security Agreement (the “Fourth Amendment”) with GBC which amended certain terms of the Loan and Security Agreement dated July 28, 2023, as amended, relating to the EBITDA Minimum financial covenant of the Company. In consideration for the Fourth Amendment, we agreed to pay GBC a non-refundable amendment fee of $50,000 in cash, as follows: (i) $25,000 shall be due and payable on March 1, 2025, and (ii) $25,000 shall be due and payable on April 1, 2025. As of December 31, 2024, we believe that our existing cash, together with $6.3 million that currently remains available under our $16.0 million revolving line of credit with Gibraltar Business Capital (“GBC Credit Facility”), subject to borrowing base limitations, and $1.0 million available under the subordinated line of credit (“Subordinated LOC”), will be not be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve (12) months. See “Future Liquidity Needs” below and Liquidity and Financial Condition in Note 3 – Summary of Significant Accounting Policies to the audited consolidated financial statements for additional information. Cash Flow Summary Year ended June 30, 2024 2023 2022 Net cash used in operating activities $ (4,798,000 ) $ (3,574,000 ) $ (23,893,000 ) Net cash used in investing activities (853,000 ) (1,024,000 ) (797,000 ) Net cash provided by financing activities 3,915,000 6,492,000 20,462,000 Net change in cash $ (1,736,000 ) $ 1,894,000 $ (4,228,000 ) 35 Table of Contents Operating Activities Net cash used in operating activities was $4,798,000 during fiscal 2024, compared to net cash used in operating activities of $3,574,000 and $23,893,000 during fiscal 2023 and 2022, respectively. The primary uses of cash during fiscal 2024 were the net loss of $8,333,000 and increases in inventory and accounts receivable, that were partially offset by non-cash operating costs and an increase in accounts payable and accrued expenses combined. The primary uses of cash during fiscal 2023 were the net loss of $7,743,000, as restated and increases in inventory, as restated, office lease payable, customer deposits and other assets, that were partially offset by non-cash operating costs and an increase in accounts payable and accrued expenses combined. The primary uses of cash during fiscal 2022 were the net loss of $16,473,000, as restated, increases in accounts receivable, inventory, as restated, and other assets, and decreases in accounts payable, accrued expenses and deferred revenue, that were partially offset by increases in customer deposits, deferred revenue and non-cash operating costs. Investing Activities Net cash used in investing activities during fiscal 2024 was $853,000, primarily due to purchases of furniture and office equipment, warehouse equipment and other related costs. Net cash used in investing activities during fiscal 2023 was $1,024,000, primarily due to purchases of furniture and office equipment, warehouse equipment and other related costs. Net cash used in investing activities during fiscal 2022 was $797,000, primarily due to purchases of furniture and office equipment, computer software, warehouse equipment and other related costs. Financing Activities Net cash provided by financing activities during fiscal 2024 was $3,915,000, primarily due to $3,922,000 in net borrowings under the GBC Credit Facility and SVB Credit Facility. Net cash provided by financing activities during fiscal 2023 was $6,492,000, primarily due to $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 during fiscal 2022 was $20,462,000, primarily due to $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 and have determined that our existing cash resources are not sufficient to meet our anticipated needs during the next twelve (12) months, from the filing of this annual report. See Liquidity and Financial Condition in Note 3 – Summary of Significant Accounting Policies to the audited consolidated financial statements for additional information. As of December 31, 2024, we had a cash balance of $1.0 million, funding available under our GBC Credit Facility under which up to $6.3 million is currently available, subject to borrowing base limitations, and funds available under our 2023 Subordinated LOC under which $1.0 million is currently available. Our operations have relied on our ability to successfully maintain and draw on our credit facilities. 36 Table of Contents Our ability to draw funds from the GBC Credit Facility is subject to certain restrictions, covenants and borrowing base limitations. In light of the recent Default under the GBC Credit Facility, the financial covenants in the Agreement were modified to help prevent future defaults. If we are unable to meet the conditions provided in the loan documents, the funds may not be available to us. In addition, our operations have been impacted by delays in new orders of its energy storage solutions due to corresponding deferrals of new forklift purchases mainly caused by lower capital spending in the market sector that we serve and interest rate variability affecting selected large customer fleets which have impacted its ability to meet projected revenue targets and generate cash from operations. Further, these events have placed pressure on our cash resources and raise substantial doubt about our ability to continue as a going concern for the next twelve months following the filing date of this Annual Report on Form 10-K. Furthermore, should there be any delays in the receipts of key component parts, due in part to supply change 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 new product development, which may have a material adverse effect on future cash flows and results of operations and our ability to continue operating as a going concern. See Liquidity and Financial Condition in Note 3 – Summary of Significant Accounting Policies to the audited consolidated financial statements for additional information. 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. Our failure to timely file our fiscal 2024 annual report on form 10-K and subsequent fiscal 2025 interim quarterly reports on Form 10-Q means that we currently are ineligible to use a registration statement on Form S-3. We will not be eligible to use a registration statement on Form S-3 again until we have timely filed all materials and reports required to be filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 for a period of at least twelve (12) calendar months immediately preceding the filing of a new registration statement on Form S-3. The inability to use a Form S-3 registration statement will limit our ability to raise capital through sales of our securities in a timely and cost-efficient manner. To the extent that we raise additional funds by issuing equity, equity-linked 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