Flux Power(FLUX) - 2022 Q3 - Quarterly Report

Introductory Information Special Note Regarding Forward Looking Statements Forward-looking statements in this report involve known and unknown risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are subject to known and unknown risks and uncertainties, potentially causing actual results to differ materially[7] - Key areas of uncertainty include securing sufficient funding, managing working capital, obtaining raw materials, managing growth, maintaining market share, achieving profitability, fulfilling backlog, adapting to technology changes, competing with larger companies, and dependence on major customers[8] - The company does not assume an obligation to publicly update forward-looking statements unless legally required[10] Use of Certain Defined Terms Key terms used throughout the report, such as company references, the Exchange Act, and the SEC, are defined here - "Company," "Flux," "we," "us," and "our" refer to Flux Power Holdings, Inc. and its wholly-owned subsidiary, Flux Power, Inc[11] - "Exchange Act" refers to the Securities Exchange Act of 1934, as amended[11] - "SEC" refers to the Securities and Exchange Commission[11] PART I - Financial Information ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) This section presents the unaudited condensed consolidated financial statements and related notes for Flux Power Holdings, Inc - The financial statements are unaudited and prepared in accordance with GAAP and SEC rules for smaller reporting companies[24] - The company designs, develops, manufactures, and sells advanced lithium-ion energy storage solutions for industrial commercial sectors like material handling and airport ground support equipment[26] - The company's long-term strategy focuses on meeting growing demand for lithium-ion solutions, expanding product mix, sales/marketing, customer support, and improving production capacity[108] Condensed Consolidated Balance Sheets The company's condensed consolidated balance sheets, detailing assets, liabilities, and equity at specific dates, are presented Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (Unaudited) | June 30, 2021 | Change (Absolute) | Change (%) | | :---------------------- | :------------------------- | :------------ | :---------------- | :--------- | | Cash | $3,804,000 | $4,713,000 | $(909,000) | -19.29% | | Accounts receivable | $9,508,000 | $6,097,000 | $3,411,000 | 55.95% | | Inventories, net | $20,934,000 | $10,513,000 | $10,421,000 | 99.12% | | Total current assets | $34,823,000 | $21,740,000 | $13,083,000 | 60.18% | | Total assets | $39,211,000 | $26,262,000 | $12,949,000 | 49.31% | | Accounts payable | $13,361,000 | $7,175,000 | $6,186,000 | 86.22% | | Line of credit | $3,500,000 | $- | $3,500,000 | N/A | | Total current liabilities | $20,494,000 | $10,390,000 | $10,104,000 | 97.25% | | Total liabilities | $22,987,000 | $13,256,000 | $9,731,000 | 73.41% | | Total stockholders' equity | $16,224,000 | $13,006,000 | $3,218,000 | 24.74% | Condensed Consolidated Statements of Operations This section presents the company's condensed consolidated statements of operations for the three and nine months ended March 31 Financial Performance (3 Months Ended March 31) | Metric (3 Months Ended March 31) | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------------- | :----------- | :---------- | :---------------- | :--------- | | Revenues | $13,177,000 | $6,964,000 | $6,213,000 | 89.22% | | Cost of sales | $11,257,000 | $5,287,000 | $5,970,000 | 112.92% | | Gross profit | $1,920,000 | $1,677,000 | $243,000 | 14.49% | | Operating loss | $(3,697,000) | $(2,968,000) | $(729,000) | 24.56% | | Other income | $- | $1,307,000 | $(1,307,000) | -100.00% | | Net loss | $(3,749,000) | $(1,725,000) | $(2,024,000) | 117.33% | | Net loss per share | $(0.23) | $(0.14) | $(0.09) | 64.29% | Financial Performance (9 Months Ended March 31) | Metric (9 Months Ended March 31) | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------------- | :------------ | :----------- | :---------------- | :--------- | | Revenues | $27,138,000 | $17,932,000 | $9,206,000 | 51.34% | | Cost of sales | $22,838,000 | $13,893,000 | $8,945,000 | 64.38% | | Gross profit | $4,300,000 | $4,039,000 | $261,000 | 6.46% | | Operating loss | $(12,870,000) | $(9,762,000) | $(3,108,000) | 31.84% | | Other income | $- | $1,307,000 | $(1,307,000) | -100.00% | | Net loss | $(12,956,000) | $(9,073,000) | $(3,883,000) | 42.79% | | Net loss per share | $(0.85) | $(0.80) | $(0.05) | 6.25% | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit Stockholders' Equity (March 31, 2022) | Metric (March 31, 2022) | Common Shares | Common Stock Capital Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :---------------------- | :------------ | :-------------------------- | :------------------------- | :------------------ | :------------------------- | | Balance at June 30, 2021 | 13,652,164 | $14,000 | $79,197,000 | $(66,205,000) | $13,006,000 | | Issuance of common stock and warrants – registered direct offering, net of costs | 2,142,860 | $2,000 | $14,074,000 | $- | $14,076,000 | | Issuance of common stock – public offering, net of costs | 190,782 | $- | $1,602,000 | $- | $1,602,000 | | Stock based compensation | - | $- | $200,000 | $- | $200,000 | | Net loss | - | $- | $- | $(4,130,000) | $(4,130,000) | | Balance at March 31, 2022 | 15,992,080 | $16,000 | $95,369,000 | $(79,161,000) | $16,224,000 | Condensed Consolidated Statements of Cash Flows This section presents the company's condensed consolidated statements of cash flows, categorizing activities into operating, investing, and financing Cash Flow Activity (9 Months Ended March 31) | Cash Flow Activity (9 Months Ended March 31) | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------------------------- | :------------ | :------------ | :---------------- | :--------- | | Net cash used in operating activities | $(19,338,000) | $(14,000,000) | $(5,338,000) | 38.13% | | Net cash used in investing activities | $(644,000) | $(692,000) | $48,000 | -6.94% | | Net cash provided by financing activities | $19,073,000 | $16,398,000 | $2,675,000 | 16.31% | | Net change in cash | $(909,000) | $1,706,000 | $(2,615,000) | -153.28% | | Cash, end of period | $3,804,000 | $2,432,000 | $1,372,000 | 56.49% | - Financing activities in 2022 included $13,971,000 from a registered direct offering, $3,500,000 from the SVB Line of Credit, and $1,602,000 from ATM Offering sales[161] - Non-cash investing and financing activities for 2022 included $9,700 in common stock issued for vested RSUs[22] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and breakdowns of various financial statement line items, accounting policies, and other significant financial information - The notes clarify that the financial statements are prepared under GAAP and SEC rules for smaller reporting companies, and should be read with the prior annual report[24] - The company designs, develops, manufactures, and sells lithium-ion energy storage solutions for industrial commercial sectors[26] - No material changes in significant accounting policies or their application have occurred since the last annual report[28] NOTE 1 - NATURE OF BUSINESS This note describes Flux Power Holdings, Inc.'s core business of designing, developing, manufacturing, and selling lithium-ion energy storage solutions - Flux Power Holdings, Inc. operates through its wholly-owned subsidiary, Flux Power, Inc[25] - The company designs, develops, manufactures, and sells advanced lithium-ion energy storage solutions for material handling, airport ground support equipment (GSE), and stationary energy storage[26] - These solutions are positioned as reliable, high-performing, cost-effective, and environmentally friendly alternatives to traditional lead-acid and propane-based solutions[26] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note confirms that no material changes in significant accounting policies have occurred and recent pronouncements are not expected to have a material effect - No material changes in significant accounting policies or their application have occurred since the Annual Report on Form 10-K for June 30, 2021[28] - Recent accounting pronouncements are not expected to have a material effect on the condensed consolidated financial statements[29] NOTE 3 – ACCRUED EXPENSES This note provides a breakdown of accrued expenses, including payroll, PTO, and warranty liabilities Accrued Expenses | Accrued Expense | March 31, 2022 | March 31, 2021 | Change (Absolute) | Change (%) | | :-------------- | :------------- | :------------- | :---------------- | :--------- | | Payroll and bonus accrual | $784,000 | $1,271,000 | $(487,000) | -38.32% | | PTO accrual | $438,000 | $417,000 | $21,000 | 5.04% | | Warranty liability | $920,000 | $895,000 | $25,000 | 2.79% | | Total Accrued expenses | $2,142,000 | $2,583,000 | $(441,000) | -17.07% | NOTE 4 – NOTES PAYABLE This note details the company's notes payable, including the PPP Loan forgiveness and the revolving line of credit with SVB - The PPP Loan of approximately $1,297,000 principal and $10,000 accrued interest was fully forgiven by the SBA on February 9, 2021, recorded as other income[34] - The revolving line of credit with SVB was increased from $4.0 million to $6.0 million in October 2021, maturing November 7, 2022[37] - As of March 31, 2022, the outstanding balance on the SVB Revolving LOC was $3,500,000, with $2,500,000 remaining available[37] NOTE 5 - RELATED PARTY DEBT AGREEMENTS This note confirms no outstanding related party debt and details the repayment and termination of prior agreements - No outstanding related party debt agreements as of March 31, 2022[38] - The Esenjay Note, initially $1,400,000, was partially assigned and converted into common stock, with the remaining balance transferred to the Credit Facility[39][40][41] - The Credit Facility with Esenjay and other lenders, with a maximum of $12,000,000, was fully repaid and terminated on June 10, 2021[42][45] - The Cleveland Loan of $1,000,000 was fully repaid by August 19, 2020[46][48] NOTE 6 – FACTORING ARRANGEMENT This note states that the factoring agreement with CSNK Working Capital Finance Corp. was terminated - The Factoring Agreement with CSNK Working Capital Finance Corp. was terminated effective August 30, 2020[49] NOTE 7 - STOCKHOLDERS' EQUITY This note provides details on changes in stockholders' equity, including stock issuances, warrants, and stock-based compensation - From December 21, 2020, to March 31, 2022, the company sold 1,169,564 shares under the ATM Offering for gross proceeds of approximately $14.3 million and net proceeds of $13.7 million[54] - In September 2021, a registered direct offering (RDO) sold 2,142,860 shares and warrants for $15.0 million gross proceeds, with warrants exercisable at $7.00 per share[58] - As of March 31, 2022, 1,286,313 warrants were outstanding and exercisable at a weighted average exercise price of $6.58[71] - Stock-based compensation expense for the nine months ended March 31, 2022, was $601,000, down from $650,000 in the prior year[82] NOTE 8 - CONCENTRATIONS This note discusses concentrations of credit risk related to cash balances, major customers, and key suppliers - Cash balances at a California commercial bank exceeded the FDIC insured limit of $250,000, but management believes there is no significant credit risk[83] - For the three months ended March 31, 2022, four major customers accounted for 82% of total revenues; for the nine months, three major customers accounted for 59% of total revenues[85] - For the three months ended March 31, 2022, three suppliers accounted for 48% of total purchases; for the nine months, one supplier accounted for 32% of total purchases[87] NOTE 9 - COMMITMENTS AND CONTINGENCIES This note outlines the company's legal proceedings, lease commitments, and future minimum lease payments - No material legal proceedings are currently pending or expected against the company[89][175] - The company leases approximately 45,600 square feet of industrial space, with an amendment in February 2020 for an additional 17,539 square feet, expiring November 20, 2026[90][91] Future Minimum Lease Payments as of March 31, 2022 | Year Ending June 30, | Amount | | :------------------- | :---------- | | 2022 (remaining) | $187,000 | | 2023 | $768,000 | | 2024 | $791,000 | | 2025 | $815,000 | | 2026 | $840,000 | | Thereafter | $359,000 | | Total | $3,760,000 | | Less: discount | $(781,000) | | Total lease liability | $2,979,000 | NOTE 10 - SUBSEQUENT EVENTS This note describes significant events occurring after the balance sheet date, including RSU grants and a new subordinated line of credit - On April 28, 2022, 71,172 RSUs were granted to non-executive directors, vesting on April 28, 2023[95] - On May 11, 2022, the company secured a new subordinated line of credit of $3.0 million to $5.0 million, with an initial commitment of $4.0 million, bearing 15.0% annual interest[96][98] - In connection with the new line of credit, the company agreed to issue warrants to purchase 160,000 shares of common stock (pro-rata based on commitment) at an exercise price of $2.53 per share, exercisable immediately and expiring in five years[101][102] - A financial advisory agreement was entered with Cleveland Capital Management, L.L.C. on May 11, 2022[104] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations, including strategic initiatives and financial performance - The company's long-term strategy is to meet growing demand for lithium-ion energy solutions, expand product mix, sales, marketing, and improve production capacity and efficiency[108] - Supply chain disruptions due to COVID-19 have led to increased backlog, higher procurement costs for steel and electronic components, and increased shipping costs[112][113][127] - Strategic initiatives include expanding supplier base, introducing new product designs for cost reduction and serviceability, improving manufacturing capacity, seeking competitive carriers, and transitioning to new cell technology[116] Business Overview This section provides an overview of the company's core business, new patent filings, and order backlog - The company's core business is lithium-ion energy storage solutions for material handling, GSE, and stationary energy storage[107] - New patent filings focus on optimizing charging cycles, understanding battery health, and applying AI for predictive cell balancing[108] Order Backlog | Quarter Ended | Backlog (Start of Period) | New Orders | Shipments | Backlog (End of Period) | | :--------------- | :------------------------ | :----------- | :----------- | :---------------------- | | December 31, 2020 | $2,528,000 | $6,561,000 | $6,330,000 | $2,759,000 | | March 31, 2021 | $2,759,000 | $9,977,000 | $6,826,000 | $5,910,000 | | June 30, 2021 | $5,910,000 | $15,053,000 | $8,339,000 | $12,624,000 | | September 30, 2021 | $12,624,000 | $13,122,000 | $6,313,000 | $19,433,000 | | December 31, 2021 | $19,433,000 | $19,819,000 | $7,837,000 | $31,415,000 | | March 31, 2022 | $31,415,000 | $20,495,000 | $13,317,000 | $38,593,000 | - As of May 10, 2022, the order backlog was approximately $33.1 million[111] Business Updates This section highlights that the backlog of open orders increased due to growing demand and ongoing supply chain disruptions - Backlog of open orders increased due to growth in demand and supply chain disruptions from COVID-19[112] Supply Chain Issues and Higher Procurement Costs This section addresses the impact of supply chain disruptions, increased costs, and mitigation strategies on the business - Supply chain disruptions, including port delays, increased prices for steel and electrical components, and higher shipping costs, are impacting the business[113] - Price increases were implemented in October 2021 and April 2022 to offset rising costs[113] - Inventory of raw materials and component parts increased to $20.9 million as of March 31, 2022, to mitigate disruptions[113] Strategic Initiatives This section outlines the company's strategic initiatives to expand its supplier base, reduce costs, improve capacity, and grow its customer base - Initiatives include expanding supplier base, new product designs for cost reduction, improving manufacturing capacity, and seeking competitive carriers[116] - The company plans to transition product lines to new cell technology for lower costs, improved supplier reliability, and higher energy capabilities[116] - Efforts are underway to expand the customer base, particularly among Fortune 100 & 500 companies, and deploy Sky BMS telematics technology[116] New Product Update This section provides an update on new product designs and recent product launches aimed at higher capacities and lower ownership costs - New product designs introduced in Q1 2022 offer higher capacities, easier servicing, and lower total cost of ownership[118] - Three new products launched at MODEX March 2022: L36 (36-volt for 3-wheel forklifts), C48 (for AGV/AMR), and S24 (210Ah for Walkie Pallet Jacks)[119] Recent Corporate Development This section details the establishment of a new subordinated line of credit and the issuance of warrants to lenders - On May 11, 2022, a new subordinated line of credit (LOC) was established for $3.0 million to $5.0 million, with an initial commitment of $4.0 million from lenders[119] - The LOC bears an interest rate of 15.0% per annum and has a due date of December 31, 2022, with options for extension[121] - Lenders received warrants to purchase common stock, with an exercise price of $2.53 per share, exercisable immediately and expiring in five years[123][124] COVID-19 Update This section discusses the ongoing impact of COVID-19 on supply chains, operations, and associated risks - COVID-19 continues to cause supply chain disruptions, leading to shortages, price increases, and production delays[127] - The company has implemented safety measures and navigated staffing challenges due to COVID-19[127] - Significant risks of supply shortages, shipping delays, and price increases remain, potentially affecting financial condition and operating results[127] Segment and Related Information This section states that the company operates as a single reportable segment - The company operates as a single reportable segment[128] Results of Operations and Financial Condition (Three Months Ended March 31) This section analyzes the company's financial performance for the three months ended March 31, including revenues, costs, and net loss Financial Performance (Three Months Ended March 31) | Metric (3 Months Ended March 31) | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------------- | :----------- | :---------- | :---------------- | :--------- | | Revenues | $13,177,000 | $6,964,000 | $6,213,000 | 89.22% | | Cost of sales | $11,257,000 | $5,287,000 | $5,970,000 | 112.92% | | Gross profit | $1,920,000 | $1,677,000 | $243,000 | 14.49% | | Gross profit margin | 15% | 24% | -9 percentage pts | -37.50% | | Selling and administrative | $3,904,000 | $3,122,000 | $782,000 | 25.05% | | Research and development | $1,713,000 | $1,523,000 | $190,000 | 12.48% | | Other income | $- | $1,307,000 | $(1,307,000) | -100.00% | | Net loss | $(3,749,000) | $(1,725,000) | $(2,024,000) | 117.33% | Results of Operations and Financial Condition (Nine Months Ended March 31) This section analyzes the company's financial performance for the nine months ended March 31, including revenues, costs, and net loss Financial Performance (Nine Months Ended March 31) | Metric (9 Months Ended March 31) | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------------- | :------------ | :----------- | :---------------- | :--------- | | Revenues | $27,138,000 | $17,932,000 | $9,206,000 | 51.34% | | Cost of sales | $22,838,000 | $13,893,000 | $8,945,000 | 64.38% | | Gross profit | $4,300,000 | $4,039,000 | $261,000 | 6.46% | | Gross profit margin | 16% | 23% | -7 percentage pts | -30.43% | | Selling and administrative | $11,402,000 | $9,177,000 | $2,225,000 | 24.25% | | Research and development | $5,768,000 | $4,624,000 | $1,144,000 | 24.74% | | Other income | $- | $1,307,000 | $(1,307,000) | -100.00% | | Interest expense | $86,000 | $618,000 | $(532,000) | -86.08% | | Net loss | $(12,956,000) | $(9,073,000) | $(3,883,000) | 42.79% | Adjusted EBITDA This section defines Adjusted EBITDA as a non-GAAP financial measure and provides its reconciliation to net loss - Adjusted EBITDA is a non-GAAP financial measure used to assess the performance of fundamental business activities[153][154] Adjusted EBITDA Reconciliation (9 Months Ended March 31) | Metric | 2022 | 2021 | Change (Absolute) | Change (%) | | :------------------------ | :------------- | :------------ | :---------------- | :--------- | | Net loss | $(12,956,000) | $(9,073,000) | $(3,883,000) | 42.79% | | Interest, net | $86,000 | $618,000 | $(532,000) | -86.08% | | Depreciation and amortization | $412,000 | $176,000 | $236,000 | 134.09% | | EBITDA | $(12,458,000) | $(8,279,000) | $(4,179,000) | 50.48% | | Stock-based compensation | $601,000 | $650,000 | $(49,000) | -7.54% | | Adjusted EBITDA | $(11,857,000) | $(7,629,000) | $(4,228,000) | 55.42% | Liquidity and Capital Resources This section discusses the company's cash position, capital resources, and plans for securing additional funding to support operations and growth - Cash balance was $3,804,000 and accumulated deficit was $79,161,000 as of March 31, 2022[157] - Management believes existing cash, $2.5 million from SVB Line of Credit, and $4.0 million from the new subordinated line of credit will be sufficient for the next twelve months[157][164] - Net cash used in operating activities was $19,338,000 for the nine months ended March 31, 2022, an increase from $14,000,000 in the prior year[158][159] - Net cash provided by financing activities was $19,073,000 for the nine months ended March 31, 2022, primarily from stock issuances and SVB Line of Credit borrowings[158][161] - The company intends to secure additional capital from various sources, including equity securities, to support operations and anticipated growth[164] Critical Accounting Policies This section notes that interim financial statements involve estimates and assumptions consistent with prior annual reports - Interim financial statements involve estimates and assumptions that could differ from actual results[167] - Critical accounting policies are consistent with those detailed in the Annual Report on Form 10-K for June 30, 2021[167] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Flux Power Holdings, Inc. is not required to provide the information typically required under this item - The company is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company[168] ITEM 4. CONTROLS AND PROCEDURES Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2022[169] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[173] Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as evaluated by management - Disclosure controls and procedures were evaluated and found effective as of March 31, 2022[169] - Internal control over financial reporting aims to provide reasonable assurance regarding financial reporting reliability but has inherent limitations[171] Changes in Internal Control Over Financial Reporting This section states that no material changes in internal control over financial reporting occurred during the quarter - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[173] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is not aware of any material legal proceedings currently pending or expected against it, though litigation is subject to inherent uncertainties - No material legal proceedings are pending or expected against the company[175] ITEM 1A. RISK FACTORS Investors are advised to carefully consider the risks outlined in the "Risk Factors" section of the company's Annual Report on Form 10-K - Investment in common stock involves a high degree of risk, and investors should review the "Risk Factors" in the Annual Report on Form 10-K for June 30, 2021[176] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There were no unregistered sales of equity securities or use of proceeds to report for this period - No unregistered sales of equity securities or use of proceeds to report[177] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities to report for this period - No defaults upon senior securities to report[177] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine safety disclosures are not applicable to the company[178] ITEM 5. OTHER INFORMATION There is no other information to report under this item - No other information to report[179] ITEM 6. EXHIBITS This section lists the exhibits filed as part of the report, including certifications under the Sarbanes-Oxley Act and XBRL-related documents - Exhibits include certifications (Sarbanes-Oxley Act Sections 302 and 906) and XBRL documents[172][181] SIGNATURES Signatures The report is duly signed on behalf of Flux Power Holdings, Inc. by Ronald F. Dutt, Chief Executive Officer, and Charles A. Scheiwe, Chief Financial Officer, on May 12, 2022 - The report was signed by Ronald F. Dutt (CEO) and Charles A. Scheiwe (CFO) on May 12, 2022[185]